The West’s New Critical Minerals Playbook

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China has long dominated the critical minerals supply chain, with an already large share in mining of many minerals but a particular chokehold further downstream — it refines between 47% and 87% of copper, lithium, cobalt, graphite and rare earths, according to the International Energy Agency. These minerals are used in defense technologies, semiconductors, renewable energy components, batteries and refining processes. Western interest in reducing dependence on China when it comes to critical minerals has ratcheted up significantly since China in October announced strict export controls on rare earths.

Within weeks of China’s October announcement, the US and Australia signed an $8.5 billion critical minerals pact, the G7 nations launched a Critical Minerals Production Alliance, and the US has signed memorandums on critical minerals with numerous countries. But recent months have also been notable for an increasing number of direct government investments in mining companies, sometimes accompanied by government offtake agreements.

In Canada, that includes a seven-year, fixed-price government offtake for 30,000 tons per year of graphite concentrate “to be placed with Canada and allied countries or entities for strategic applications” from Nouveau Monde Graphite’s planned Matawinie graphite mine and a C$25 million (US$18 million) investment and offtake in Rio Tinto’s under-construction scandium oxide production plant.

This follows on the heels of the US Department of Defense (DOD) in July agreeing to become the largest shareholder in US rare earths miner MP Materials via a multibillion-dollar investment and committing to securing offtake for MP Materials-produced rare earths magnets for 10 years with a floor price far above market prices at the time. The DOD in October followed up with a binding letter of intent to invest approximately $35.6 million in Trilogy Metals, taking a 10% stake in the company, to support development of its Upper Kobuk Mineral projects, which contain copper, zinc, lead, gold, silver and cobalt mineralization, and a $620 million DOD loan announced in November to Vulcan Elements to increase production of rare earth magnets.

This support isn’t solely focused on domestic miners. During a visit of Central Asian leaders to the US in November, Kazakhstan and the US agreed a deal under which US firm Cove Capital and Kazakhstan’s state-owned Tau-Ken Samruk will jointly develop the largest known undeveloped tungsten resource in the world, which is in Kazakhstan. Cove Capital will market 100% of the output and, under a letter of intent with the US International Trade Association, will prioritize American needs. As part of the Australia pact, the DOD will also invest in the construction of an advanced gallium refinery in Australia.

But these measures will likely be insufficient to completely eliminate dependence on China in the near term.

Long-Term Strategy

“China’s advantage isn’t just about capacity. It has decades of learning these processing skills and integrated supply clusters that make refining cheap,” Viet Nguyen-Tien, a research economist at London School of Economics’ Centre for Economic Performance, told Energy Intelligence. “That means subsidies for mines in the US or Europe or Canada will help … but they won’t be sufficient by themselves. To displace or diversify away from China, you need sustained targeted support for midstream processing and refining, investment in skills and R&D, allied coordination on demand and offtake, and big pushes on recycling institutions. That competitiveness will take years, likely decades to build, though strategic investments can create early wins.”

One of the main reasons that government support is required for miners to get into production or to expand their operations is that Chinese companies can often withstand prices that would put their Western competitors out of business.

Chinese producers “are more willing and more able to operate at a loss for a longer period of time,” says Adam Webb, Benchmark Minerals head of energy raw materials. That’s because “sometimes the company operating the mine will be vertically integrated,” and “They can operate that mine at a loss if they’re making profits further down the supply chain,” for example, from batteries or electric vehicle (EV) manufacturing.

Market Impacts

Market prices are sometimes simply too low to incentivize non-Chinese producers to enter production, or the risk of prices dropping below costs is too high to enter production without price guarantees. But this means that supporting some non-Chinese miners may require pushing mineral prices up, increasing costs for manufacturers reliant on these minerals.

Government investments in mining companies alone may have little impact on larger markets. “Lithium, bauxite [feedstock for aluminum], copper — these are huge markets. $20 million [investment] isn’t moving the needle,” Ian Lange, professor of economics and business at the Colorado School of Mines, told Energy Intelligence. In smaller markets, such as rare earths, there could be a more direct price impact from government investment. But those smaller markets also have much less impact on clean energy supply chains than lithium or copper.

More notable price impacts could stem from trade restrictions. With trade restrictions, you might see “a bifurcation of prices,” said Webb, noting that for rare earths, “North American prices are at a premium to Chinese prices.”

The US deal with MP Materials “did push North American prices up,” said Webb. However, “It’s hard to say for sure whether that would happen in other markets.” Aluminum, steel, semifinished copper products and copper-intensive derivative products are currently subject to 50% US tariffs, and graphite is subject to a 93.5% US tariff on Chinese imports. An ongoing US Section 232 investigation into all critical minerals and their derivative products has the potential to impose further import restrictions.

“Exposure to critical mineral risk can slow down the growth of affected firms, especially those involved in the clean energy supply chain,” said Nguyen-Tien. “In the short term, companies respond by, for example, stockpiling materials or passing higher costs on to customers. But we are also seeing growing interest in material substitution and circular economy solutions.”

For instance, high nickel and cobalt prices in 2021 and 2022 spurred huge growth in lithium-ion battery chemistries that didn’t require these minerals, and numerous EV makers have shifted away from rare earths due to China’s near-monopoly on the sector.