Nickel and Dime: The Philippines' Approach to Attracting Western Capital

Introduction

Aware of the integral role of critical minerals in clean energy systems and other modern technologies, the Philippines has begun courting Western investment to develop its domestic critical mineral industry. The country has vast reserves of untapped natural resources, including nickel, a critical component of electric vehicle (EV) batteries. According to the International Energy Agency, global demand for nickel is expected to increase by approximately 65% by the end of the decade. The Philippines stands to financially benefit from the expected surge of demand for nickel in the coming years, but must first build the requisite infrastructure (e.g., mines, refining plants, processing facilities, transport hubs, etc.) to realise the economic potential of this mineral resource.

To attract increased foreign investment, the Philippines is positioning itself as an alternative to China in the global nickel supply chain. This stance draws from the rationale that the United States (U.S.) and other Western countries will want to diversify their critical mineral supply chains away from China given contemporary security concerns with China and its dominance over nickel supplies and processing capabilities. Such a strategy has both geopolitical and economic implications, especially as it relates to strategic trading and investment blocs that reflect the U.S.-China power competition. By aligning with Western interests, the Philippines aims to bolster its economic growth while contributing to a more balanced global supply chain for critical minerals.

Nickel Industry in the Philippines

The Philippines is currently the world’s second-largest supplier of nickel, accounting for 11% of global production. The country’s nickel exports are expected to increase over the next couple of years to meet growing global demand, particularly in the EV sector. However, this outlook depends on how the country navigates other political and economic factors, including (1) volatility in market prices; (2) trade relations and international partnerships; (3) ability to attract foreign investment; (4) the implementation of government policies that promote industry development; and (5) environmental, social, and governance considerations. The Philippines Government has seemingly decided that, at its current stage, the best way to develop the country’s nickel production capacity is by focusing on boosting foreign investment in the domestic nickel industry.

Investment Strategy

Indonesia is the largest global supplier of nickel, producing over 40% of the world’s nickel in 2023. Approximately 90% of Indonesia’s nickel industry is controlled by Chinese companies, giving China a dominant market position over nickel. The market concentration of this critical mineral has caused unease and consternation amongst Western nations that fear China may leverage this control over the global nickel supply chain to their disadvantage. The Philippines, which itself has experienced escalating tensions with China over territorial claims in the South China Sea, has leveraged this fear, attempting to use it to spur greater foreign investment in their own nickel industry. Through this investment, the Philippine government hopes to develop the domestic nickel sector, especially as it relates to downstream processing, where most of the value-added occurs. The investment strategy comes amid a broader effort to augment economic ties and foster greater alignment with the U.S. and its allies, although the country is still open to Chinese investment. Government officials in Manila have shared that the U.S., Australia, Britain, Canada, and European Union have all expressed interest in directing investment to the Philippines’ nickel sector.

To date, there have been a few initiatives to advance the Philippines’ nickel industry. In late 2023, government officials from the Philippines and the U.S. signed a Memorandum of Understanding that provided $5 million to set up a technical assistance programme to develop the Philippines’ critical mineral sector. The leaders of the U.S., Japan, and the Philippines also held an economic security summit in April 2024 that featured discussions on strengthening critical mineral supply chains. Similarly, there have been preliminary talks about a trilateral arrangement in which the Philippines would supply raw nickel, the U.S. would provide financing, and a third country (e.g., Australia) would offer the technology necessary to process and refine the nickel. However, thus far, these discussions have yielded little in the way of concrete financing or investment initiatives that would provide notable benefit to the industry.

Geopolitical and Geoeconomic Implications

While the U.S. and its allies support a diversification of the global nickel supply chain, their ability to shift the paradigm will likely prove to be a difficult undertaking. Strengthening the Philippines’ nickel mining, processing, and refining capacity up to a level in which it will be able to recapture significant market share from Indonesia and China will require a huge amount of economic and political resources. This is something most countries will shy away from incurring in an important election year. For example, the U.S. has communicated its reluctance to sign a critical minerals agreement amidst the 2024 U.S. presidential race. Further, countries will not want to antagonise China and risk retaliation, given that many economies currently rely on China for the production and processing of critical minerals and their downstream technologies.

As a result of major Chinese investment and technological innovation, Indonesia’s production of nickel has notably increased in recent years. This flood of new nickel supplies has put downward pressure on global nickel prices and crowded out competition from entering the market. With slumping prices, it may be a challenge to attract sufficient foreign financing without a policy framework or safeguards that could inspire greater investor confidence. A potential remedy could be regulatory policies and tax incentives that favour non-Chinese companies. Nevertheless, the economic development associated with increased nickel production is integral to the Philippines economy, so the country does not want to alienate Chinese investors if they prove to be the best path forward.

Concluding Remarks

The Philippines’ strategic efforts to develop its nickel industry through Western investment illustrate the dynamics of economic ambition and geopolitical considerations. By positioning itself as a viable alternative to the China-dominated Indonesian nickel industry, the Philippines aims to leverage global security concerns to increase investment in its domestic nickel sector. However, the realisation of this ambition will hinge on overcoming significant political and economic challenges, such as fluctuating prices and dynamic geopolitical tensions. As the country navigates these hurdles, the outcome of its initiatives will significantly impact its role in the global critical minerals supply chain, shaping future economic and strategic alignments.

Small Modular Reactors Nuclear Renaissance?

In the era of climate urgency, increasing energy demands, and geopolitical uncertainties, Small Modular Reactors (SMRs) could redefine the energy landscape and provide viable alternatives to current energy sources. SMRs present a scalable, safer alternative to traditional nuclear power. This report from London Politica explores the potential of SMRs to revolutionise energy production, mitigate climate change, and enhance energy security. With uranium prices soaring and global interest in nuclear energy surging, SMRs are poised to play a critical role in the nuclear renaissance.

Our comprehensive analysis covers key regions, including the US, Europe, and China, examining their nuclear strategies, regulatory landscapes, and market dynamics. We also delve into the controversies surrounding uranium supply chains and the broader political and economic implications of nuclear power. Dive into our in-depth analysis of the future of SMRs and their global impact.

Eastern Entente: Houthi Campaign

Following developments in the Houthi campaign, the growing cooperation between China, Russia, and Iran is becoming a major concern for the Red Sea region. This emerging ‘Axis’ increases uncertainty for stakeholders in commodity trade, as the stability of the Suez Canal, Strait of Hormuz, and Gulf of Oman are threatened. Iran’s power projection in the region, characterised by the use of proxy groups in an ‘Axis’ of resistance, has paralysed global trade flows. Although China and Russia's involvement is presented as a means to stabilise the region and foster trade, rising scepticism clouds maritime traffic and worsen future prospects (as quantitatively analysed in a recent article by the Global Commodities Watch). The geopolitical and economic implications are profound and pose risks to all parties involved, raising questions about the motives behind this new ‘Axis’ formation and what it means for the disruptive ‘Axis of Resistance’.

Axis of Resistance - In Retrospect

Since the Iranian Revolution of 1979, the Tehran regime’s foreign policy has been characterised by its desire to propagate its brand of Shi’a Islam across the Middle East. To this end, it has long developed and fostered relationships with sympathetic proxy groups throughout the region. This has allowed it to project power in locations that might otherwise be beyond its reach while exercising some degree of “plausible deniability." In January 2022, this prompted the former Israeli Prime Minister, Naftali Bennett, to brand Iran “an octopus” of terror whose tentacles spread across the Middle East. 

The country’s so-called “Axis of Resistance'' has expanded since 1979, its first major franchise being Hezbollah, which was founded in 1982 to counter Israel’s invasion of Lebanon that year. Its most recent recruit has been the Houthis. This group was established in northern Yemen in the 1980s to defend the rights of the country’s Shi’a Zaidi minority. What was initially a politico-religious organisation then evolved into an armed group that fought the government for greater freedoms. It was able to exploit the chaos of the Arab Spring to capture the national capital, Sana’a, in the autumn of 2014, and the group now controls around 80% of Yemen’s population.

Exactly when the Houthis became a part of the “Axis of Resistance” is something of a moot point, but the general consensus among the group’s observers is that it started receiving Iranian military assistance around 2009, with this almost certainly contributing to its capture of the Yemeni capital, Sana’a, in 2014. Since the HAMAS attack against Israel on October 7, 2023, it has rapidly emerged as a key Iranian franchise whose focus has been attacking shipping in the southern Red Sea. At the time of writing, an excess of 40 vessels had been targeted, while repeated US-led strikes against Houthi military infrastructure on the Yemeni coast appeared to have had limited success in degrading the group’s intent or capability. 

March 2024 saw a proliferation in the number and efficacy of attacks, with the first three fatalities reported on the sixth of the month as the Barbados-flagged bulk carrier True Confidence was struck near the coast of Yemen. Around three weeks later, on March 26th, four ships were attacked with six drones or missiles in a single 72-hour period. Separately, on March 17th, what is believed to have been a Houthi cruise missile breached southern Israel’s air defences, coming down somewhere north of Eilat, albeit harmlessly.

Since starting their campaign against mainly international commercial shipping in the waters of the Red Sea and Gulf of Aden in November 2023, the Houthis have become one of the mostaggressive Iranian proxy groups in the Middle East. This and their apparently strengthened resolve in the face of US and UK strikes have substantially raised their profile internationally and won them plentifulplauditsfrom their supporters across the region. The perception that they are standing up to the US, Israel, and their Western cohorts has been instrumental in developing their motto“God is great, death to the U.S., death to Israel, curse the Jews, and victory for Islam” into a mission statement.

Map of Houthi Attacks

Source: BBC

Iran-Houthi Mutualism

In terms of regional geopolitics, the mutual benefits to Iran and the Houthis of their cooperation are far-reaching. For their part, the Iranians can use the Houthis to project power west into the Red Sea and Gulf of Aden, pushing back against the influence of Saudi Arabia and other Sunni states. Although not part of the Abrahamic Accords of 2020, Riyadh has been showing signs of a willingness to harmonise diplomatic relations with Israel, even since the events following October 7, 2023. This is a complete anathema to Tehran, for which the Palestinian cause is central to its historic antagonism with Tel Aviv. The fact that Saudi Arabia was instrumental in setting up the coalition of nine countries that intervened against the Houthis in Yemen from 2015 onwards only strengthens Tehran’s desire to confront the country’s influence regionally.

A secondary benefit of the Houthis’ Red Sea campaign is that it helps to maintain Tehran’s maritime supply lines to some of its franchise groups further north in Lebanon, Gaza, and Syria. Their importance to Iran’s proxy operations was illustrated in March 2014 when the Israel Defence Forces (IDF) conducted “Operation Discovery,"  intercepting a cargo ship bound for Port Sudan on the Red Sea’s western shores carrying a large number of M-302 long-range rockets. Originating in Syria, they were reckoned to have been destined for HAMAS in Gaza following a circuitous route that included Iran and Iraq and which would have culminated in a land journey from Port Sudan north through Egypt to the Levant. 

Iran began to increase its military presence in the Red Sea in February 2011 and has since established a near-permanent presence there and in the Gulf of Aden, to the south, with both surface vessels and submarines. However, this footprint is relatively weak compared to that of its presence in the Persian Gulf, to the east, and it would be no match for the Western vessels that have been operating against the Houthis in the Red Sea since late 2023. The latter’s campaign in these waters can, therefore, only reinforce Iran’s presence thereabouts.

A lesser-known reason for Iran’s desire to maintain influence around the Red Sea is a small archipelago of four islands strategically located on the eastern approaches to the Gulf of Aden from the Indian Ocean and Arabian Sea. The largest of the four islands is called Socotra and is considered by some to have been the location of the Garden of Eden. With a surface area of a little over 1,400 square miles, it has, in recent years, found itself more and more embroiled in the struggle for hegemony between Iran and its Sunni opponents in the region. In this sense, it and its neighbours could be seen to have an equivalence to some of the small islands and atolls of the South China Sea that are now finding themselves increasingly on the frontlines of Beijing’s regional expansionism.

While officially Yemeni, Socotra has long enjoyed close ties with the United Arab Emirates (UAE), with approximately 30% of the island’s population residing in the latter. Following a series of very damaging extreme weather events in 2015 and 2018, the UAE strengthened its hold on Socotra by providing much-needed aid, with military units arriving entirely unannounced in April 2018. Vocal opposition from the Saudi-allied Yemeni government led to Riyadh deploying its own forces to the island in the same year, but these were forced to withdraw in 2020 when the UAE-allied Southern Transition Council (STC) took full control of the island. Since then, Socotra has been considered to be a de facto UAE protectorate, extending the latter’s own influence south into the Gulf of Aden.

Shortly after came the signing of the Abrahamic Accords, which normalised relations between Israel and several other regional countries, including the UAE. Enhanced cooperation with the UAE gave Tel Aviv a unique opportunity to expand its own influence in the region through military cooperation with its new ally. In the summer of 2022, it was reported that some inhabitants of the small island of Abd al-Kuri, 130 km west of Socotra, had been forced from their homes to make way for what has been described as a joint UAE-Israeli “spy base." For Iran, this means that Israel now has a presence at a strategic point on the strategically vital approaches to the Red Sea from the Indian Ocean.

Perhaps a greater irritant for both the Houthis and Iran is the presence of UAE forces on the small island of Perim. This sits just 3 km from the Yemeni coast in the eastern portion of the Bab al-Mandab Strait, giving it obvious strategic importance. The UAE took the island from Houthi forces in 2015 and started to construct an airbase there almost immediately. Although there is no known Israeli presence there, Perim is now a major thorn in the side of Iran’s own regional ambitions. In the regional tussle for supremacy, this is yet another very pragmatic reason for the Houthi-Iran relationship.

Perim Airbase

Source: The Guardian

Since February 2022, much has been made of the extent to which Ukraine has become a weapons incubator for both sides in the conflict there, not least with regard to innovative drone and AI technology. Given the range of weaponry now apparently at the disposal of the Houthis in the Red Sea and Gulf of Aden, it may be that that campaign is serving a similar purpose for a Tehran keen to test recent additions to its armoury. Indeed, the Houthis’ use of a range of modern weapons, including drones, Unmanned Underwater Vehicles, and cruise missiles, since November 2023 continues to be reported on a regular basis. 

In return for prosecuting its campaign in the Red Sea, the latter received substantial material military support from Tehran, allowing them to raise their standing even more. The aforementioned attack, which killed three seafarers aboard the True Confidence, was the first effective strike against a ship using an Anti-Ship ballistic Missile (ASBM) in the history of naval warfare. First and foremost, this will have been regarded as a major coup for the Iranian military assets mentoring the Houthis in Yemen. Additionally, it has given the latter’s global standing a further boost since an attack of this magnitude would be more normally associated with the much more sophisticated standing military of a larger country. 

A simplistic analysis of the Houthi-Iranian relationship could stop at this point. However, recent events in the Middle East and further afield show that it is a relatively small coupling in a much larger, global marriage of convenience. A clue to this appeared in media reporting in late January 2024, when The Voice of America reported that Korean Hangul characters had been found on the remains of at least one missile fired by the Houthis. This led to the conclusion that the Yemeni group has received North Korean equipment via Iran.

North Korean missile supposedly used by the Houthis

Source: VOA

Russian Involvement

In late March 2024, Russia and China signed a historic pact with the Houthi in which the nations obtained assurance of safe passage through the Red Sea and Gulf of Aden in return for ‘political support’ to the Shia militant group. Despite the assurance, safety for Russian and Chinese vessels is not guaranteed. In late January, explosions from missiles were recorded just one nautical mile from a Russian vessel shipping oil, while on the 23rd of April, four missiles were launched in the proximity of the Chinese-owned oil tanker Huang Lu. Evidently, increased regional tensions incur an extra security risk for Russian tankers, regardless of the will of the Houthis to keep said tankers safe. 

The Kremlin is trying to walk a thin line between provoking and destabilising the West while simultaneously trying to avoid, literally and figuratively, capsizing regional Russian maritime activity. Its seemingly contradictory two-pronged approach aims to secure vital shipping routes while fostering an anti-Western bond with regional actors. Russia is seen upholding its anti-West rhetoric, which serves as a cornerstone for bonding with regional actors and pushing forth Russian economic interests, while silently attempting to facilitate regional de-escalation led by Washington. Despite being a heavy user of their veto power in the UNSC, Russia abstained from voting on Resolution 2722, which demands the Houthis immediately stop attacks on merchant and commercial vessels in the Red Sea. 

On January 11th, Washington put forth UN Resolution 2722 to the UNSC, which sought to justify attacks on Houthi infrastructure as a push-back for the group’s recent activities in the Red Sea. During the voting procedure of the resolution, Russia chose to abstain, even though Moscow often frequents vetoes as a tactic to show support for Kremlin-friendly states in Africa and the Middle East. The resolution subsequently passed, and the US and UK commenced their first strikes on Yemen the following day. These reveal Russia’s interests in securing enough stability to continue shipping its estimated 3 million barrels of oil a day to India, while aligning with overarching geopolitical alignments. 

Russia’s interest in stabilising regional conflicts may lie in the threats to its weapon supply chains. As the war in Ukraine drags on, Tehran’s importance as a weapon supplier increases the Kremlin’s collaboration efforts. Putin continues to foster and protect regional connections by actively protesting Western regional presence, attempting to balance the current crisis with crucial ties to middle-eastern nations.

Trade Route Diversion

Since the onset of the crisis in the strait, Russia has utilised the opportunity to bolster anti-Western and pro-Russian sentiments. For one, Russia has flagged various Russian transport initiatives. On January 29th, Russia’s Deputy Prime Minister, Alexey Overchuk, noted that Russia’s “main focus is on the development of the North-South international transportation corridor,"  which is a 7200-km multi-modal transport network offering an alternative and shorter trade route between Northern Europe and South Asia.

International North-South Trade Corridor

Source: ResearchGate Article by Eram Ashraf

A key part of the trade route involves an imagined rail network spanning from Russia to Iran. Though positioned as a universally beneficial transport option for both Europe and Asia, it seems Moscow and Tehran would benefit the most. The two highly sanctioned states, whose connection has recently deepened due to their shared economic isolation from the global economy, could position themselves as lynchpins of an effective transport network. 

Unlike Tehran, which still has control over the vital Strait of Hormuz choke point, Russia’s political might in terms of energy transport networks is quickly dwindling after the Baltic states’ complete exit from the BRELL energy system and the West’s resolve to decrease energy dependence. The North-South corridor thereby holds value as a catalyst of global energy transport and trade. 

However, this vision is thwarted by financial crises, with workon the railroad from Rasht to Astara in Iran suffering setbacks. Iran does not have the means to pour into the project and has already obtained a 500 million euro loan (about half of the total cost of construction) from Azerbaijan in FDI. In May 2023, it became known that the Kremlin would fund the project themselves by issuing a 1.3 billion euro loan to Tehran, despite Iran’s ballooning debt to Russia. The same month, Marat Khusnullin, Deputy Prime Minister, announced that Russia is expecting to invest approximately $3.5 billion in the North-South corridor by 2030. This is likely a major underestimation of the costs needed to complete the project. 

With Iran’s growing debt and Russia’s war-born financial strain, further trade route developments are sure to be delayed. Seeing as the railroad project between Russia, Azerbaijan, and Iran has been in existence since 2005 with no concrete end in sight, the North-South Corridor, despite Russia’s active marketing campaign in light of the troubles in the Red Sea, is unlikely to become a viable transport option in the near future. 

The Northern Sea Route (NSR), which Putin has similarly promoted since the start of the Houthi attacks, is likely to suffer a similar fate. The NSR’s realisation as a major global route is hindered by the fact that the Arctic Circle’s harsh climate causes the route to be icebound for about half of the year. Furthermore, in light of the recent war in Ukraine, the NSR is off-limits to even being considered a viable transportation route for large swaths of the West due to sanctions against Putin’s regime. 

Russia: Long-Term Strategy

With Russia’s closest regional naval presence being Tartus in Syria, Russia is also interested in establishing naval bases closer to the Red Sea. Russia’s primary interest is to establish a port in Sudan. High-level bilateral negotiations have been actively taking place between Khartoum and Moscow, with an official deal being announced in late 2020. The construction of a naval base would increase Russia’s influence over Africa, facilitating power projection in the Indian Ocean. Nonetheless, the ongoing Sudanese civil war seems to have stalled negotiations. 

The region is of such strategic interest to Russia that Moscow has recently pushed forth another alternative for bolstering its presence in the Red Sea: a naval base in Eritrea. During a state visit to Eritrea in 2023, Russian Foreign Minister Sergey Lavrov underscored the potential that the Massawa port holds. The same year, a Memorandum of Understanding was signed between the city of Massawa and the Russian Black Sea naval base Sevastopol, in which the two countries pledged to foster closer ties in the future. 

A New Axis
China and Russia have recently struck a deal with the Houthis to ensure ship safety, as reported by a Bloomberg article. Under the agreement, ships from China and Russia are permitted to sail through the Red Sea and the Suez Canal without fear of attack. In return, both countries have agreed to offer some form of “political support” to the Houthis. Although the exact nature of this support remains unclear, one potential manifestation could involve backing the Yemeni militant group in international institutions such as the United Nations Security Council. In January 2024, a resolution condemning attacks carried out by the Houthi rebels off the coast of Yemen was passed, with China and Russia among the four countries that abstained.

Despite instances of misfiring by Chinese ships after the deal, the alignment between these countries has been viewed as the emergence of an “axis of evil 2.0." Coined by former U.S. President George W. Bush at the start of the war on terror in 2002, the term “axis of evil” originally referred to Iran, Iraq, and North Korea, which were accused of sponsoring terrorism by U.S. politicians. Indeed, China and Iran have maintained a robust economic and diplomatic relationship. China is a significant buyer of Iranian oil, purchasing around 90 percent of Iran’s oil output, totalling 1.2 million barrels a day since the beginning of 2023, as the U.S. continues to enforce Iranian oil sanctions.

Chinese Dominance of Iranian Crude Oil Exports

Source: Seeking Alpha

However, it may be far-fetched to consider China, Russia, Iran, and North Korea as a united force akin to the Communist bloc against the West during the Cold War. After all, there are significant tensions within these relationships. For example, Beijing has not fully aligned with Moscow regarding the invasion of Ukraine. Additionally, there are power imbalances within these relationships, as Iran relies on China far more than China relies on Iran.

Despite the thinness of this idea of an "axis," it remains concerning that these powerful countries (three of which are nuclear-armed) are aligning against the democratic world. Considering the volume of trade passing through the Suez Canal and the impossibility for the U.S. and company’s Operation Prosperity Guardian to protect every ship in the region, the deal struck between China, Russia, and Iran may be a significant factor that could shift the current global economic balance towards the side of the "Eastern Axis.”

Similarly, China’s recent activities against the Philippines in the South China Sea could be viewed as an attempt to undermine the Philippines’ economy, which heavily relies on its seaports. This could force the Philippines to capitulate or incur significant costs for the U.S. should it decide to provide more assistance to further enhance the Philippines’ defence capabilities.

China: Long-Term Strategy

In recent years, China has increased its ties with countries outside the ‘Western sphere’. Apart from being present in the Gulf of Oman and destining a myriad of vessels to secure the region, it has made strides in developing long-term partnerships with Russia and Iran. Chinese collaboration with Russia is advertised as having “no limits,”,  and its 25-Year Comprehensive Cooperation Agreement with Iran further cements its political and economic involvement with both nations. 

The security and economic aspects of China’s long-term plans are the most relevant to commodity trade, as violent conflicts and geopolitical tensions are the prime hindrances to trade flows through the region. Nonetheless, the cooperation of these nations does not bode well with the West and could negatively impact trade regardless of improved security. 

China’s circumvention of the financial sanctions placed on Iran mocks the international community’s concerted effort to dissuade Tehran’s human rights violations, nuclear activities, and involvement in the Russia-Ukraine war. Its “teapot” strategy, which allowed China to purchase90% of total Iranian oil exports, relies on the use of dark fleet tankers and small refineries to avoid detection and evade the financial sanctions placed on Iranian exports.

Increased its bilateral trade flows with Russia also point to increased cooperation, with $88 billion worth of energy commodities being imported by China in 2022, with imports of natural gas increasing by 50% and crude oil by 10%, reaching 80 million metric tonnes. In 2023, bilateral trade reached $240 billion, proving both countries hold cooperation as a pillar of their economic strategy.

Chinese-Iranian Oil Trade

Source: Nikkei Asia

The West has increased efforts to dissuade cooperation with Russia, as seen with the creation of the secondary sanction authority. These sanctions cut off financial institutions that transact with Russia’s military complex from the U.S. financial system and have successfully led three of the largest Chinese banks to cease transactions with sanctioned companies. Despite the success of certain measures and sanctions, cooperation between both states remains, and their involvement in the Middle East will ensure collaborative efforts for the foreseeable future. 

Conclusion

The evident development of collaborative endeavours among the ‘Eastern Axis’ countries is enough to engender strife and uncertainty in trade in the Red Sea. It is becoming increasingly evident that uncertainty will still roam the seas regardless of whether the Houthi conflict is tamed, preventing maritime trade in the Red Sea’s key routes from reaching their potential. The reliance of regional security on both violent attacks and political alignments, such as the involvement of the Eastern Axis in the region, highlights how deeply supply-chain stability is intertwined with geopolitical relations, establishing Iran as a determinant of the Red Sea’s future commodity trade prosperity.

M23: How a local armed rebel group in the DRC is altering the global mining sector

In recent weeks, North Kivu, a province in the eastern part of the Democratic Republic of Congo (DRC), has seen over 135,000 displacements in what has become the latest upsurge in a resurging conflict between the Congolese army and armed rebel groups. The indiscriminate bombing in the region puts an extra strain on the already-lacking humanitarian infrastructure in North Kivu, which thus far harbours approximately 2.5 million forcibly displaced people.

The March 23 Movement, or M23, is an armed rebel group that is threatening to take the strategic town of Sake, which is located a mere 27 kilometres west of North Kivu’s capital, Goma, a city of around two million people. In 2023, M23 became the most active non-state large actor in the DRC. Further advances will exacerbate regional humanitarian needs and could push millions more into displacement. 

The role of minerals  

Eastern Congo is a region that has been plagued with armed violence and mass killings for decades. Over 120 armed groups scramble for access to land, resources, and power. Central to the region, as well as the M23 conflict, is the DRC’s mining industry, which holds untapped deposits of raw minerals–estimated to be worth upwards of US$24 trillion. The recent increase in armed conflict in the region is likely to worsen the production output of the DRC’s mining sector, which accounts for 30 per cent of the country’s GDP and about 98 per cent of the country’s total exports.

The area wherein the wider Kivu Conflicts have unfolded in the last decade overlaps almost entirely with some of the DRC’s most valuable mineral deposits, as armed groups actively exploit these resources for further gain. 

The artisanal and small-scale mining (ASM) sector produces about 90 per cent of the DRC’s mineral output. As the ASM sector typically lacks the size and security needed to efficiently deter influence from regional rebel groups, the mining sector as a whole falls victim to instability as a result of the M23 upsurge. Armed conflict and intervention by armed groups impacts 52 per cent of the mining sites in Eastern Congo, which manifests in the form of illegal taxation and extortion. As such, further acquisitions by M23 in Eastern Congo may put the DRC’s mineral sector under further strain.

The United Nations troop withdrawal

The escalation of the M23 conflict coincides with the United Nations’ plan to pull the entirety of their 13,500 peacekeeping troops out of the region by the end of the year upon the request of the recently re-elected government. With UN troops withdrawn, a military power vacuum is likely to form, thereby worsening insecurity and further damaging the DRC’s mining sector. However, regional armed groups are not the only actors that can clog this gap. 

Regional international involvement

A further problem for the DRC’s mining sector is that the country’s political centre, Kinshasa, is located more than 1,600 km away from North Kivu, while Uganda and Rwanda share a border with the province. 

Figure: Air travel distance between Goma and Kinshasa, Kigali and Kampala (image has been altered from the original)

The distance limits the government’s on-the-ground understanding of regional developments, including the extent of the involvement of armed groups in the ASM sector, thereby restricting the Congolese military’s effectiveness in countering regional rebellions. 

In 2022, UN experts found ‘solid evidence’ that indicates that Rwanda is backing M23 fighters by aiding them with funding, training, and equipment provisions. Despite denials from both Kigali and M23 in explicit collaboration, Rwanda admitted to having military installments in eastern Congo. Rwanda claims that the installments act as a means to defend themselves from the Democratic Forces for the Liberation of Rwanda (FDLR)–an armed rebel group that Kigali asserts includes members who were complicit in the Rwandan genocide. The FDLR serves as a major threat to Kigali’s security, as its main stated aim is to overthrow the Rwandan government. 

As such, M23, on the other hand, provides Rwanda with the opportunity to assert influence in the region and limit FDLR’s regional influence. Tensions between Rwanda and the DRC have, therefore, heightened, especially with the added fact that the Congolese army has provided FDLR with direct support to help the armed group fight against M23 rebels. As such, the DRC has been accused of utilising the FDLR as a proxy to counter Rwandan financial interests in the Congolese mining sector. 

Another major point of contention between the states involves the smuggling of minerals. The DRC’s finance minister, Nicolas Kazadi, claimed Rwanda exported approximately $1bn in gold, as well as tin, tungsten, and tantalum (3T). The US Treasury has previously estimated that over 90 per cent of DRC’s gold is smuggled to neighbouring countries such as Uganda and Rwanda to undergo refinery processes before being exported, mainly to the UAE. Rwanda has repeatedly denied the allegations. 

Furthermore, the tumultuous environment caused by the conflict might foster even weaker checks-and-balance systems, which will exacerbate corruption and mineral trafficking, which is already a serious issue regionally. 

In previous surges of Congolese armed rebel violence, global demand for Congolese minerals plummeted, as companies sought to avoid problematic ‘conflict minerals’. In 2011, sales of tin ore from North Kivu decreased by 90 per cent in one month. Similar trends can be anticipated if the M23 rebellion gains strength, which may create a global market vacuum for other state’s exports to fill. 

China 

In recent years, China gained an economic stronghold of the DRC’s mining sector, as a vast majority of previously US-owned mines were sold off to China during the Obama and Trump administrations. It is estimated that Chinese companies control between 40 to 50 per cent of the DRC’s cobalt production alone. In an interest to protect its economic stakes, China sold nine CH-4 attack drones to the DRC back in February 2023, which the Congolese army utilised to curb the M23 expansion. Furthermore, Uganda has purchased Chinese arms, which it uses to carry out military operations inside of the DRC to counter the attacks of the Allied Democratic Forces (ADF), a Ugandan rebel group, which is based in the DRC. In return for military support, the DRC has granted China compensation via further access to its mining sector, which is helping bolster China’s mass production of electronics and technology within the green sector.

The US

Meanwhile, the US has put forth restrictions on imports of ‘conflict minerals’, which are minerals mined in conflict-ridden regions in DRC for the profit of armed groups. Although the US attempts to maintain certain levels of mineral trade with the DRC, the US’s influence in the country will likely continue to phase out and be overtaken by Beijing. The growing influence of M23 paves the path for further future collaboration between China and the DRC, both militarily and economically within the mining sector. 

The UAE 

The UAE, which is a major destination for smuggled minerals through Rwanda and Uganda, has since sought to end the illicit movement of Congolese precious metals via a joint venture that aims to export ‘fair gold’ directly from Congo to the UAE. In December of 2022, the UAE and DRC signed a 25-year contract over export rights for artisanally mined ores. The policy benefits both the DRC and the UAE as the UAE positions itself as a reliable partner in Kinshasa’s eyes, which paves the path for further business collaboration. In 2023, the UAE sealed a $1.9bn deal with a state-owned Congolese mining company in Congo that seeks to develop at least four mines in eastern DRC. The move can be interpreted as part of the UAE’s greater goal to increase its influence within the African mining sector. 

Global Shifts

China and the UAE’s increasing involvement in the DRC can be seen as part of a greater diversification trend within the mining sector. Both states are particularly interested in securing a stronghold on the African mining sector, which can provide a steady and relatively cheap supply of precious metals needed to bolster the UAE’s and China’s renewables and vehicle production sectors. The scramble for control over minerals in Congo is part of the larger trend squeezing Western investment out of the African mining sector. 

Furthermore, the UAE’s increasing influence in the DRC is representative of a larger trend of the Middle East gaining more traction as a rival to Chinese investment in Africa. Certain African leaders have even expressed interest in the Gulf states becoming the “New China” regionally, as Africa seeks alternatives to Western aid and Chinese loans. 

Although Middle Eastern investment is far from overtaking China’s dominance of the global mining sector, an interest from Africa in diversifying their mining investor pools can go a long way in changing the investor share continentally. Furthermore, if the Middle East is to bolster its stance as a mining investor, Africa serves as a strategic starting point as China’s influence in the African mining sector is at times overstated. In 2018, China is estimated to have controlled less than 7 per cent of the value of total African mine production. Regardless, China’s strong grip on the global mining sector might be increasingly challenged through investor diversification in the African mining sector. The DRC is an informant of such a potential trend. 

The further spread of the M23 rebellion, though likely to damage the Congolese mining business, might also foster stronger relations with countries such as the UAE which seek to minimise ‘conflict mineral’ imports. As such, the spread of the M23 rebellion–which acts as a breeding ground for smuggling, might catalyse new and stronger trade relations with the Middle East. This could be indicative of a trend of “de-Chinafication” in the region, or at least greater inter-regional competition for investment into the African mining sector.

Rice Bowls and Revitalization: Navigating China's Complex Food Security Landscape

Introduction

CCP Chairman Xi Jinping has proclaimed that the “Chinese people should hold their rice bowls firmly in their own hands, with grains mainly produced by themselves”. Yet this directly conflicts with his other stated goal of “rural revitalisation”, the effort to identify high value crops and agricultural industries for the purpose of raising farmer’s incomes and to alleviate rural poverty. Such tensions denote the contrast between two old visions of the state's duty to Chinese citizens, with both outlooks sharing little in common with the other.

This is reflective of the dual problems China faces over the coming decades: how to continue on the path of uplifting the rural poor from poverty, whilst simultaneously restricting their choice of crops to core staples in the interest of national food security.

This spotlight presents the problems facing China’s domestic food supply and increasing foreign dependence while discussing the complications caused by goals of both economic uplift of citizens and the long term protection of the nation’s dwindling farmland. Additionally, this spotlight analyses historic trends in Chinese food production and demand and their subsequent effect on global food prices, before reviewing the possible Taiwan-related motivations of the Chinese state. 

This spotlight concludes that the proclaimed “guozhidazhe”, meaning a national priority or a main affair of the state, can be considered both as a push for food security while at the same time demonstrating a deliberate decision to prioritise the food security of the urban middle classes over the rural poor, this tradeoff itself having political and social consequences.

Rural Policy Background

The Deng Xiaoping market reforms of the 1980s seem to fade further and further into the rear view mirror as China trundles along towards true self-sufficiency. That’s when collective farms, a staple of most early communist regimes, were split and farmers were permitted to sell any crop they wished at market price.

Current Chairman, Xi Jingping, takes the opposite view, that Chinese farmers must forget the days when premium sellers such as flowers and fruit were harvested on China’s dwindling and already small stocks of arable land. Instead, farmers must focus on harvesting the staples that keep a nation going, a factory’s workers churning, and the nation’s stockpiles ever expanding. As such, China has been building up huge stockpiles in basic foodstuffs such as wheat, rice, and corn (around a year’s national supply of each). This has raised the global price of grain, with China now hoarding over half the world’s supply.

China is not blessed with good conditions for agricultural production. China has long been troubled by famine, with the emperors of antiquity usually looking to fill bellies as the first step to win hearts and minds. Today, China attempts to feed a fifth of humanity with less than 10% of the world’s farmland and only 7% of the world’s fresh water. Despite this, it manages to produce around a quarter of the world’s grain and ranks first across the globe for the production of cereals, fruit, vegetables, meat, poultry, eggs, and fishery products.

China's food security strategy today faces several challenges and trade-offs. One of them is the dilemma between increasing farmer's incomes and promoting the production of basic foodstuffs over cash crops. Cash crops are crops that are grown for sale rather than for domestic consumption, such as cotton, tobacco, tea, and fruits. Cash crops can provide higher returns for farmers and stimulate rural development, but they also compete with food crops for land, water, and other resources. This is causing confusion and resentment on the ground, where generations of shifting national priorities have been felt in the pockets of China’s rural population.

Another challenge is the dependence of China's food security on the stability of the global food market and the geopolitical situation. China is the world's largest importer of agricultural products, including soybeans, corn, wheat, rice, and dairy products. Between 2000 and 2020, the country’s food self-sufficiency ratio decreased from 93.6 percent to 65.8 percent. This is predominantly due to changing diet patterns with imports of edible oils, sugar, meat, and processed foods increasing. 

This has been spurred on by the increasingly large Chinese urban middle class. More concerned with food safety than their parents, and dismayed from Chinese brands by decades of little to no strict food safety regulations in the country, these people turn increasingly to internationally imported goods. Additionally, there have been many contaminated and unsafe food scandals in China this side of the millennium, for example a large proportion of parents are still loyal to foreign baby formula as the result of six babies dying and hundreds of thousands being poisoned as a result of contaminated domestically produced formula in 2008.

China is also the largest producer of meat on the planet as stated earlier. This has been achieved by diverting many of the basic foodstuffs to livestock instead of to humans. China consumes around 175 million tonnes of corn in animal feed each year and imports approximately 100 million tonnes of soybeans to also use in animal feed. The growing urban middle class has increased demand for animal products domestically, such that corn used for animal feeds tripled from around 20% in the 1960s to 64% by 1994. This has contributed to state concerns over food security, with more of the staples going to livestock than ever before and the population's nutritional intake increasing in complexity. The reliance on imported food to meet those needs presents China with a problem,  not just in terms of quantity for those at the bottom, but also in terms of quality and variety for those in the newly established middle class. China, therefore, is aiming to increase staple harvests not just to meet the needs of the population in terms of calories but also in terms of happiness and nutrition in an evermore complex and dangerous world the CCP perceives in the face of climate and geopolitical threats.

Additionally, it is difficult for food producers to make any meaningful profit farming staples, due to the price controls instituted from the top down. Therefore, another of Xi’s policy staples seems set for the chopping block. Xi has identified the uplifting of the rural poor as a priority for the CCP by allowing them to grow crops of high market value and invest in profitable agricultural industries to achieve rural revitalisation.

China has further diversified its uses for corn into the production of High Fructose Corn Syrup (HFCS). Reforms in the mid-2010s led to a mass sell-off of the nation’s then corn reserves and allowed for HFCS output to increase and for idle capacity to be reignited. HFCS sells for around a third of the price of natural sugar in China and garners a fifth of the domestic sweetener market. Chinese HFCS has also been exported abroad and disrupted the sugar industries of a number of southeast Asian states, with already declining sugar consumption causing concern in the Philippines where sugar cane harvests regularly outstrip demand and where around half of Chinese HFCS ends up. As the CCP pushes for more corn to be grown domestically and therefore be bought within strict price controls, the HFCS industry may further disrupt the growth in sugar demand awaited by many burgeoning economies in the region, particularly India, Indonesia, and Vietnam where imports of Chinese HFCS rank just behind the Philippines. 

The Filipino government enacted trade restrictions on Chinese HFCS to protect domestic sugar production, further export of HFCS will increase tensions, place economic pressure on a key Filipino national industry, and inflame tensions in the region.

However, many question what happened to the “Grain to Green” goal set in the 1990s of planting forests to counter soil erosion and limit desertification. China’s food dependence is predicted to continue increasing, as a result of arable land loss. China in 2019 only possessed 95% of the arable land it held in 2013, this has been attributed to overuse of fertilisers, neglect of land, and climate change. Extreme weather, environmental degradation, water scarcity, and pollution all look to be ready to make the problem worse in the coming years and decades. Researchers from both China and the US judged that climate change and the loss of parts of the ozone layer were responsible for a 10% drop in average crop yields from 1981 to 2010.

The implications for global commodities

A fifth of humanity drastically changing the quantities and types of food they eat has unsurprisingly had major effects on the global price of food in the past. The food price hike of 2007-2008 pushed approximately 400 million people into poverty worldwide and was partly blamed by many on China and India’s rising demand for foreign agriculture leading to increased consumer competition on international markets and therefore higher prices.

However, if China stays on course to increase the amount of food produced domestically, at least in the short to medium term, based on the lack of attention paid to the slowly dwindling supply of arable land, then demand internationally for agricultural commodities like wheat, rice, and corn is bound to fall, possibly leading to a reduction in prices for these basic products and the foodstuffs they produce in combination with other materials and ingredients. Some of the poorest and most import-dependent countries on Earth should expect less competition at the table from now on as China prioritises the stomachs of its people over its farmers’ wallets. 

Why Change So Much So Quickly?

China’s buildup of stockpiles on top of increasing domestic food production has many analysts worried. With tensions over Taiwan at a high, it raises the possibility that China’s move to increase food security is an attempt to prepare for future US-led sanctions and blockades as a consequence of invading what it considers to be a rebel province. 

Alternatively, the justifications of the policy make sense in the opposite terms, not that conflict is planned but that shocks to the global food system, such as the collapse of the Ukraine Russia grain deal of which China was a major beneficiary, are only expected to increase as a result of conflicts in the region, or on the other side of the world. 

It can be easily understood that the push for national food security is one caused by external factors alone, but the initiative’s counteraction against ideals of rural revitalisation demonstrate a definite domestic consequence and a readjustment of the urban/rural political and economic relationship in China. Even as improved physical and digital infrastructure draw the educated and successful back to small towns and villages, there has been very little progress towards bridging the urban/rural divide. In 1995, urban workers made three times their rural counterparts, today the ratio is roughly the same even in the face of government efforts to close the gap. 

The realignment taking place, for farmers to grow low income but highly needed crops to keep both basic food prices low and maintain a steady supply of cheap other foodstuffs such as meat and sweetener, illuminates China’s prioritisation of the urban middle classes with more complex dietary expectations over the farmers and rural poor reaching to claim their share of the Chinese dream.

Conclusion

China's dual objectives of ensuring food security and promoting rural revitalisation underscore a complex challenge. Balancing the imperative for self-sufficiency with the need to uplift rural communities reveals tensions between historical legacies, socioeconomic aspirations, and global realities. The intricate interplay between these goals not only impacts China's domestic landscape but also resonates internationally through changing trade dynamics and geopolitical considerations. The nation's journey to navigate these complexities will define its agricultural trajectory, with far-reaching implications for both its citizens and the global community.

Image credit: Colin W via Wikimedia Commons

Examining the rise of Resource Nationalism

Recently, China’s Zhejiang Huayou Cobalt company approved plans for a new $300m lithium processing plant in Zimbabwe. The company is aggressively expanding operations in line with CCP foreign policy, consolidating rare earth resources and the infrastructure needed to process them. The investment comes after the China-based firm purchased the Arcadia hard rock deposit from Australian Prospect Resources for $422m last year. It now brings total investment by Chinese firms in Zimbabwe to over $1 billion since 2021. However, it also raises the potential benefits that resource nationalism may bring to nations, particularly those in Africa.

That is because the investment comes on the heels of recent Zimbabwean export bans on lower grades of lithium and raw lithium ores in an effort to nationalise its lithium production. In December of 2022, Zimbabwean mining minister Winston Chitando stated that ‘no lithium-bearing ores or un-fabricated lithium shall be exported from Zimbabwe to another country except under the written permission of the minister’. This move was further galvanised by the incorporation of a larger group of ‘Approved Processing Plants’ by the government, which means that any firms looking to invest in lithium operations will have to invest in Zimbabwean infrastructure in order to do business. Furthermore,in addition to relying on government approved facilities, the mining firms will have to follow the prices set by the MMCZ when selling their raw ore to processing plants. 

This twofold measure not only confines the entire lithium extraction and refinement process to Zimbabwe, but also pressures foreign firms to have more vested stakes in the development of Zimbabwe. These measures have had no negative impact in Zimbabwe, as foreign investments have shown no signs of slowing. Zimbabwe is quickly reaching its target of $12 billion in production, with future plans to surpass that target in the coming years. This move by Zimbabwe, which is the 6th largest lithium miner globally,further cements the growing wave of resource bans that have become a popular way of raising revenue and encouraging passive investment in infrastructure at little cost.

Zimbabwe is an example in a growing group of nations who are racing to nationalise and control their natural resources. In the Americas, Mexico and Chile recently nationalised their lithium resources and now have total control over the extraction and refinement of the metal, which has allowed them to enjoy considerable economic benefits, in addition to increased infrastructure and employment. Whilst African and South American countries are consolidating their mineral deposits, Asian countries have also joined the fray. In 2020, Indonesia instituted a nickel ore export ban after a six-year debate. Since doing so, it has increased its smelting facilities from 2 to 13 and increased the value of Indonesia’s nickel exports from $57m in 2020, to $750m in just three years.These  

By looking at these cases, there seems to be an ironclad case for resource nationalism, which has seen a resurgence owing to the rise of China as a key economic player. Both Chile and Mexico are relying on Chinese investment and demand, whilst Indonesia’s key infrastructure was developed as a part of the ‘Belt and Road’ initiative.

The role of Covid-19, however, cannot be ignored either, as the pandemic persuaded many countries to nationalise their resources. Additionally, in the case of Chile and Mexico, there is a strong nationalist presence that demands the state have more control over mineral resources. Issues around resource policy became more prevalent during the pandemic, where resource and capital uncertainty pushed some nations to pursue more nationalistic agendas in regards to their resources.

The overall picture of resource nationalism seems to be a positive one, with countries that nationalised seeing a rise in revenue and infrastructure, with the latter being more important to allow for future economic expansion. Other nations have also moved to introduce resource bans. The move to curb artisanal mining has proven to be a positive one, but it could potentially fuel a rise in global prices and lead to more intense resource competition. 

There also are other potential complications that arise from resource nationalisation. In particular, the example of the DRC is one to be cautious of for prospective nations. After implementing their new Mining Code in 2018, the government gained more power to tax and intervene in the mining industry. This led to increased taxation, intervention and corruption as the government became more involved in the mining industry. This was seen when the Congolese government suddenly began revoking permits for mining projects, which resulted in a drop in activity and even legal action in the case of Sundance Resources.However, it should be noted that this did little to slow the creation of new mining ventures or operations, with the government granting 3053 different mining-related permits. In addition, the value of exports have risen since the law was implemented, showing that despite the challenges faced by the law, companies are still willing to engage in activity in the region.

Resource nationalism is gaining more popularity and continues to be a tested source of revenue generation for nations that are already invested in mining and metal industries. With current trends, it would stand to reason that resource nationalism could spread to soft commodities, as states look for ways they can expand their revenue and infrastructure more passively through legislation and private market action. 

Gallium and Germanium: Pioneers in China's Export Ban

From August 1, 2023, China has announced a ban on the export of gallium and germanium along with their chemical compounds. As per the Critical Raw Materials Alliance, China produces 60% of the world’s germanium and 80% of gallium. Both these metals in question have heavy industrial uses such as in defence, semiconductors and communication equipment. Gallium and germanium, however, are extracted as by-products of aluminium and zinc - metals of which China is largest global exporter - which means that alternative sourcing and supply chain diversification becomes difficult.

China’s export ban stems from the US-led restrictions on the export of semiconductors and related equipment to China. It also comes in the wake of restrictions heralded by Japan and Netherlands against the export of of chip making equipment to China. Given the momentum to diversify supply chains from the world’s largest manufacturer, countries such as Belgium, Canada, Germany, Japan, Ukraine, South Korea, Russia and Germany have been identified as potential sources to produce gallium and germanium. India on the other hand has been identified as a potential destination to take over China’s sway in manufacturing of semiconductors. Such developments present a cue from Kaname Akamatsu’s ‘Flying Geese Model’ that promotes diversification of supply chains. With Taiwan Semiconductor Manufacturing Co allocating resources to develop semiconductor plants in Japan and the USA, plans to cut China’s dominance in chip making have already been rolled out. However, hiccups exist as despite the passage of the CHIPS and Science Act in the US, suppliers based in South Korea and Taiwan remain reluctant to shift their manufacturing bases outside of China given their large-escale investments in the country. Also, the recent protectionist measures unleashed by the US have accentuated concerns about the stability in supply chains as trade and military tensions rise between the globe’s two major economies. 

Although considered a ban, experts opine that China’s ban is more limited in scope as it requires exporters to apply for licences and report details of overseas buyers and their applications. The ban has been identified as a means of retaliation that the Chinese government is willing to take to secure its national interests. China has previously used trade restrictions to sustain its downstream industries and has also faced legal hurdles at the WTO. In the wake of such rising trade restrictions announced by several countries, an examination of Article XI of the General Agreement on Tariffs and Trade (GATT) under the WTO allows for the temporary application of export controls to relieve critical shortage of the commodity in question. In the realm of politics, nation-states tend to manipulate this concept of ‘temporary application’ by laying claim to Article XXI. Article XXI gives WTO members absolute sway in implementing their respective trade restrictions by justifying their policies as crucial to ‘essential security interests’. 

As legislative enactments promoting export control gathers stream across economies, the concept of balancing stakeholder interests both upstream and downstream becomes challenging due to geopolitical issues. Contingency planning, diversification in sourcing and procurement, establishing manufacturing plants outside traditional locations, etc. may become the norm in the future as businesses swim through the ripple effects of deglobalisation policies.

“De-dollarization” – A Teaser

In February 2023, the yuan’s share of global trade increased to 4.5% — close to the Euro at 6% — from less than 2% no longer than a year ago. Simultaneously, the dollar share of central bank foreign reserves fell to a 20-year low of 58% in the same period (IMF). This situation followed the sweeping sanctions imposed by the West on Russia after its invasion of Ukraine, notably freezing Russian dollar reserves through the SWIFT payment system. The financial blockade has naturally led Russia to seek alternatives to the dollar to conduct international trade, rapidly making the Chinese yuan the most traded foreign currency on the Russian exchange.

Beyond Russia, Western sanctions have acted as a shock therapy for emerging economies, with numerous countries announcing their intentions to diversify their currency usage, and multiplying bilateral trade agreements denominated in their own currencies. For instance, Saudi Arabia has reportedly entered into active talks with China to price some of its oil sales in yuan. Similarly, Brazil has positioned the yuan as the second foreign reserve currency, ahead of the Euro, while Banco BOCOM BBM—a Brazilian bank controlled by China's Bank of Communications—became the first bank in Latin America to sign up as a direct participant in China's competing settlement agreement, CIPS, in March 2023. India is also slowly departing from the dollar, multiplying regional trade agreements settled in its own currency.

This movement away from the dollar system reignited the debate around “de-dollarization,” an hypothesis which has featured economic debates since former US President Richard Nixon upended the original Bretton Woods agreements in 1971. However, macroeconomics pundits call for moderation: Money is first and foremost a game of trust, it requires users’ confidence to work. Countries do not hold a foreign currency if their trade partners are unlikely to accept it as payment for their exported goods. On this benchmark, the US dollar is expected to remain the game in town in absence of deep structural changes. Indeed, its closest competitor—the Chinese yuan—is a closed currency: It cannot be exchanged for other currencies without the CCP’s approval, which maintains a tight control over international capital flows. This fundamentally limits the ability for central banks to accumulate yuan as reserve and to use it to trade internationally. As the liberalization of the Chinese financial system would pose major challenges on its economic governance, most believe that the convertibility of the yuan represents an unrealistic scenario for the foreseeable future.

Yet, the underlying trend seems to be clear: BRICS countries are gradually developing into a trading alliance. On August 22nd, the BRICS will hold a meeting in South Africa to explore the possibility of introducing a new shared currency. Such a solution would tackle one of the main impediments of de-dollarization through bilateral agreements. Through a shared currency, the BRICS would tap into a geographically diversified basket of commodities and manufactured goods, making a compelling argument for parking said-shared currency as a central bank foreign reserve, rather than converting it back to US dollars or Euros for international trade.

Would this shared currency be a credible threat to the US dollar in the long-run? Yes. Under its current organization, BRICS countries have outgrown the G7 on a PPP basis. Their geographical diversity would allow a level of self-sufficiency and production range beyond current monetary unions such as the Eurozone, while BRICS’ combined trade surplus would underpin the currency’s stability (FP). Furthermore, as regional economic powerhouses, BRICS could influence their local trade partners to adopt their currency, allowing goods to circumvent any potential bilateral trade restrictions through third countries, thus ensuring global trade continuity. With 19 other commodity-rich countries—such as Argentina, Iran, Egypt, Indonesia, and, most importantly, Saudi Arabia—interested in becoming part of the BRICS association, the challenge to dollar hegemony appears increasingly tangible.

To achieve global acceptance, the BRICS would need to demonstrate successful joint currency management. This would, evidently, be a long and challenging undertaking for the BRICS. However, initial steps toward this vision have already been taken with the creation of the BRICS Interbank Cooperation Mechanism and BRICS Pay, a cross-border payment system that avoids conversion to dollars, while talks of aligning Central Bank Digital Currencies have also been floated. While past efforts to establish ambitious projects have often fallen short of expectations, such as the BRICS credit rating agency or the BRICS’ New Development Bank, the group remains steadfast on de-dollarization, having a history of overcoming internal crises. Despite significant upheavals between its members, the BRICS group has intensified its collaboration and persistently expanded the breadth of policy matters it tackles, a phenomenon which should sound familiar to our European readers. Having now identified de-dollarization as a common goal, it appears unlikely that the group deviates from its trajectory.

On July 7th, the Russian Embassy in Kenya declared on Twitter that “the BRICS countries are planning to introduce a new trading currency, which will be backed by gold,” propelling the yellow metal to $1954 per ounce, along with silver. While Russia’s bombastic announcements should be approached with caution, this path is not unlikely. By tying their currency to gold, BRICS countries could introduce a degree of confidence into their shared currency, harkening back to pre-Bretton Woods monetary arrangements. In today’s fragmented international order, commodities are reclaiming the center stage, as global demand for resources surges amid industrial onshoring, and increased emphases on energy transition and energy security in advanced economies. Those emerging needs are pushing nations to secure strategic reserves and developing their local processing capacities, thereby reshaping antiquated trade dynamics. In this scenario, commodity-rich countries, once sidelined, are finding themselves in positions of increased influence against debt-laden, service economies. As investors reinterpret what constitutes a good sovereign debt collateral, a shift from fiat back to a commodity-backed monetary system could provide the necessary impetus for the BRICS shared currency plan to gain traction and begin the slow erosion of dollar dominance.

Regardless of what will come out of the next BRICS meeting, stay posted for the next joint release from London Politica Global Commodities Watch and Business and Market Watch. We will explore in depth the likelihood, as well as the consequences, of de-dollarization on world politics.

“Protecting America's Strategic Petroleum Reserve from China Act”: Assessing the US Congress’ new idea for depleting Chinese oil markets

On January 12, 2023, the United States House of Representatives passed Bill H.R. 8488, titled the "Protecting America's Strategic Petroleum Reserve from China Act." If enacted, the legislation would prevent the Secretary of Energy from exporting the US strategic petroleum reserve (SPR) “to any entity under the ownership, control, or influence of the Chinese Communist Party”.

The bill received approval with 331 favourable votes and is currently awaiting deliberation by the Senate ever since. The Upper House can either reject or approve the bill and if approved, it would proceed to the President for consideration. This spotlight attempts to clarify the potential impacts on China (if any) in case the Act ever becomes law and restricts its access to imported SPR reserves.

The road ahead on Capitol Hill

The Bill had significant bipartisan support in the Lower House to secure a comfortable majority, with all the 218 present Republicans and about half (113) of present Democrats voting “yes”. Analyst Benjamin Salisbury from Height Capital Markets argues that approval in the Senate might not be so smooth as the Upper House is controlled by Democrats, but it’s still feasible under “tough compromises” - and under greater pressure from voters for a stronger stance against China. The greatest obstacle, however, might arise from the President's Office

President Joe Biden has been depleting the SPRs at an unprecedentedly faster pace to manage oil prices driven up by the war in Ukraine. However, some argue that the move is more about political concerns involved in alleviating inflationary pressures on fuel ahead of an election year.  Since the SPRs are only meant to be used in times of great uncertainty and with due restraint - only enough to secure minimal levels of energetic security - critics point out that the President might be compromising the country’s long-term energetic security for short-term political gains. From this point of view, the Executive would hardly sanction a bill that would constrain its influence on oil markets.

But even in a scenario where the Act is approved by both the Legislative and Executive branches, current data suggests that its effects on China’s energy markets are likely to be minimal.

How will China be impacted?
China is the world’s second-largest consumer of crude oil in total volume, and the commodity accounts for roughly 20% of the country’s total energy generation. This figure is roughly comparable to other large emerging economies like India (23%) and Russia (19%). Nevertheless, China represented only one-fifth of the total foreign purchases of SPR released in 2022, while the US itself accounts for only 2% of China’s total crude imports.

Source: S&P Global Commodity Insight

As evident from the chart above, China depends more on oil producers in the Middle East and Eurasia and has concentrated its diplomatic efforts accordingly. It has expanded economic and financial ties with Saudi Arabia, mediated an agreement with Iran, and continues to purchase Russian oil in large quantities. These efforts are likely to provide China with greater resilience against disturbances that may affect energy supplies and limit the US' ability to manipulate oil markets to harm the Chinese economy. Rather than a practical purpose, the act’s eventual approval would likely serve a rhetorical one: Washington is taking a tougher stance against Beijing.

Climate change, El Niño and food security in China

Heavy rainfall in China has caused significant damage to wheat fields, leading to an increase in wheat prices. As the world's top consumer and producer of wheat, China's agricultural sector plays a crucial role in global food security. The impact of the recent extreme weather events on wheat production could be catastrophic for China’s food security, and the Chinese Communist Party (CCP) has announced measures being taken to mitigate the risks.

Henan province, accounting for 25% of China's wheat production, has suffered the worst rainfall near harvest in over a decade. This extreme weather pattern has caused flooding and landslides, resulting in the loss of lives, and further exacerbating concerns about food security. The recent occurrence of record-breaking heatwaves and droughts in China, including Shanghai's hottest May in a century, has raised alarm bells regarding the vulnerability of the country's food supply. Despite the current rain, officials remain worried that the drought may extend to the Yangtze River Basin, which provides China with two-thirds of its rice. Animals have already succumbed to the intense heat, further underscoring the urgency to address the water scarcity issue. El Niño, a natural phenomenon that brings even warmer temperatures originating from the Pacific, is also a cause for concern, as it could exacerbate China's food security challenges.

China's wheat production reached 140 million tonnes in 2022, highlighting its significance as a key crop for the nation and the world. The country is expected to have a bumper crop this year, which is a harvest with an unusually high yield. However, the heavy rains in the last few weeks have resulted in damaged wheat crops, pushing up prices in regions like Henan and causing concerns for both domestic and international markets. Due to the damage to wheat crops, animal feed markets have started to replace corn with cheaper wheat, leading to further price fluctuations. While the rains have temporarily supported prices, the long-term impact remains uncertain, as commodity analysts in Shanghai suggest that clarity will only emerge once the rainfall subsides, which could be as late as August.

Several government agencies agree with the Ministry of Emergency Management also predicting that rain, floods, and hailstorms are likely to persist until August. Northern China faces water-related disasters, the South may experience drought, and the East Coast, a key driver of economic growth, could encounter typhoon storms earlier than usual. Sichuan and Chongqing provinces face a significant risk of reduced rainfall, increasing the threat of drought and adding to the complexity of China's food security situation. Food security has been identified as a top priority by the Chinese government, with President Xi Jinping emphasising its critical importance to national security. Scientists have already warned that climate change will exacerbate global food security challenges in the future, making it crucial for China to address its vulnerabilities and develop resilient agricultural practices.

So far, markets have been focused on the destruction of the Kakhovka Dam in Ukraine. On 6th June,  following the sabotage and subsequent flooding of the surrounding area, the price of global wheat spiked 2.4% to US$6.39 per bushel. Corn and oats both rose by 1% and 0.73% respectively. Markets have likely priced in the upcoming possible disruptions in wheat supplies from China, but the extent to which the disasters could damage this year’s yield is yet to be seen, and could surprise analysts. The Kakhovka Dam’s destruction is a reminder to markets of the volatility of wheat supplies, especially to developed countries which are particularly affected by shortages.

Brazil-China: Trade Relations and their Impact on Commodities

Brazilian President Lula's recent trip to China has stoked tensions between Brazil and the West. From both a geopolitical and financial point of view, Lula’s actions surrounding the trip represent a marked change from his predecessor Bolsonaro. Where Bolsonaro had backed ally President Trump’s aggressive rhetoric on foreign policy, Lula is not only trying to reestablish Brazil’s role in global diplomacy, but is also toeing a more neutral line in the developing cold war between China and the US. Lula seems to be aligning himself with the other BRICS (Brazil, Russia, India, China, and South Africa) nations, but due to rivalries between the member nations, it is the bilateral economic deals that will have a more visible effect on the world, rather than empty foreign policy promises. 

Alongside 240 Brazilian business leaders, Lula headed to China for the inauguration of former Brazilian President Dilma Roussef as head of the New Development Bank, a multilateral development bank established by the BRICS to help fund infrastructure projects in developing countries. This set the financial tone for the rest of his visit, in which 15 deals worth about $10 billion were signed between Brazil and China. China has long been Brazil’s largest export market and Lula wants to leverage this relationship to help with the reindustrialization of Brazil. With US companies leaving Brazil, the symbolism of Ford seeking to sell its plant to BYD cannot be understated. This coupled with talks between BRICS to dethrone the dollar as the currency for international trade will come as a blow to Biden, though it is unlikely that China will want the Yuan to become an international currency. Lula’s comments surrounding the Russo-Ukrainian war sparked more controversy in the West after he offered to join China in mediating peace talks while also placing partial blame for the conflict on the US. 

Overall, Lula’s visit is most surprising as it marks a shift in Brazilian foreign policy, though this is only surprising when looking at the policies of his predecessor. Indeed, Lula is known to be a staunch leftist and had started cultivating a relationship with China in his previous presidency, so we can assume that this relationship will only be strengthened under his administration. President Xi has made it clear that Brazil is a key part of his plans of challenging US global hegemony, and this is shown by bilateral trade increasing by 10.1% from 2021 to 2022. A key commodity being sold by Brazil is beef, as China has a huge demand for it with 55% of their imports coming from Brazil and 10% of Brazil’s sales being to China. However, Brazil is also a key part of the iron, soybean, and crude petroleum markets. In addition to this, Brazil was the single largest recipient of Chinese FDI in 2021. This is part of Xi’s plan of integrating Brazil into the Belt and Road initiative, to increase China’s influence in Latin America, so we can expect trade to grow in coming years. 

The markets for each of Brazil’s main commodities, beef, soybeans, and crude petroleum could change drastically by the end of the year. Both beef and soybean sales are interconnected. Soybeans are instrumental for feeding beef cattle with cattle feed making up 18% of soybean sales in the US and 52% of the oil gathered from soybeans are used in the food industry. With growing demand for beef from China opening up, we can expect beef sales to increase through restaurants reaching pre-pandemic levels of demand and pushing soybean prices up as restaurants need more oil for frying food, while farmers will need more soybeans to feed growing cattle numbers. While some feared stricter controls on cattle rearing in the Amazon with the election of a left leaning President, Lula has been unwilling to change his predecessor's profitable policies. While Lula has talked about placing people and nature in front of profits, this philosophy has not yet reached the agricultural sector, but this does not necessarily mean it will enjoy projection for the rest of his term. For now the only thing which has stopped the flow of Brazilian beef has been cases of mad cow disease, but suspensions were normally lifted within a few months of being placed.

Iron ore makes up the largest portion of Brazil’s exports and its price shifts are harder to predict. In the short term, prices will increase as China opens back up. As it eases its coronavirus policy and its real estate sector gradually recovers, it is likely that demand for iron will increase from Brazil’s main trading partner. However, as the markets recover their supplies from India and Brazil, it is likely by the end of the year that prices could decrease. There is even the chance that Russian and Ukrainian supplies flood back into the market, which could drastically change the price of iron ore but it is unclear if a peace settlement can be reached anytime soon.

Commodities in the First Quarter: Inflation, War, and Geopolitics

Goldman Sachs’ 2023 commodity markets outlook had anticipated a substantial return of over 40 per-cent by the end of 2023 for commodities (S&P GSCI TR Index). As the first quarter of 2023 draws to a close, S&P GCSI spot prices closed the quarter at a -2.81 per-cent loss. As was the case in many financial markets, the S&P GCSI saw its biggest decline in the first quarter in the week of Silicon Valley Bank’s collapse – gold being the glaring exception.  Of course, this is by no means indicative of how commodity markets will perform for the remainder of the year. Nevertheless, the impact of the ongoing banking on the inflation-duration investment cycle (elaborated below in Figure 1) for commodities remains to be assessed. This spotlight aims to do precisely that, considering some of the macroeconomic assumptions and models proposed in Goldman Sachs’ 2023 commodity outlook. 

Understanding the Inflation-Duration Investment Cycle

The inflation-duration investment cycle is a tool useful for understanding investment in commodities and commodity market behaviour, relative to inflation and interest rates. It loosely correlates with the Merril Lynch Investment Clock – although it is a bit more specific to commodity markets.

Figure 1 - The Inflation-Duration Investment Cycle. Adapted from Goldman Sachs Commodity Outlook.

When Goldman Sachs published their 2023 Commodity Outlook, they affirmed that at present, the commodity market was still in the first stage of the inflation-duration investment cycle. Crucially, the 2023 Commodity Outlook explains that in addition to the current high-inflation, high-interest rate macroeconomic environment, commodity markets are confined in an underinvestment super cycle such that unless there is a sustained increase in capital expenditure (capex), increasing demand cannot trigger a supply-side response hence creating inflationary pressures in the short-term. The remainder of this spotlight will sum up the overarching macro-level geopolitical supply-side risks impacting three core sectors of the commodities market: agriculture, rare earth minerals, and energy markets. 

Agriculture in Q12023

S&P agriculture indices (GSCI Agriculture, GSCI Livestock, and GSCI Grains) outperformed the S&P GSCI with GSCI Livestock being the best performing index considered in this spotlight, gaining 5.94 per-cent this quarter. Agriculture and Grains lost 0.61 per-cent and 2.57 per-cent, respectively. 

At the macro-level there are two factors that will keep grain prices high, despite losses in value in the first quarter of 2023. These factors are the supply-side issues resulting from the Russo-Ukrainian War, despite the recent extension of the Black Sea Grain Initiative, and climate change – which is already having some impact on grain yields. As hypothesised at the start of the Russo-Ukrainian war, grain prices skyrocketed as the two countries contribute to about half of the world’s grain supplies. The wide use of grain in human and animal diet means that the precarity of grain supply will likely underpin most food-related price rises and contribute significantly to the cost of living crisis, globally. For that reason, the extension of the Black Sea Grain Deal on March 18 was of great relief for the global food supply chain. However, despite the extension there are two items still on the snag list: (i) a disagreement between Moscow and Kyiv over how much longer the Grain Deal will run for, and (ii) Russia banning major grain exporter – Cargill – from exporting Russian grain, which has already impacted futures’ prices. 

Short-term risks impacting the supply of agricultural commodities also consist of grain supply, as they are crucial for animal feed. In addition to this, avian influenza outbreak in poultry supplies, which are not limited to just the United Kingdom, are having impact on related goods. Avian influenza outbreaks have been reported in the United Kingdom, United States, the rest of Europe, and there are fears that avian influenza and eventual egg shortages are also felt in South America. Long-term impacts of zoonotic diseases like avian influenza are difficult to quantify. Notwithstanding, after the outbreak of COVID-19 and the ensuing pandemic, there has been formal research dedicated to the matter which would suggest that countries with highly-industrialized, high-density agricultural industries run a higher risk of having disease outbreaks harm crop and livestock supplies. Thus, balancing land use and industrial density with growing populations’ driving up demand will be of importance if governments want to avoid severe shortages of crucial food items. 

Energy Markets in 2023Q1

The three S&P energy indices considered in this spotlight – GCSI Natural Gas, Global Oil, and Global Clean Energy – all lost value quarter in 2023. Natural gas especially took a substantial hit, losing 44.43 per-cent of its value at the end of trading on March 31. Oil lost a little over five per-cent throughout the opening quarter whereas Global Clean Energy’s losses were below the one per-cent mark. 

The stand out commodity here is natural gas (including LNG) and this is in large part because of the “geopolitical struggle between Europe and Russia” which will play a crucial role in dictating natural gas markets for the foreseeable future. As severe sanctions on Russian oil and gas were confirmed by the European Union throughout 2022, the bloc has not yet dealt with the fact that there is still strong demand and necessity for those commodities. Although some effort by means of REPowerEU have laid the groundwork for a shirt to alternative energy supplies, European countries have begun to look elsewhere for natural gas supplies. One such effort has been made by Italy who has looked to further increase imports of Algerian natural gas. 

Another recent trend has been importing Indian-refined petroleum products derived from Russian oil, despite embargoes. This shows that short-term procurement of oil and gas into Europe could well become economically and politically costly until alternative energy supplies are not secured. As the necessity for reliable energy supplies begin to outweigh the political value of sanctions on Russia, European countries may well find themselves having to prioritise one over the other. A pessimistic outlook that may be, but it is already materialising; as France settled its first LNG deal in Yuan with China. As the BRICS countries begin to trade in their own currencies the return of a multi-polar energy market might lead to less market predictability and prolonged period of macro-scarcity.

On the other hand, the political and economic urgency to expedite the green energy transition is indicative of a positive outlook for renewables markets according to the International Energy Agency’s latest industry overview. Indeed, analysis and forecasts from McKinsey share this sentiment as they expect substantial growth in solar and wind energy. Bloomberg shares this sentiment in the hydrogen sector, too. As legislation and regulation gears itself towards carbon-neutrality in the world’s three largest economies – the United States, China, and the EU – there is a genuine legal basis for optimism in renewables markets. A medium to long-term risk to watch out for, however, would be the political and economic competition over the necessary resources – such as copper – for a green transition.  

Rare Earth Metals in 2023Q1

In the opening quarter of the year, the S&P GCSI Core Battery Metals Index – which tracks stocks of rare earth metals (REM) pertinent to battery production – stagnated around the -0.34 per-cent mark. On the other hand the S&P GCSI Precious Metals Index soared 9.14 per-cent, though this was in large part due to investors backing gold and silver as the United States’ regional banking crisis erupted. 

Although the relationship between geopolitical tensions and short-term supply risks of REMs is not yet at the scale of the relationship between geopolitical tensions and the supply of agricultural and energy commodities, there is reason to believe that this will not last very long. Essentially, this is because REMs and precious metals are crucial to the green energy transition and the production of key electronics’ components like semiconductors. REMs are also becoming ever-more important for the production and maintenance of modern-day defence systems. Thus, securing REM supply chains and secondary materials is a paramount task for states and businesses looking to establish a dominant presence at the international level. As of 2020 REM exports originated overwhelmingly from Asia with Myanmar, China, and Japan accounting for over half of all exports. The United States and its European allies, on the other hand, exported just over 10 per-cent of global REM exports. Furthermore, sanctions against Russia and Myanmar have further complicated access to REM imports for Western business and countries. This is exacerbated further by Beijing’s recent efforts to improve relations with Moscow and Naypyidaw – with the latter being crucial for China’s efforts to overcome the ‘Malacca Dilemma’. 

In recognising this weak spot, both the Biden and Trump administrations took swift action to incentivise the reshoring production of crucial electronics, starting with the National Strategy for Critical and Emerging Technologies as a direct countermeasure to China’s efforts to increase its own electronics production. This was followed up with the CHIPS and Science Act and formal export controls, limiting semiconductors produced with American technology and inputs to China.  In the meantime, the United States has sought to diversify its REM supplies from Africa, where China has a considerable geopolitical presence. What the impact the ongoing China-United States rivalry over REM supplies and semiconductor development will have on prices in the short-term remains to be seen, but the medium-to-long-term protectionism and antagonism between Beijing and Washington will likely lead to REMs enjoying substantial price increases considering their growing demand. 

Summary: Outlook for 2023 and Beyond

The first quarter of 2023 carried forward many of 2022’s geopolitical dynamics and risks into global commodity markets. There have also been supply shocks, like avian influenza outbreaks and severe climate events, which have harmed the supply of crucial commodities that have further exacerbated the impacts of geopolitics on market activity. 

This is particularly visible in agriculture markets where the uncertainty on how long the Black Sea Grain Initiative extension will last is a key risk to secure grain supplies globally. If Russia’s demands for a reduction of sanctions can be made credible by its recent rapprochement with China, then an extension of the Black Sea Grain Initiative beyond the current deadline will likely result from a reduction in Western sanctions. Conversely, if the West can find ways to cope with inflation and diversifying energy supplies, then Moscow might be forced to formally accept a longer extension. The outlook on the matter remains speculative, but the consequences of a no-extension scenario could spell disaster for global food supplies within the next quarter.

Although energy and REM markets are also mired by geopolitical power struggles and risks, the potential for a drastic spillover into commodity markets and the wider economy in the short-term is, at this stage, quite limited. Although, as REMs become more intertwined and necessary for future energy markets this outlook will likely change post-2023. This is because in the absence of short-term flashpoints, the increasing pursuance of protectionist and antagonising trade policies between Beijing and Washington will very likely undo much of the economic globalisation that occurred pre-COVID. 

Hence, it is not likely that global commodity markets will break the macro-scarcity phase of the Inflation-Duration Investment Cycle in 2023 – and potentially prolong the under investment in commodities into 2024 and beyond. However, there is still a lot of 2023 to go and there is a lot of time for pressing issues to unfold and provide a clearer picture for commodity markets. Although, the current direction of the international regulatory and political environment does not offer much optimism for the long-term, with regards to increasing capex or securing crucial supply chains.

Cover photo credits to: Black Sea Grain Initiative FAQ | United Nations in Namibia

India’s Lithium Rush: Supply Chains, Clean Energy, and Countering China

The discovery of vast lithium deposits in the Indian territory of Jammu and Kashmir is being hailed as a win for the country’s clean energy transition. With the government already promoting domestic EV manufacturing, this could prove to be one of the missing pieces for the puzzle of an Indian EV supply chain.

Background

With rising demand for portable electronics and a push for a low-carbon future, lithium has become one of the most important minerals. Given its application in lithium-ion batteries, it is vital for powering everything from electric vehicles and portable electronics to stationary energy storage systems.

In particular, Lithium-ion battery demand from EVs is set to rise sharply, from the current 269 gigawatt-hours in 2021 to 2.6 terawatt-hours (TWh) per year by 2030 and 4.5 TWh by 2035. According to BloombergNEF’s (BNEF) Economic Transition Scenario (ETS) – which assumes no additional policy measures – global sales of zero-emission cars will rise from 4% of the global market in 2020 to 70% by 2040. Consequently, the global supply chain for lithium has become increasingly important.

EV battery supply chain. Image credit: International Energy Agency

The lithium supply chain is complex, involving multiple stages and players, and is subject to geopolitical and economic factors. Most of the world’s lithium deposits are in the ‘Lithium Triangle’ of the world in South America – Chile, Argentina, and Bolivia. Of these three, however, only Chile Ranks amongst the list of the world’s top lithium producers, headed by Australia. Apart from production, China dominates both the refining and battery manufacturing in the EV battery value chain.

Source: Statista

India: The New Potential Partner of the World

Given the global geopolitical environment, singular dependence on China for a vital resource such as lithium has far-reaching strategic implications. Naturally, democratic nations across the world are prioritizing the reconfiguration of their supply chains for critical manufacturing inputs. Combining its demographic dividend, educated and sufficient workforce, and entrepreneurial spirit– India is rising as a potential and reliable partner. The European Union’s ‘China + 1’ strategy, the EU-India Trade and Technology council, the United States’ recent Initiative for Critical and Emerging Technologies (iCET), and Australia’s Economic Cooperation Trade Agreement with India – testify to the merit that the liberal-democratic world order sees in a partnership with India.

In the given friend-shoring environment that India enjoys, the recent discovery of 5.9 million tons of lithium in the country is monumental. India’s automobile sector itself is transforming. According to NITI Aayog, by 2030, 80% of two and three-wheelers, 40% of buses, and 30 to 70% of cars in India will be EVs. The newly found lithium can help the nation meet rising demand, both domestically and globally. India’s government has already been pushing for electric mobility and domestic EV manufacturing. The 2023-24 Union Budget, allocated INR 35,000 crore for crucial capital investments aimed at achieving energy transition, including efforts for electrification of at least 30% of the country's vehicle fleet by 2030 and net-zero targets by 2070. For EV manufacturers, the government has launched initiatives such as the Faster Adoption of Manufacturing of Electric Vehicles Scheme – II (FAME – II), allocating approximately $631 million towards subsidizing and promoting the adoption of clean energy vehicles.

Indian Lithium deposits: Risks and Challenges

The recent discovery in the Reasi district of the Union territory of Jammu and Kashmir solves one of the major challenges to a localized li-ion battery supply chain in the country– access to lithium deposits. However, there are more challenges ahead.

Firstly, the Reasi district is just 100 kilometres from the Rajouri district, a geopolitically sensitive area. Although today these areas are well-connected to India with proper infrastructure, including airports and highways, the Line of Control between India and Pakistan is less than 100 kilometres from Rajouri and around 200 kilometres from Reasi. The region’s proximity to Azad Jammu and Kashmir also makes it vulnerable to militant activities. Greater infrastructural development in the region, including a robust logistics network will have to be developed to ensure an uninterrupted indigenous supply chain (given that other stages of the supply chain are also established domestically).

Secondly, although the Geological Survey of India (GSI) has the capacity to discover and locate lithium deposits, the remainder of the value chain to produce commercial-grade lithium indigenously is not in place. Similar to Australia, Canada, and China, the identified lithium reserves in India are in hard rock formations. In order to extract the resource, mining capabilities will first have to be established in the region. It is still unclear whether these reserves will be managed by state authorities or undertaken by the central government, given the strategic importance of the resource. Furthermore, whether the mines be auctioned, like India’scoal mines, or entrusted to a public sector enterprise, is not yet known.

Timely and major investment in developing refining, processing, and purification technologies will be required. India will have to build a large-scale capacity for transforming extracted material into high-purity lithium in order to take full advantage of this discovery. While the opportunity is considerable, so are the costs. India’s government will need to devise a clear strategy that effectively helps both the country’s energy transition and domestic manufacturing ambitions.

Image credit: Nitin Kirloskar via Flickr

Dire Straits: China’s energy import insecurities and the ‘Malacca dilemma’

In 2003, then President of China Hu Jintao named China’s energy imports passing through south-east Asia as the “Malacca dilemma”. The dilemma refers specifically to the Strait of Malacca, 1,100 kilometres in length and at its narrowest point only 2.8 kilometres wide, which has been a persistent source of vulnerability for the Chinese economy. Located between Malaysia, Indonesia, and Singapore, this strait is a transit point for around 40 per cent of global maritime trade and, perhaps more consequentially, 80 per cent of China’s energy imports. As the main shipping channel between the Indian and Pacific oceans, this connects the largest oil and gas producers in the Middle East with their largest markets in east Asia and is a strategic chokepoint for the 16 million barrels of oil that pass through daily. The Strait of Malacca is therefore critical to China’s energy production and wider economy, yet is not under Chinese control. What makes this shipping route a particular insecurity for Beijing, and what is being done to mitigate against it?

Source: U.S. Energy Information Administration

Major risks

China’s reliance on imported hydrocarbons for energy production, mostly on oil, is at the root of this insecurity. To fuel continued industrial development, energy consumption will increase rapidly alongside a widening gap between domestic energy supply and demand- in 2017, China surpassed the United States as the world’s largest importer of crude oil. Around 70 per cent of the country’s oil requirements come from imports, with analysts estimating this dependency will increase to 80 per cent by 2030. China is thus vulnerable to external shocks, whether in the price of oil or in its supply. That the vast majority of this oil supply passes through the Strait of Malacca chokepoint adds to Chinese evaluations of a precarious overreliance.

Geographically, the strait’s narrow span is a particular threat. With strong regional security actors in Malaysia, Indonesia, and Singapore added to the projection capabilities of India or the US, the risk for China is that a country or group of countries could easily control the strait and its flows. The Indian navy is notably building its presence in the area with its base in the Great Nicobar Islands, largely in response to China’s maritime Belt and Road Initiative projects. Additionally, Singapore is a major US ally that frequently participates in joint naval drills and is located at the eastern mouth of the strait. There is a strong possibility that states other than China can control the strait and greatly hurt the Chinese economy if desired, due to its high imported oil dependence.

South-east Asia is also particularly prone to piracy. A total of 134 separate piracy incidents were identified in the Strait of Malacca in 2015, with oil tankers among those targeted. Malaysia, Indonesia, and Singapore have been able to curb this issue to a large extent, but ships will still face insurance premiums on piracy when passing through the strait. Whilst this remains a background issue when compared to China’s oil import dependency and the strait’s potential for blockades, there is an ever-present risk of losing assets to piracy. 

If access to the Strait of Malacca was hindered by piracy or indeed by other states, the economic impacts would be colossal. Beyond short-to-medium-term adjustments in the Chinese economy, a shifting of supply to using longer routes through the alternative Lombok or Makassar straits would add an estimated $84 to $250 billion per year to shipping costs. Rerouting one of the most important shipping lanes would gridlock global shipping capacity and, highly likely, increase energy costs worldwide. The economic upheaval as a result of the 2021 Suez canal blockage illustrates this strongly, yet would pale in comparison to a blockage of the Strait of Malacca.

Forecasting scenarios

The above risk factors thus place China in a precarious position regarding the strait. Whilst states blockading an open seas shipping lane may seem fanciful at the moment, China’s ‘Malacca dilemma’ could become a reality very quickly, especially when considering a change in Taiwan’s status quo. Taiwan is geographically far from the strait but if tensions were to increase over its status, the Strait of Malacca could see a greater security presence in response. Tangibly the US security guarantee to Taiwan means in the event that Taiwan was invaded, or even blockaded as a precursor to invasion, the US could impose an analogous blockade in the Strait of Malacca. China’s vulnerability regarding this strait leaves it open to some proportional responses should it grow more assertive in regional security. The prospect of greater American or US-allied control over the Strait of Malacca is likely in a hypothetical wartime scenario.

On allies, the wider Indo-Pacific region is seeing greater security cooperation as a reaction to increasing Chinese presence. The recent AUKUS military alliance between Australia, the United Kingdom, and the US entrenches American security interests in the region and provides new capabilities for Australia. The Quad grouping between Australia, the US, India, and Japan does not yet have a concrete security element, but could rapidly become an important player in the Strait of Malacca if the threat perception from China changes. Overall the expectation is for these budding Indo-Pacific alliances to gain a stronger strategic focus on the Strait of Malacca and the oil passing through it, critical to China’s economy. 

Supply chain mitigation

Beijing is attempting to decrease its vulnerability to the risks and scenarios identified above. Above all other strategies, the China-Pakistan Economic Corridor (CPEC), a part of the Belt and Road Initiative, seeks to mitigate against the ‘Malacca dilemma’. CPEC is an opportunity for China to have an access point to the Indian Ocean through the construction of a new pipeline from western China to the new port of Gwadar in Pakistan. The overall infrastructure investment is valued at $62 billion, with the Gwadar port expected to be fully operational between 2025 to 2030. However, CPEC faces various problems. The difficult topography of the Himalayas means high transit costs for the pipeline, far beyond that of shipping through the Strait of Malacca. Passing through unstable regions adds to the logistical difficulties, with terrorist activity reported in regions the CPEC passes.

The recent China-Myanmar Economic Corridor (CMEC) can be evaluated in a similar manner. The Kyaukpyu Port developed by the Chinese government will send 420,000 barrels of oil a day via the Myanmar-Yunnan pipeline. This nevertheless pales in comparison to the 6.5 million China-bound barrels per day that pass through the Strait of Malacca. In addition, Myanmar’s military coup and the future possibility of high-intensity civil war puts CMEC in peril. Chinese investments have been damaged, with serious doubts about CMEC’s security evidenced by fighting along the infrastructure route. 

It is therefore clear that while China is developing alternatives to the Strait of Malacca, these remain woefully inadequate and there is no single replacement for the importance of the strait. Because of their respective political instabilities, ensuring that CPEC and CMEC are successful can only be one part of a solution. Diversifying away from crude oil shipping is another, and land-based pipelines will continue to be developed with central Asian countries and Russia. Of course, avoiding foreign control of the Strait of Malacca is preferable, but China is beginning to hedge on other sources for its imported oil.

In summary, it seems likely that China will continue to heavily depend on the Strait of Malacca to meet its energy needs. The strait remains a vulnerability, especially in the regional context of increasing security competition with other states. Various mitigating measures are being taken to lessen the impact of any change to this strategic chokepoint, but no cure-all solution exists. The geographic production centres and transit lanes for oil are one of the most significant issues for China and its economy and are sure to command the attention of all parties involved.

Image credit: dronepicr via Flickr

A Second Scramble for Africa?: U.S.- China Competition for Rare Earth Minerals

The global demand for rare earth minerals has been on the rise in recent years, driven by the growth of high-tech industries such as electronics, renewable energy, and aerospace. These minerals are a group of 17 elements that are essential to the manufacture of these products, due to their unique magnetic, optical, and catalytic properties. However, these minerals are found in small concentrations and are difficult to extract, making them a strategic commodity that is vital to the functioning of modern societies.

China is the world's largest producer of rare earth minerals, accounting for more than 80 per-cent of the global supply. This gives China significant geopolitical leverage, as it is able to control the supply and pricing of these critical minerals. In recent years, China has been using its dominant position to assert its influence in global affairs, including trade negotiations and technology transfer agreements. The United States is heavily dependent on China's rare earth minerals, importing nearly 80 per-cent of its total rare earth minerals.  This has become a concern for the US government, fearing that China may use its control over rare earths as a tool of economic and political coercion. This fear has only been exacerbated due to the effect the Russo-Ukrainian war has had on crucial commodities and rising tensions surrounding Taiwan. To reduce its dependence on China, the United States has been seeking alternative sources of rare earth minerals, and it has turned its attention to Africa too. Although many African countries already have long-standing mining agreements with China, there has been a recent push to break free from deals some see as not mutually beneficial. 

Several African countries, including South Africa, Namibia, and Tanzania, have significant deposits of rare earth minerals. However, the development of Africa's rare earth industry has been hampered by a lack of investment, technical expertise, and infrastructure making it heavily reliant on foreign investment mainly from China. This has left African countries vulnerable to exploitation by foreign companies, who have been accused of prioritising profit over environmental and social concerns.   

China has been actively investing in Africa's rare earth industry, seeking to secure its own supply chain and gain a strategic advantage over other countries. As of 2021, Chinese banks made up 20 per-cent of all lending to Africa and in recent years China has been providing African countries with significant technical assistance, including building infrastructure and providing equipment and training for rare earth mining and processing. This investment has given China a foothold in Africa's rare earth industry and has raised concerns about the potential for environmental and social exploitation. During the World Economic Forum at Davos, the President of the Democratic Republic of Congo (DRC), where 70 per-cent of the world’s cobalt comes from, complained that a $6 billion infrastructure for minerals was heavily one sided, with a majority of the cobalt being processed in China. 

These recent signals at a move away from China to potentially better alternatives have not gone unheard by the emerging superpower’s primary rival, the United States. Indeed, the DRC was one of many nations in attendance at the Minerals Security Partnership setup by President Joe Biden and also signed a memorandum with the US in December 2022 to develop supply chains for electric vehicles. In 2019, the US government announced plans to invest in Africa's rare earth industry, with the aim of establishing a reliable supply chain of these critical minerals. These recent acts are just the beginning of what the US government hopes will be a new leaf in their relationship with African countries to develop their rare earth industries and build infrastructure while promoting sustainable mining practices.

The competition for rare earth minerals highlights the need for a global approach to resource management. As the demand for high-tech products continues to grow, the pressure on rare earth minerals will only increase. While some are looking to our solar system’s mineral rich asteroid belt as a way of obtaining these resources, we are most likely decades away from developing the necessary technology and, in the meanwhile, the resources needed to develop said technologies will continue to be fought over. It will take some time before the US is able to really rival China in Africa’s debt markets, but US policy makers are hoping to have made a significant enough dent in China’s hold over the industry before tensions rise any higher between the two world powers.

Africa in the “white gold” rush

The global supply of lithium ore has become an increasingly tangible bottleneck as many countries move towards a green transition. The International Energy Agency (IEA) predicted that the world could face a shortage of this key resource as early as 2025, as demand continues to grow. The increasing popularity of electric vehicles (EVs), which saw sales double in 2021, as well as other products which require lithium batteries, have been primary factors in this supply crunch.

Demand for lithium (lithium carbonate in this case) has driven high prices, which also nearly doubled in 2022, over $70,000 a tonne, and put pressure on the mining industry to increase production. This has led to heightened competition over this strategic resource and a rush to explore new reserves. An emerging arena in this competition has been Sub-Saharan Africa which has the potential to become a major player in lithium production, behind already established producers in South America and Australia. This region does, however, pose a unique set of challenges for lithium production in terms of infrastructure as well as a diverse and risk prone political constellation.      

Within the region there are several countries which have already been tapped as potential producers or have already developed some degree of extraction capacity. Among these are Mali, Ghana, the DRC, Zimbabwe, Namibia and South Africa, at this stage most of these countries are at some stage of exploration, development or pre-production, currently only Zimbabwean mines are fully operational. 

The political instability in some of these countries is a primary concern in the future of lithium production. Mali stands out in this regard with the withdrawal of the French intervention force in 2022, after nearly 10 years, and the ensuing power vacuum. In other countries such as the DRC political risk has been largely tied to corruption in governance which limits competition potential as well as human rights and environmental concerns which emerged around cobalt mining.

Zimbabwe offers a perspective into the most developed lithium operation in the region. In early 2022, Zimbabwe’s fully operational Bitka mine was acquired by the Chinese Sinomine Resource Group. Also in 2022, Premier African Minerals, the owners of the pre-production stage Zulu mine, concluded a $35 million deal with Suzhou TA&A Ultra Clean Technology Co. which was set to see first shipments in early 2023. This was followed by a similar $422 million acquisition of Zimbabwe's second pre-production mine Arcadia by China’s Zhejiang Huayou Cobalt.  

Zimbabwe’s government responded to this mining boom by banning raw lithium exports stating that “No lithium bearing ores, or unbeneficiated lithium whatsoever, shall be exported from Zimbabwe to another country.” This move is intended to keep raw ore processing within the country, and despite initial appearances will not apply to the Chinese operation, whose facilities already produce lithium concentrates. Yet, this policy does demonstrate the active role that the government is able to play in the market, and their willingness to harness this economic windfall.

Even the most developed lithium mining operations in the region must pay close attention to the political situation unfolding around them. As competition over this strategic resource becomes more acute, the role of soft power will likely play a key role in negotiating favourable terms and preferential treatment in the exploitation of lithium reserves.

Critical Raw Materials - The Geopolitical risk of supply chain dependencies

The Covid-19 pandemic coupled with the war in Ukraine have led to major structural changes and shifts in the global economy, leading to debates about the possible end of globalisation. These major changes in geoeconomics have shaken the international liberal order, enhancing pre existing challenges such as dependencies with strategic rivals for critical raw materials and rare earth elements. This article highlights the geopolitical risks of supply chain dependencies for rare earth elements in three steps. It will investigate which elements and materials are considered to be strategic and why. It will then analyse the interdependencies between extraction and mining countries, with a specific focus on China. It will conclude with a reflection on the main risks and trade-offs of these geopolitical supply chain dependencies. 

Critical Raw Materials (CRMs), Rare Earth elements (REEs) – a group of seventeen metallic elements – and critical minerals – non-fuel mineral or mineral material –  are considered crucial for strategic industries, such as technologies used in the digitisation process, the energy transition and the defence industry. They are used in the construction of wind turbines and solar panels, advanced electronics, batteries for electric storage, cars, the development of technologies and components of fighter jets. Geopolitical shifts, such as the acceleration in the digitisation process, the energy transition, coupled with the war in Ukraine may cause supply shortages or additional vulnerabilities to supply chains. These shifts pose challenges such as finding alternative suppliers and alleviating dangerous dependencies.

To better understand the importance of these supply chains, it is worth investigating two examples of strategic sectors that require critical raw materials: the energy sector and the defence industry. 

The energy transition 

Climate change is at the top of the agenda for several international organisations and countries around the world. The dangers we face due to increasing temperatures and the consequences of this phenomenon for the environment, human beings, and the cascade social, political and economic effects, has increased the urgency for alternatives. Population growth over the past decades has led to the increase in the demand for energy and consequently to the rise of oil, natural gas and electricity prices, together with a further depletion of natural resources and raw materials. Higher energy prices, exacerbated even more by the current war in Ukraine and the politicisation of natural resources by Russia, urges new alternatives such as renewables and an acceleration in the transition towards the so-called green sources of energy. However, in order to produce renewables such as wind turbines, solar panels, or electric batteries for cars, CRM’s such as lithium, cobalt, tungsten, nickel or platinum are needed. These critical raw materials are scarce in supply, unevenly distributed, expensive to extract, and paradoxically even toxic for the environment. Moreover, in most cases the majority of these sources are located in countries whose political situation may be defined as unstable, characterised by autocratic governments or both: 50% of the world’s supply of cobalt, for example, is located in the Democratic Republic of Congo and 40% of manganese in South Africa. China, moreover, will be analysed deeper in the subsequent section and is by far the country that controls most of the world’s extraction and processing capacities for raw materials. 

Defence Industry 

In the defence industry there are multiple critical raw and rare earth materials used in the production of satellites communications, aeronautics, military surveillance systems and fighter jets’ components, such as lithium for batteries. Due to their significant roles for national security, they are listed among the 50 critical and strategic materials and minerals for the United States. As for the energy transition, the risk for the defence industry lies in the dependency of the supply chain from countries that are either unstable or strategic rivals: countries that because of their domestic political and social situations may increase the market volatility, soar prices, or simply use their leverage for supply cut-offs or hybrid attacks on domestic production lines. Niger, for example, is an important exporter of uranium, however, its domestic and neighbouring unstable political context makes it an unreliable partner. A disruption in the supply chain of a critical raw or mineral material may, indeed, undermine the production, reparation or modernisation of military equipment, as it already happened with the interruption of F-35 fighter jets deliveries due to cobalt sourcing problems. Fighter jets, like the F-35, require around 417 kg of rare earth materials for critical components such as electrical power systems and magnets. F-35s deliveries were suspended as the company’s producer, Lockheed Martin, realised the magnet used in the Honeywell-made turbomachine — an engine component that provides power to its engine-mounted generator — was made with cobalt and samarium alloy coming from China.

China

Critical rare earth, minerals and raw materials are unevenly distributed, which makes powers such as the United States and Europe obliged to rely on foreign and overseas countries — China, Australia, Canada, Russia, Africa or Central Asia. Yet, there is one country above all others, that has the most power and control over extraction, processing, export and with an almost monopoly of the refining process of CRM (90%), this is China. One of the biggest Chinese rare earth extraction, mining and refining companies, for example, is the China Northern Rare Earth Group High-Tech Co Ltd (Northern Rare Earth), whose headquarter is in Inner Mongolia Baotou, and is specialised in rare oxide and magnetic materials. The almost Chinese monopoly over the refining capacities of rare earth materials is of crucial strategic importance. The bottleneck on rare earths is, in fact, the concentration and purity of natural deposits and the need to refine mined minerals with energy-intensive processes. A recent study by Benchmark Mineral Intelligence shows, indeed, how China’s power and control over the production of lithium ion batteries for electric vehicles, for example, relies for 80% just on the refining process (Figure 1).  

Figure 1: “Where does China’s dominance lie in the lithium ion battery to EV supply chain?”

Source: Benchmark Mineral Intelligence

In 2010 a European Commission sponsored study group identified 41 critical raw materials, of which 14 were considered of high supply risk and high economic importance, among which there were antimony, beryllium, cobalt, fluorspar, gallium, germanium, graphite, indium, magnesium, niobium, Platinum Group Metals (PGMs), Rare Earth Elements (REs), tantalum, and tungsten. 

To assess the concentration in commodity markets the index used is the one developed by the economists O. C. Herfindahl and Albert O. Hirschman. The Herfindahl-Hirschman Index (HHI) is defined as the sum of the squares of the fraction of market share controlled by the 50 largest entities producing a particular product. The maximum value of this index is unity, and the US department of Justice established that between 0.15 and 0.25 the concentration is considered as moderate; above 0.25 it is, instead, highly concentrated. China’s global market position with regards to these critical materials is of particular importance as it produces more than 12 of the 41 critical materials identified by the European Commission, 9 of which of high supply risk. 

China’s rise in market share of critical materials’ global production has sharply increased in the past few decades, leading the country to acquire a dominant strategic position. This outcome is the result  of three main factors: the country’s large resource base; the Chinese government's long-term emphasis on strategic raw materials, rare earth, minerals and magnets for the “Made in China 2025” strategy; and finally, China’s ability to produce raw materials at a lower cost. China is the largest battery producer: dominating battery material separation and processing, component manufacturing, and controlling the downstream end of mineral processing and rare earth magnets, all critical elements necessary for the energy transition. This is a part of the global strategy adopted by China and best exemplified in the Belt and Road Initiative (BRI): gaining control of material production outside of China, imposing production quotas or restrictions to exports, leading to higher prices and volatility. To further consolidate its dominant role and power in the CRM’s domain, China has, moreover, recently established the China Rare Earth Group Co. Ltd: merging three state-owned rare earths entities. This megafirm, based in South China, accounts for around 62% of the country’s heavy rare earths supplies and it will enable the country to increase its competitiveness and pricing power, triggering dangerous consequences for the world supply chain.  

The geopolitical risk of this dependency is twofold. On one hand, there is the confrontational nature of China, who as a power, could potentially restrict exports during a dispute or simply due to domestic production needs, thus causing a spike in prices. On the other hand, the risk is determined by the deep interdependence between Western powers and China for scarce, rare and critical materials. Indeed, between 2017 and 2020 the USA has imported around 76% of rare elements from China (Figure 1), whereas Europe 98%. 

Figure 2: Major import sources of nonfuel mineral commodities for which the United States was greater than 50% net import reliant in 2021

Source: US Department of the Interior, US Geological Survey, Mineral Commodities Summary 2022

Furthermore, a report presented by the Government Accountability Office in 2010 shed light on the dominant role of China at all levels of the supply chain for Rare Earth Elements (REE). China produces 95% of raw materials, 97% of oxides, and 90% of metal alloys, and holds 37% of REE world reserves. From a military perspective, the high concentration of raw materials production by a strategic rival is incredibly threatening in case of a military confrontation due to the potential disruption to weapons systems production. 

Risks and trade-offs

It is noticeable from the previous analysis how the concentration of CRM’s supply in the hands of just one global actor immediately increases the risks of interdependence. Countries with large market shares in the supply of one critical material can distort its production, increase market vulnerability and the volatility of prices, causing strategic disruptions. 

Two possible solutions could limit the supply chain risks for critical raw materials and rare earth resources: on one hand finding new suppliers, on the other increasing controls of market shares. The first one is diversification: many resource-rich countries have been neglected in the recent multinational Minerals Security Partnership in June 2022 agreement, such as Vietnam, Chile, Argentina, Indonesia, the Philippines, Brazil, Cuba, Papua New Guinea, Madagascar and Mozambique could all be candidates for critical mineral production. However, despite trying to diversify and finding possible alternative suppliers, some rare earth materials are scarce and finite in nature. The second alternative, therefore, may be to increase partnerships and international cooperation, rather than isolationism, through multinational systems and controls over excessive market shares of a single commodity by one country. The United States, for example, has already released joint statements and signed agreements with multiple countries on critical material supply chains, security of dual-use technology, and mutual supply of defence goods and services. In this direction goes also the recent establishment of a transatlantic supply chain for rare earth metals spanning from Canada to Norway and Sweden. The mining will be performed in Canada’s Northwest territory, by the company Vital Metals, the only one in North America not selling to China. The long-term and strategic goal, therefore, is to avoid China or any dependence on it for the supply chain.

In conclusion, there is a double trade-off for policymakers. On one hand, the pervasiveness of Chinese presence and control of so many critical raw materials, rare earth, mineral and magnet sources, makes it difficult to tackle a politically strategic and rising rival power, while depending on it for critical supply chains. On the other hand, but also interconnected, the trade-off is between China and climate change. The energy transition, necessary to defeat climate change, requires technology and CRM that comes from China’s production. Therefore, is it possible for Western countries, such as the United States and the European Union, to counter the Chinese rise while having such risky supply chain dependencies? 

China’s push for hydrogen energy: The power of ambition for green infrastructure

In March 2022, China announced its target to produce approximately 200,000 tonnes per year of green hydrogen and at least 50,000 hydrogen-fuelled vehicles by 2025 to supplement its target of reaching net-zero carbon emissions by 2060. This comes after a huge push for hydrogen use during the 2022 Winter Olympics in Beijing. With China being the world’s largest producer of hydrogen at 33 million tonnes annually—80% being grey or blue hydrogen, widespread usage of green hydrogen is anticipated for China’s energy infrastructure.

In understanding hydrogen, there are three main forms: grey, blue, and green. Grey hydrogen is generated using fossil fuels and other high carbon-emitting sources and blue hydrogen is produced using low carbon-emitting sources such as steam methane reformation with Carbon Capture, Usage and Storage (CCUS) or other fossil fuels with CCUS. On the other hand, green hydrogen is made through the electrolysis of renewable energy sources and emits no carbon emissions.

The success of China’s move towards green hydrogen will depend on whether it can geographically connect its renewable-rich regions in the western provinces to the high hydrogen demand areas on the coast in China’s eastern provinces, as well as efficiently and cost-effectively store hydrogen during periods of high production yet low demand for green hydrogen energy. For example, while energy supply of hydrogen produced from solar energy sources usually outweighs demand during the summer months, energy demand rises during winter months due to higher electricity needs—such as for heating—and lower solar energy generation on account of shorter days during the winter. For this reason, green hydrogen energy storage is crucial to meet mismatched demand and supply periods.

In terms of transportation, hydrogen can be transported in a variety of ways depending on the transportation distance. For shorter distances, retrofitted pipelines for high-pressure gases or natural gas blending are the best options. Currently, China has two pure hydrogen pipelines in place—although both are under 500 kilometres—and one hydrogen-natural gas blending pilot project. For longer distances, hydrogen could be shipped in the form of ammonia, gas tanks,  liquefied, or through retrofitted subsea transmission pipelines. However, converting hydrogen to ammonia or cryogenic liquid is still extremely expensive and nascent in terms of technology, especially as liquid hydrogen technology is only used in China’s aerospace and defence sectors. This also poses a problem for hydrogen storage in the form of liquid. 

Another option is underground storage within depleted oil and gas reservoirs, salt caverns, or aquifers. However, China’s natural storage options are limited; thus, there is large scale investment into developing underground gas storage across China. Hydrogen can also be stored through gaseous storage and tube trailer technologies; however, steel containers used in China for hydrogen storage have a lower pressure capacity than that used in Europe, North America, Japan, and South Korea. Hydrogen regulations must therefore be amended to improve China’s competitive hydrogen storage ability.

While challenges for transportation and storage persist, ambition for green hydrogen energy usage across China is growing. The country now has more than 250 hydrogen refuelling stations, making it the country with the highest number of hydrogen refuelling stations globally. Moreover, investments are being poured into green hydrogen infrastructure and technology solutions in China. There is no doubt that in due time, China will be a key player in the global hydrogen industry.