The Geopolitics of Critical Minerals Supply Chains AUTHOR Jane Nakano MARCH 2021 A Report of the CSIS Energy Security and Climate Change ProgramIII | The Geopolitics of Critical Minerals Supply Chains About CSIS The Center for Strategic and International Studies (CSIS) is a bipartisan, nonprofit policy research organization dedicated to advancing practical ideas to address the worlds greatest challenges. Thomas J. Pritzker was named chairman of the CSIS Board of Trustees in 2015, succeeding former U.S. senator Sam Nunn (D-GA). Founded in 1962, CSIS is led by John J. Hamre, who has served as president and chief executive officer since 2000. CSISs purpose is to define the future of national security. We are guided by a distinct set of values nonpartisanship, independent thought, innovative thinking, cross-disciplinary scholarship, integrity and professionalism, and talent development. CSISs values work in concert toward the goal of making real-world impact. CSIS scholars bring their policy expertise, judgment, and robust networks to their research, analysis, and recommendations. We organize conferences, publish, lecture, and make media appearances that aim to increase the knowledge, awareness, and salience of policy issues with relevant stakeholders and the interested public. CSIS has impact when our research helps to inform the decisionmaking of key policymakers and the thinking of key influencers. We work toward a vision of a safer and more prosperous world. CSIS does not take specific policy positions; accordingly, all views expressed herein should be understood to be solely those of the author(s). 2021 by the Center for Strategic and International Studies. All rights reserved. Acknowledgments The author would like to thank CSIS colleagues Sarah Ladislaw and Nikos Tsafos for feedback and Ian Barlow for graphics assistance. The author would also like to thank Brandon Tracy of the U.S. Congressional Research Service and Marco Giuli of the Brussels School of Governance for reviewing a draft. This report was made possible by the generous support of the Japan External Trade Organization. Center for Strategic over 80 percent of the global supply of lithium comes from Australia, Chile, and Argentina; and 60 percent of the global supply of manganese comes from South Africa, China, and Australia. 3 Most notably, over 85 percent of the global supply of rare-earth elements comes from China. Supply chain security for the minerals and materials needed in clean energy technologies has become a strategic issue, not only because it could affect the pace of clean energy technology deployment around2 | The Geopolitics of Critical Minerals Supply Chains the world but also because clean energy technology has become the latest frontier for the geoeconomic rivalries sparked by Chinas competitive manufacturing sector. No longer a simple mineral producer or component assembler, China is emerging as a higher-value manufacturer that requires a growing volume of the minerals and metals that are considered key to clean energy technology manufacturing. This development has increased the pressure for other major economies dependent on mineral imports to secure their critical minerals supply chains. An equally important factor is that China appears to recognize the strength of its critical minerals supply chains as geopolitical leverage. For example, during one of the heightened phases of the U.S.-China trade war in 2019, President Xi Jinping of China and his top trade negotiator toured a rare-earth processing facility in Jiangxi Province, which is known for its rare-earth wealth. The visit was widely interpreted as a reminder to the United States that China has leverage over the rare-earth supply chains, bringing back the memory of Chinas embargo on rare-earth exports to Japan, which occurred over a territorial dispute in the fall of 2010. Additionally, Xi Jinpings call in April 2020 for the need to enhance global supply chains dependence on China and “develop powerful retaliation and deterrence capabilities against supply cut-offs by foreign parties” has only fueled concern among Western policymakers that heavy economic dependence on China for something as critical as rare- earth minerals may translate into a vulnerability that can be exploited by China in the event of a clash between China and the West. 4 Furthermore, the Covid-19 pandemic has exposed fragility in the global supply chains for not only pharmaceuticals and crucial medical supplies but also some critical minerals. For instance, the transport of cobalt produced in the Democratic Republic of the Congo was delayed in South Africa for months following the South African governments imposition of a strict lockdown in the second quarter of 2020. 5 A confluence of these developments has elevated the strategic importance of securing critical minerals supply chains, especially to a group of economies that are home to innovators and manufacturers. Some governments have modernized or expanded existing strategies to address the challenge, while others have outlined action plans or articulated their perspectives on only specific portions of the supply chains. The author identified a select set of economies whose approach to the security of critical minerals supply chains is likely to be consequential in terms of geopolitics. Through a literature survey and interviews, the author reviewed the statuses of these economies critical minerals supply chains as well as their strategies to address the supply security concern. This report illuminates the key economic, security, and geopolitical factors behind the recent evolution of these economies strategies and their approaches to the security of critical minerals supply chains. Key observations include: The security of critical minerals supply chains is a strategic issue, in light of the expected exponential demand growth led by clean energy technology deployment around the world. Sustained political commitment to technological innovation is essential to managing the growing competition over resources and clean energy manufacturing value chains. Chinas development of midstream and downstream capacities has turned it from a supplier of raw minerals and materials to a key consumer of them. Chinas commanding position along critical minerals supply chains is a key factor that shapes other economies strategic responses.3 | Jane Nakano Different economies are motivated by different concerns reflecting the heterogeneity in their resource endowment profiles and industrial structures. The United States appears most concerned about import dependence that can be exploited geopolitically, while the European Union and Japan appear primarily concerned with the effects of supply disruptions on their industrial competitiveness. Recent efforts to strengthen critical minerals supply chains include the United States development of midstream capacities, the European Unions orchestrated support for its battery sector, and Japans stockpile modernization and resource development abroad. Competition over critical minerals supplies is also rising between import-dependent economies. Such competition could hinder effective international partnerships that might otherwise mitigate existing risks to supply chains4 | The Geopolitics of Critical Minerals Supply Chains C hina has become a dominant stakeholder in the global supply chains for critical minerals and clean energy goods. In solar PV manufacturing (which broadly consists of the manufacturing of polysilicon, ingots, wafers, cells, and modules), China is home to over 90 percent of the worlds wafer manufacturing capacity, and Chinese companiesregardless of factory locationown two-thirds of the global polysilicon manufacturing capacity and 72 percent of the global module manufacturing capacity. 6 In lithium-ion battery manufacturing, China has a majority of processing capacity for key components (such as cathodes, anodes, separators, and electrolytes), as well as almost 80 percent of global battery cell manufacturing capacity. 7 Although less dominant, China still has a strong presence in the wind turbine value chain: it is home to about half of total manufacturing plants for nacelles, blades, wind towers, turbine generators, and gearboxes. 8 Chinas emergence as a major force along the clean energy technology value chain is partly the result of their resource wealth, as China is home to roughly one-third of global rare-earth reserves. However, this emergence also represents the culmination of long-term industrial policy, Chinas capacity to execute it, and advantages derived from a lag in extractive industry regulations. 9 Where it lacks access to resources, China has invested in mining projects abroad. For example, since nearly 60 percent of cobalt ore comes from the DRC, Chinese enterprises invest in cobalt mines and participate in cobalt smelting projects there to secure stable access to cobalt resources. 10 China has come to account for 72 percent of the global cobalt refining capacity. 11 The consumption of cobalt by Chinawhere approximately three-quarters of supply is used in lithium battery manufacturingis forecast to almost double between 2017 and 2023. 12 Also, while China is only one of five countries that produce lithium (another key mineral for lithium-ion battery production), it accounts for roughly 60 percent of global lithium refining capacity. 13 China also leads the rest of the world in its capacity to 2 The Chinese Dominance of the Global Critical Minerals Supply Chains5 | Jane Nakano process these refined materials into components, mainly cathodes (producing 52 percent of the global cathode supply), anodes (78 percent), separators (66 percent), and electrolytes (62 percent). 14 In 2018, for the first time in over three decades, China became a net importer of at least seven rare earths, as domestic output declined due to a government crackdown on illegal production. 15 Chinas recognition of the strategic value of non-fuel minerals and their industrial applications dates back at least to the seventh National Five-Year Plan for Rare Earth Industry (19861990), which made it a priority to “develop research and production of advanced rare-earth applications and new materials (e.g., permanent magnets and lasers) for domestic consumption and export.” 16 The Chinese government spurred the development of midstream and downstream sectors through investment policies that allowed foreign investment in rare-earth smelting with the import of advanced technologies and machinery and encouraged foreign investment and joint ventures in producing advanced products downstreamall while prohibiting foreign investment and joint ventures in the mining sector. 17 State-sponsored investment in research and development took off early in China. By 1985, there were more than 300 research institutes and university research centers in China working on research projects related to rare-earth mining, smelting, and applications. 18 China has filed more rare-earth patents than the rest of the world combined. 19 Low-cost minerals and supply of materials attracted many foreign firms to relocate to China, a situation that not only afforded these firms access to the growing Chinese market but also benefitted the Chinese by enhancing Chinas downstream manufacturing capacity through technology transfer. Clean Energy Mineral Supply Chains and Top oal Suppliers Raw Materials Processed Materials 5 8 5 9 Components Ecyp Assembly -c 54 9 Raw Materials BDy Processed Materials Bg ppwfGf 4 Components cB Assembly W 9 5 0 58 5 7 Raw Materials BGG gZ Processed Materials -yc f 50 5 89 Components y/p Wf Assembly f/- 70 8 7 BWV *ExcgJp c:yBwfEp (B:Ep00). * c energy security and climate change program6 | The Geopolitics of Critical Minerals Supply Chains China has also employed export and production quotas. From 1999 to 2014, China imposed an annual export quota. The export quota system was structured to favor firms that could create high additional value. 20 Moreover, in 2006, China introduced production quotas on rare-earth concentrates, with the stated goal of controlling total production and illegal mining. These actions caused a spike in rare-earth prices, given Chinas strong position in the global supply. Chinas export restrictions continued until 2014 when a World Trade Organization (WTO) dispute settlement panel agreed with the United States, European Union, and Japan that Chinas export duties and export quotas on rare earths, tungsten, and molybdenum constituted a breach of WTO rules. 21 More recently, the Chinese government identified “new materials,” such as permanent magnets, to be among the 10 industries targeted for government support under the Made in China 2025 initiative. This industrial initiative, released in 2015, aims to upgrade Chinas manufacturing capacity by 2025 through focused allocation of resources, such as beneficial regulations, tax incentives, and financing by public banks. 22 The development of the new materials industry is seen as a foundation for the successful development of Chinese manufacturing capacity in nine other industries, such as EVs, new information technology, and aerospace. 23 Chinas heavy focus on expanding its technology innovation capacity is likely to continue until at least 2035a year identified by the Chinese Communist Partys Central Committee in October 2020 to be when China becomes the global technology leader. 24 Since the Chinese government has been promoting domestic downstream industry, the countrys consumption of rare-earth minerals has been on the rise. Between 2004 and 2014, Chinas consumption of rare-earth minerals grew at an average annual rate of 7.5 percent, while the rare- earth mineral consumption of the rest of the world decreased by 3.8 percent, raising Chinas share of the global consumption from 43 to 70 percent. 25 Moreover, Chinas production of rare-earth end-use products grew by about 70 percent between 2005 and 2015; by 2015, domestic consumption accounted for over 80 percent of the domestic production of rare earths. 26 In order to better position itself to weather potential supply disruptions, Chinas National Mineral Resource Plan for 20162020 called for establishing a range of capabilities, including a warning mechanism for the rare-earth industry to safeguard its supply chains against various causes of potential disruptions and a more systematic demand and supply analysis on mineral products. 27 More recently, in October 2020, China passed an export-control law that would restrict exports of controlled items to protect Chinas interest and security. Although the government has not elaborated or clarified which items and technologies will fall under this law, rare earths are among the strong suspects. 28 Furthermore, in early January 2021, China introduced draft legislation to “reinforce the protection of its rare earth resources” and “strengthen full industrial chain regulation” by