China dominates world’s supply chains

According to the International Energy Association (IEA), fossil fuel usage in electricity generation dropped by 245 terawatt hours (Twh) last year, while renewables production rose by 119 Twh. (put in context, Scotland, with a population of just over 5 million, requires an annual 25 Twh of electrical energy; global energy demand per year is roughly 160,000 Twh)

The organization’s executive director recently said that turmoil in the oil sector caused by covid-19 should be seen by governments as an opportunity to embrace green energy. In an interview with Reuters, Faith Birol said lithium-ion batteries and the use of “electrolyzers” to produce hydrogen, should be candidates for government subsidies and policy support. 

In an earlier article we addressed the opportunities for lithium batteries in the growing energy storage market. 

As renewable energies come down in price and become a larger percentage of countries’ total energy mixes, the need to store energy for later feeding into the grid has become more important.

That’s because solar and wind power, for all their green credentials, are only useful when the wind blows or the sun shines. Capturing their energy for later use has become one of the most pressing technical dilemmas of the 21st century. A breakthrough would shift renewables to a form of baseload power and break their dependence on natural gas “peaker plants” to supply power to the grid when solar panels or wind turbines aren’t producing any.

Fortunately, there is a lot of research going on right now into utility-scale battery storage. The technology saw its biggest success in December 2017, when the world’s biggest lithium-ion battery was switched on in Hornsdale, Australia. The 129 MWh battery was built by Tesla to hook into the Hornsdale wind farm and stabilize the grid, after South Australia suffered a string of blackouts.

While the biggest obstacle to large-scale energy storage is cost, recent analysis by BloombergNEF found that for applications requiring two hours of energy, batteries are beating natural gas peaker plants on price. 

The finding is another arrow in the quill of lithium-ion battery makers and lithium miners, opening up a potentially lucrative market for lithium and other metals that go into lithium-ion batteries, beyond electronics and EVs.

Note that in the UK, despite data from April showing the lowest number of new cars sold since 1946, nearly one-third (32%) were electric. 

Electrolyzers are devices that transform renewable electricity into hydrogen using electrolysis. The hydrogen is then used for heating or transport. 

One of the most interesting areas of hydrogen research is “power to gas” technology, where hydrogen and methane are used as fuel for back-up power plants. Germany and the Netherlands are reportedly looking at substantially altering their energy systems using power-to-gas technology, to meet a target of reducing 1990-level greenhouse gas emissions by 80-95% by 2050. 

Japan and Canada are also keen on hydrogen. In March Japan opened the world’s largest “green hydrogen” production facility in Fukushima, a region known for the 2011 nuclear power plant disaster. Recharge reports the Fukushima Hydrogen Energy Research Field (FH2R) uses a 20MW solar array, backed up by renewable power from the grid, to run a 10MW electrolyzer at the site in Namie Town, Fukushima Prefecture.

The project will be used as a test bed for mass production of green H2, with initial output directed to fuel hydrogen cars and buses in Japan…

Canada’s Hydrogenics Corporation last year announced a hydrogen production facility would be operational in 2020, using a 20-MW electrolyzer and services provided by French industrial gas company Air Liquide. 

We are also a pioneer in hydrogen fuel cells installed in hydrogen cars, buses and vans, led by Ballard Power Systems and Hydrogenics. 

Other nations moving towards a green hydrogen economy include Australia, China, France, Germany, Norway, South Korea, the UK and the United States, according to Greentech Media. Hydrogen could potentially even replace diesel as baseload fuel on remote mine sites. 

At AOTH we are behind these developments 100%. The existence of climate change, either human-caused, due to natural cycles or both, is no longer up for debate. To avoid ecological catastrophe, we must reduce our reliance on fossil fuels, clean up our environment, embrace renewable energies, and continue down the path of electrifying the global transportation system. 

Only problem is, our global supply chains aren’t set up for it. If the IEA wants more lithium-ion battery storage and hydrogen power, the imbalance of materials supply will have to be addressed. We are talking here about China. Not only does China currently process the most lithium, Beijing is also planning a major uptake in hydrogen as a way of decarbonizing its transportation sector. GTM reports the country’s targets include 5,000 fuel-cell vehicles by 2020 and 1 million by 2030. Wuhan, the epicenter of the coronavirus outbreak, is being groomed as a “hydrogen city”, with plans for up to 100 hydrogen fueling stations. To incentivize buyers, China offers tax exemptions for hydrogen vehicles.

Will Beijing aim to monopolize hydrogen production, just like it has done for rare earths, lithium, cobalt, graphite and a host of other critical minerals like manganese and vanadium? We don’t know for sure, but what we do know is that China has the largest hydrogen production capacity in the world, and that last year, Chinese conglomerate Weichai Power invested $163 million for a 19.9% in Ballard, a Canadian company. 

China’s lithium lock-up

We know from previous articles that China has been extremely active in acquiring ownership or part-ownership of foreign lithium mines and inking offtake agreements. 

By 2025, the Chinese government wants EVs to represent 20% of all cars sold.

By comparison, the US sold 361,307 EVs in 2018, just under a third of China’s volume.

China of course, has also locked up the rare earths market and is the primary player in a number of critical mineral markets including cobalt, graphite, manganese and vanadium. 

For years the United States and Canada didn’t bother to explore for these minerals and build mines. Globalization brought with it the mentality that all countries are free traders, and friends. Dirty mining and processing? NIMBY. Let China do it, let the DRC do it, let whoever do it.

China recognized opportunity knocking and answered the door, seizing control of almost all REE processing and magnet manufacturing, in the space of about 10 years.

Last year, as part of its trade war strategy, China raised the prospect of restricting exports of these commodities, that are critical to America’s defense, energy electronics and auto sectors.

Over half of the world’s cobalt – a key ingredient of electric vehicle batteries – is mined as a by-product of copper production in the Democratic Republic of Congo (DRC). In a $9 billion joint venture with the DRC government, China got the rights to the vast copper and cobalt resources of the North Kivu in exchange for providing $6 billion worth of infrastructure including roads, dams, hospitals, schools and railway links.

China controls about 85% of global cobalt supply, including an offtake agreement with Glencore, the largest producer of the mineral, to sell cobalt hydroxide to Chinese chemicals firm GEM. China Molybdenum is the largest shareholder in the major DRC copper-cobalt mine Tenke Fungurume, which supplies cobalt to the Kokkola refinery in Finland. China imports 98% of its cobalt from the DRC and produces around half of the world’s refined cobalt.

In 2019 the United States produced just 500 tons of cobalt compared to 100,000t mined in the DRC. The US did not produce any vanadium either; the top three producers of the steel additive are, in order, China, Russia and South Africa.

As Quartz notes, in order to maintain its dominance in the EV market, Chinese manufacturers need a lot of cheap lithium. That explains why its largest lithium miner, Tianqi Lithium, owns 51% of Australia’s Greenbushes spodumene mine – the world’s dominant hard-rock lithium mine. And why China bid for, and got, a 23.7% stake in Chilean state lithium miner SQM, the second largest in the world, for $4.1 billion.

China produces roughly two-thirds of the world’s lithium-ion batteries and controls most of its processing facilities. 

The US only produces 1% of global lithium supply and 7% of refined lithium chemicals, versus China’s 51%. The country is about 70% dependent on imported lithium.  

Diversifying supply chains

Without a reliable supply chain, a country must depend on outsiders. This gives foreign suppliers incredible leverage over the United States. There is always the possibility of slowed flows or bans on strategic materials, due to politics or trade disputes.

The Trump administration recognized this when the president issued an executive order in December 2017, instructing his government to devise “a strategy to reduce the Nation’s reliance on critical minerals” that are largely imported.

The directive was a response to a report by the US Geological Survey concluding that the US relies on China for sourcing 20 out of the 23 minerals deemed critical for US national security and the economy.

If China were to suddenly refuse sale of any of these 20 metals, such as manganese needed to make steel, or rare earths used by the Military, the US economy and its defense capabilities would be in serious trouble.

The United States under Trump has shown a willingness, absent from previous administrations, to go after China for real and perceived unfair trade practices. The ongoing trade war is based on Trump’s obsession with leveling the trade deficit with China, allowing US companies better access to the 1.3-billion Chinese market, and repatriating outsourced manufacturing jobs. 

The coronavirus has opened up a new battle front between the two largest economies, as accusations fly over who started the virus and how badly each failed to contain it.

That has led to the Trump administration “turbocharging” an initiative to remove global industrial supply chains from China. According to a recent Reuters article, economic destruction and the U.S. coronavirus death toll are driving a government-wide push to move U.S. production and supply chain dependency away from China…

The U.S. Commerce Department, State and other agencies are looking for ways to push companies to move both sourcing and manufacturing out of China. Tax incentives and potential re-shoring subsidies are among measures being considered to spur changes, the current and former officials told Reuters.

“There is a whole of government push on this,” said one. Agencies are probing which manufacturing should be deemed “essential” and how to produce these goods outside of China…

The U.S. government is working with Australia, India, Japan, New Zealand, South Korea and Vietnam to “move the global economy forward,” Secretary of State Mike Pompeo said April 29.

These discussions include “how we restructure … supply chains to prevent something like this from ever happening again,” Pompeo said.

The secretary of state is referring to how the pandemic has shone a light on China’s role in global supply chains for generic drugs. Although the country accounts for only 13% of active pharmaceutical ingredient (API) makers supplying the US market, it produces many APIs for widely used medicines along with chemicals used to formulate APIs. Often China ships them to India for processing into tablets. 

Such medicines include antibiotics, ibuprofen, acetaminophen and heparin, an anticoagulant taken by patients with heart disease. 

The pandemic so far hasn’t led to drug shortages, but the possibility became real after India, the main supplier of generic medicines, restricted the export of 26 drug ingredients. And while some Chinese factories are back to full production with the lifting of covid-19 restrictions, a dozen Chinese drug ingredient manufacturers describe a supply chain in disarray. 

China’s dominance in the manufacture of masks, gloves and thermal cameras needed to test workers for fevers, has also raised alarm bells in Washington, amid widespread shortages of medical equipment in US hospitals treating patients stricken with coronavirus.  

Beyond medical supplies, the Reuters article states Trump has already signed an order that could allow limits on imports of components for the US power grid from Russia and China, and would soon issue a separate order requiring federal agencies to purchase US-made medical products. 

The United States is also looking to block global exports of chips to Chinese telecom giant Huawei, whose 5G network is said to threaten national security. Recently tensions flared between the White House and the UK over Prime Minister Boris Johnson’s decision to let the company develop Britain’s 5G network. The country is reviewing all US security and intelligence assets in the UK. Republican senators are even attempting to block the deployment of 48 new US fighter jets to Britain, according to The Telegraph. 

Meanwhile Japan has piled on China in scapegoating the country for starting the coronavirus. Japan Times reports the country has earmarked ¥243 billion of its record ¥108 trillion rescue package to assist Japanese companies in pulling operations out of China. 

Safe Haven notes how supply chains can become “instruments of weaponized pressure,” for example: China’s 2019 threat to restrict rare earth exports to gain leverage during the trade war; when bottlenecks entail potentially life-threatening shortfalls in foreign-made medical equipment and pharmaceuticals; and the United States blacklisting Huawei. 

US vs China

In a previous article we asked whether an increasingly aggressive, and authoritarian China should be allowed to continue as a member of the World Trade Organization, which Beijing has used to take advantage of provisions that suit its interests, and skirt less convenient restrictions.  

For example, Beijing has embraced WTO regulations allowing it to expand Chinese companies and investments abroad, but obstructed foreign firms from investing and operating freely in China. 

The degree to which China benefited from its first decade and a half in the WTO, viz a viz the US, was reflected in the much higher volume of US imports from China, compared to US exports to China. The growing US-China trade deficit was one of Donald Trump’s primary targets for criticism during his 2016 presidential campaign, and the antecedent of his trade war launched approximately two years ago.  

As China and its trading partners swap daily volumes of shipments worth billions, Beijing is cracking down on dissent and building a large security apparatus to spy on its citizens. The country has turned to sophisticated artificial intelligence (AI) to exert social control and suppress political activity. A vast network of surveillance cameras constantly monitor people’s movements, reportedly to reduce crime and terrorism. 

Beyond its borders, China has acted to aggressively rein in regions with desires for self-determination, ie. Hong Kong and Taiwan. 

Under Obama, the US could not prevent China from annexing 80% of the South China Sea, defend freedom of navigation through the $5-trillion annual maritime trade corridor, or stop China-backed North Korea from conducting nuclear tests. 

Meanwhile China continues to expand its military. Ongoing maneuvers in the South China Sea show that Beijing is willing to flex its muscles in a region it sees as strategically and economically important – even if it means going up against the almighty US Navy, mandated to safeguard international shipping lanes and to defend its ally, Taiwan, considered by China to be a renegade province that must be united with the motherland. 

China has also projected economic power through a series of mineral and oil acquisitions in Africa, Canada, the US, Australia and Latin America. The reason, of course, is to feed China’s insatiable appetite for commodities. As an example, the Chinese are both the largest producers and consumers of aluminum and iron ore. 

China’s Belt and Road Initiative is a $900 billion industrial strategy to open channels between China and its neighbors, mostly through infrastructure investments. China long ago put a lock on much of Africa’s vast mineral resources, including oil, iron ore, copper, cobalt and platinum.

China has also gone to great lengths to monopolize the solar power sector. In the early 2000s, Chinese manufacturers who supplied most of the world’s solar panels expanded too fast, leading to an oversupply of panels and causing prices to tank. In 2016 China was accused of violating an agreement with the European Union, after another surge in Chinese panel production lowered prices, inflicting damage on China’s EU competitors. 

Finally, there are now stacks of evidence proving that the Chinese government undertook pernicious measures to conceal the coronavirus outbreak in Wuhan. They included destruction of virus samples, suppression of information, and delaying lockdown of a city of 11 million, allowing the virus to spread throughout China and worldwide, through airline travel during the Chinese Spring Festival, the largest annual migration of holiday travelers on earth. 

Some Chinese officials have intimated the United States brought the virus to the Chinese Mainland through military athletes, others are incensed by US accusations it started in a Wuhan laboratory.  

In a Project Syndicate column, economist Stephen Roach quotes a new poll by the Pew Research Center which found 66% of US citizens now view China in an unfavorable light, while [a]n equally nationalistic Chinese public is also irate at the United States. 

Roach contends the breakdown in the US-China relationship has gone beyond economics:

A decisive shift in the balance of global power, ushering in a new cold war, could well be at hand. Under Trump’s “America First” administration, the US has turned inward, heaping scorn on its once-loyal allies, withdrawing support for key multilateral institutions (including the World Trade Organization and, in the midst of a pandemic, the World Health Organization), and embracing trade protectionism. Meanwhile, China is filling the void, partly by design (through its Belt and Road Initiative, the Asian Infrastructure Investment Bank, and airlifts of medical supplies to pandemic-ravaged countries in Europe and elsewhere), but also by default, as the US retreats.

At AOTH, we haven’t been shy about suggesting the conflict could easily break out into open warfare. We were also quick to point out that the United States’ decision to leave the 1987 IMF Treaty between the US and Russia opens up the possibility of an arms race between the two former Cold War adversaries, and the new kid on the block, China. 

Our prediction appears to have come true. Reuters reports the Trump administration is planning to deploy long-range, ground-launched cruise missiles in the Asia Pacific region, including versions of the Tomahawk cruise missile carried on US warships, and the first new long-range anti-ship missiles in decades. The US Air Force has also begun developing the first hypersonic cruise missile, capable of eluding detection by flying at least five times the speed of sound. 

The U.S. moves are aimed at countering China’s overwhelming advantage in land-based cruise and ballistic missiles. The Pentagon also intends to dial back China’s lead in what strategists refer to as the “range war.” The People’s Liberation Army (PLA), China’s military, has built up a huge force of missiles that mostly outrange those of the U.S. and its regional allies, according to senior U.S. commanders and strategic advisers to the Pentagon, who have been warning that China holds a clear advantage in these weapons… 

In a series last year, Reuters reported that while the U.S. was distracted by almost two decades of war in the Middle East and Afghanistan, the PLA had built a missile force designed to attack the aircraft carriers, other surface warships and network of bases that form the backbone of American power in Asia. Over that period, Chinese shipyards built the world’s biggest navy, which is now capable of dominating the country’s coastal waters and keeping U.S. forces at bay.

The technology the US intends to deploy to counter China’s range war missiles use lithium batteries and rare earths magnets. China controls the market in both.

Conclusion

Let’s be clear: China doesn’t need the United States, or really any trading partners beyond the countries it has signed up for its Belt and Road Initiative. The country already has a lock on most of the world’s critical minerals, especially the ones that count ie., lithium, graphite and cobalt needed for lithium-ion batteries used in electric vehicles and energy storage; manganese and vanadium used in steelmaking; and rare earths. Without rare earths a country doesn’t have the capability of manufacturing components necessary for a modern military or a 21st century economy. The only rare earths mine in the US, Mountain Pass in California, ships its rare earth concentrate to China for further refining. The only US lithium mine, Albemarle’s Silver Peak in Nevada, exports its lithium products to China for further processing. 

China leads the world in the manufacture of electric vehicles and charging stations, far exceeding second-place USA. China has the most installed solar capacity, wind power, and hydrogen production. And as we discovered during the pandemic, China is also the world’s major producer of ventilators, respirators and other personal protective equipment front line health workers are in desperate need of, and some have died from the lack of. Lets hope the coronavirus is the final nail in the coffin for China’s dominance of the global supply chain. 

The bottom line? China cannot continue to supply us, as in Canada and the United States, with everything. The time has come, and Trump is right about this, to get serious about re-making global supply chains that cut China out of the loop.

Diversifying our supply chains away from China will strengthen us economically and geopolitically.

(By Richard Mills)