China is winning the minerals war

Chinese processing plants in Indonesia pump out vast quantities of nickel. AFP/GETTY IMAGES
Chinese processing plants in Indonesia pump out vast quantities of nickel. AFP/GETTY IMAGES

Summary

Despite years of efforts by the West to make a dent, Chinese mining companies are becoming more dominant, not less.

SINGAPORE—For the past few years, the West has been trying to break China’s grip on minerals that are critical for defense and green technologies. Despite their efforts, Chinese companies are becoming more dominant, not less.

They are expanding operations, supercharging supply and causing prices to drop. Their challengers can’t compete.

“China is not just standing still waiting for us to catch up," said Morgan Bazilian, director of the Payne Institute at the Colorado School of Mines. “They are making investments on top of their already massive investments in all aspects of the critical-minerals supply chain."

Take nickel, which is needed for electric-vehicle batteries. Chinese processing plants that dot the Indonesian archipelago are pumping out vast quantities of the mineral from new and expanding facilities, jolting the market.

Meanwhile, Switzerland-based mining giant Glencore is suspending operations at its nickel plant in New Caledonia, a French territory, concluding it can’t survive despite offers of financial help from Paris. The U.K.’s Horizonte Minerals, whose new Brazilian mine was expected to become a major Western source, said last month that investors had bailed, citing oversupply in the market.

At least four nickel mines in Western Australia are winding down.

Lithium projects in the U.S. and Australia have been postponed or suspended after a surge in Chinese production at home and in sub-Saharan Africa.

The only dedicated cobalt mine in the U.S. also suspended operations last year, five months after local dignitaries attended its opening ceremony. Its owners say they are struggling against a flood of Chinese-produced cobalt from Indonesia and the Democratic Republic of Congo.

Last year, non-Chinese production of refined cobalt declined to its lowest level in 15 years, according to Darton Commodities. The share of lithium mining done within China or by Chinese companies abroad has grown from 14% in 2018 to 35% this year, according to Fastmarkets, a commodities information provider. Over the same time, lithium processing done within China has risen from 63% in 2018 to 70%, according to Fastmarkets.

The breakneck expansion has assailed Western producers, who say China’s domestic economy can’t always absorb the flood of minerals its firms bring to market. Slower-than-expected electric-car sales growth in China last year meant there were fewer takers for China’s mineral surge, contributing to the crash in global prices.

What’s more worrying for Western producers is that there is little sign of a letup.

“It’s just the way China does things. They have tended to build more capacity whether it’s in aluminum, or cement, or nickel," said William Adams, head of base metals research for Fastmarkets. Chinese companies “all gun for market share, and the consequence for that is you get oversupply."

Western officials, too, are sounding the alarm. In response to a question last month about China’s dominance in nickel, Canadian Deputy Prime Minister Chrystia Freeland said the market had been flooded, making businesses in free-market democracies uneconomic.

“It is our belief that that behavior can be intentional, can be happening with the purpose of driving companies in our country, in those of our allies, out of business," she said. Freeland didn’t provide further details or any evidence for the claim.

China’s Foreign Ministry didn’t respond to a request for comment.

‘The big bad wolf’

Chinese companies are continuing to ramp up, thanks to years of aggressive acquisitions. Zijin Mining, a Chinese state-backed company, said it would increase lithium production by around 85 times this year from a low base, and by a further five times next year.

The projected growth stems from its 2022 purchase of a Western asset—a premium untapped mine in Argentina—that is scheduled to begin pumping out lithium this year.

The mine was discovered in 2015 when Waldo Perez, an Argentinian-born geologist, took samples at a remote lake 13,000 feet above sea level in the Andes, which turned out to be part of a massive lithium deposit. He formed a Canadian company called Neo Lithium with partners, secured the mineral rights, listed it on the Toronto Stock Exchange and stepped up exploration.

By 2021, they decided to sell.

Constantine Karayannopoulos, Neo Lithium’s chairman at the time, said he courted potential suitors—miners and makers of EV batteries alike—from Japan, Germany, the U.S., South Korea and Australia, but there was little interest. With lithium prices rising at the time, he said they were wary of joining the “feeding frenzy" and shelling out a lot of money for the mine in case it turned out to be a bust.

The three best offers the company received were from Chinese companies, including the winning $750 million bid from Zijin, whose largest shareholder is a Chinese state-owned firm.

The sale passed a Canadian government review but perturbed conservative lawmakers in the country and in the U.S.

Karayannopoulos said he was protecting shareholder interests and there was little to be done about “some very far removed non-stakeholders complaining that we shouldn’t be selling this to the big bad wolf."

“The Chinese were true believers but the Westerners were not," said Perez, the geologist who discovered the deposit and was Neo Lithium’s chief executive at the time of the sale.

‘Single-member OPEC’

China has many advantages in the race to lock up minerals. Its miners are deep-pocketed and aggressive, making bets in resource-rich countries that Western companies have long viewed as corrupt or unstable, such as Indonesia, Mali, Bolivia and Zimbabwe. State banks provide financing for power plants and industrial parks abroad, paving the way for further private Chinese investment.

China’s rapid industrial development also means its companies have spent decades fine-tuning the art of turning raw ore into metals. They can set up new facilities quickly and cheaply. A paper published in February by the Oxford Institute for Energy Studies pegs the costs of building a lithium refinery outside China as three to four times higher than building one within the country.

In eastern Indonesia, Chinese companies have built a fleet of highly efficient nickel and cobalt plants over the past few years after mastering a technology Western miners long considered glitchy and expensive. The plants run on coal power, some of it new, at a time when the world is looking to phase out dirty energy.

“It’s just a simple, straightforward engineering capability that the Chinese have that has been lost in the rest of the world," said Jim Lennon, managing director for commodities strategy at Macquarie, an Australian bank. “The Chinese have this overwhelming competitive advantage now that can’t really be addressed."

Talon Metals is trying to compete. The company, headquartered in Toronto, controls a rich underground nickel reserve in central Minnesota—a mine the White House says is part of its plan for breaking U.S. mineral dependence on China. The Energy Department has earmarked more than $100 million for Talon to build a refinery in North Dakota to process ore from Minnesota and elsewhere in North America.

Tesla agreed to buy the nickel for car batteries.

“U.S. policymakers on both sides of the aisle realize we cannot allow China to become a ‘single-member OPEC’ for critical minerals like nickel," Sean Werger, Talon’s president, said last month, referring to the oil cartel formed by many of the world’s top producers to coordinate supply.

But some investors have soured on Talon, whose share price on the Toronto Stock Exchange has dropped around two-thirds over the past two years amid a flood of Chinese nickel from Indonesia. Many analysts say projects outside Indonesia will struggle to take off unless nickel prices rise significantly. Talon says its high-quality ore gives it an edge, that it is using innovative technologies to boost revenue, and that there is still demand for U.S.-mined minerals.

Like other Western miners, Talon says it isn’t a fair fight. Chinese nickel companies receive cheap state financing as part of a “strategic imperative to gain control over pricing," said Todd Malan, Talon’s director of external affairs. “All the Western projects have to meet market-based economic criteria."

Australia’s Queensland Pacific Metals is developing a nickel-processing plant in Australia to refine imported ore from New Caledonia and sell it to General Motors. But last month Queensland Pacific said it would limit further expenditure on the nickel project and instead focus on drilling for gas, citing low nickel prices and challenging market conditions.

The mineral industry is a national priority for Beijing. Metals and mining investments under its Belt and Road Initiative hit record levels last year, according to a report by Australia’s Griffith Asia Institute. Chinese official lending for minerals projects in developing countries typically offers lower rates than commercial loans, according to AidData, a university research lab at William & Mary in Virginia.

Meanwhile, Western companies struggle to get loans. Amos Hochstein, a top White House energy adviser, said this month that Western banks are reluctant to finance projects in risky mineral-rich countries and that China is often the only player.

U.S. legislation passed in 2022 offers electric-vehicle manufacturers incentives to buy minerals domestically or from countries with whom the U.S. has free-trade agreements. Starting next year, batteries could be disqualified for subsidies if they contain minerals that are mined or processed by Chinese companies.

Last Tuesday the White House announced new tariffs on China, including on critical minerals such as natural graphite that Beijing dominates.

Western miners are hopeful that these provisions will eventually drive demand for their minerals, though some are concerned carmakers could find workarounds. They also hope Chinese companies will dial down production.

“At today’s prices, the economics for new greenfield projects, particularly in the West are not supported," Kent Masters, chief executive of Albemarle, the largest U.S. lithium producer, said this year. Unless prices rise, Masters has said he doesn’t think there is a “business case" for a complete Western lithium supply chain.

Write to Jon Emont at jonathan.emont@wsj.com

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