As the new cold war dawns, China’s international influence is on the rise, driven by its economy and it growing control over critical minerals that play a pivotal role in various products, which hold the key to shaping the future.
Companies involved at every stage of the supply chain, spanning from mining to the production of batteries and electric vehicles, are actively participating in this competitive race across emerging markets. In response to increasingly stringent foreign investment regulations prevalent in developed markets, Chinese enterprises are strategically shifting their focus towards securing access to critical minerals like lithium and cobalt through alternative avenues.
Spanning the entire value chain – from mining operations to battery fabrication and electric vehicle (EV) assembly – Chinese corporations are enthusiastically participating in this global pursuit. Their impetus stems from multifaceted drivers such as augmenting top-line growth, optimizing cost structures, ensuring supply chain resilience, and achieving vertical integration. This strategy’s resilience is anticipated to endure fluctuations in mineral prices, asserting its sustainability.
While various nations are recognizing the strategic significance of these critical minerals, it is Chinese entities that have spearheaded such endeavors. The trajectory extends to emerging markets across Africa and Latin America, poised as the next strategic frontiers for the New Cold War. While these ventures hold prospects of yielding substantial benefits, they concurrently introduce heightened investment risks and execution challenges as the influx of corporations into these nascent markets escalates.
In response to industry appeals, the Chinese government is poised to adopt supportive measures, aligned with its recognition of these sectors as pivotal components of the nation’s core strategy. This confluence of interests is poised to expedite China’s ascent to a position of influence concerning these critical minerals and the industries intricately reliant upon them. As an increasing number of Chinese enterprises secure access to resources and expand production capacities, the collaborative momentum is set to shape the landscape further.
New Cold War – Pursuit of Critical Minerals: Chinese Mining Ventures Shift to Lithium Amid Dominance in Rare Earths
With China’s unshakable supremacy in the rare earth critical minerals sector, attention has turned toward the next pivotal resource: lithium. Lithium, a fundamental raw material indispensable for a spectrum of transformative industries including mobile technology, electric vehicles (EVs), renewable energy, and high-performance computing, has garnered substantial interest. The United Nations has designated lithium-ion batteries as a cornerstone of a fossil fuel-free economy, while the US Energy Department underscores lithium’s strategic importance for the nation’s economic and security interests.
Curiously, despite the strategic significance attributed to lithium, it is Chinese enterprises rather than their American counterparts that have spearheaded a proactive approach to lithium-related mergers and acquisitions (M&A). Notably accelerated since 2021 (as depicted in Table 1), this surge in acquisitions of lithium assets aligns with the ascending trajectory of lithium prices.
Although a recent deceleration in demand from EV markets due to global economic moderation has occurred, the enduring appeal of these critical minerals is projected to persist. Corporations operating across associated sectors remain resolute in their pursuit, driven by imperatives surrounding supply chain resilience and mitigating cost volatility.
Prominent lithium producers, exemplified by Ganfeng Lithium Co. Ltd. and Tianqi Lithium Corp., are actively endeavoring to secure upstream raw materials. This strategic drive stems from the imperative of accommodating the expansion of their core operations. Concurrently, metal mining giants such as Zijin Mining Group Co. Ltd. are embarking on their own pursuit of lithium resources, propelled by a desire to diversify risk exposure and harness the considerable growth potential inherent in this mineral.
In addition to lithium, the allure of nickel and cobalt is fostering investments across both upstream and midstream segments of the Chinese industry. Investments in these commodities are relatively smaller in scale and are predominantly concentrated in Indonesia and Australia. This trend is evidenced by the establishment of nickel smelters by industry players such as Lygend Resources & Technology Co. Ltd., Zhejiang Huayou Cobalt Co. Ltd., and Tsingshan Holdings Group within Indonesia’s borders.
Remarkably, a majority of these M&A endeavors have been financed through internally generated cash reserves. The flourishing operational cashflows of sizeable upstream mining entities, courtesy of the recent commodity upswing, have facilitated these ventures. Moreover, select midstream firms have successfully tapped into equity markets for capital infusion, as witnessed in the initial public offerings (IPOs) of Lygend and Tianqi in 2022.
New Cold War – Strategic Motivations Behind Battery Manufacturers’ Vertical Integration
The trajectory of vertical integration pursued by Chinese battery manufacturers is intricately linked with the cadence of electric vehicle (EV) adoption in China and the dynamic movement of raw material prices.
During the pre-2021 period, marked by a modest EV penetration rate of approximately 5% in China, equilibrium characterized both the supply and demand facets of both battery components and essential raw materials. Battery manufacturers adroitly embarked on minor upstream investments, acquiring fractional ownership stakes in mining enterprises. This strategic maneuver served the dual purpose of fostering strengthened industry relationships and securing a dependable supply stream.
In the context of constrained supply chains and the tumultuous price oscillations of raw materials, a strategic impetus toward heightened self-sufficiency upstream emerged. This strategic pivot augments battery-makers’ capacity to exercise cost controls and mitigate potential operational hiccups. As the landscape witnessed a proliferation of charging infrastructure, a broader spectrum of product offerings, and remarkable advancements in battery technology, the embrace of EVs soared considerably. Illustrated by a nearly fivefold increase in battery installations during 2022 compared to 2020, China observed an impressive rise in EV penetration rates to 15% in 2021 and a remarkable ascent to 27% in 2022.
Propelled by this robust demand coupled with substantial production impediments amid the throes of the COVID-19 pandemic, the prices of pivotal raw materials, including lithium, nickel, and cobalt, experienced an unprecedented surge. The timeline spanning from the initiation of 2021 through the culmination of 2022 saw the cost of lithium carbonate surge by a minimum of tenfold. This seismic shift exerted considerable pressure on the profit margins of battery producers (as depicted in Chart 1), given that raw materials constitute a substantial 60%-70% proportion of the comprehensive battery cell manufacturing expenses.
Navigating Battery Industry Challenges in New Cold War : A Strategic Shift towards Strengthened Integration
The mounting cost pressures within the battery sector are further exacerbated by the intensifying competition within the market. This phenomenon has restrained battery players’ capacity to seamlessly transmit incremental expenses to original equipment manufacturers (OEMs) in the automotive domain.
In light of these circumstances, the profitability of battery manufacturers has encountered a perceptible decline since the threshold of 2021. An illustrative instance comes from Contemporary Amperex Technology Co. Ltd. (CATL), the global leader in EV battery production, whose reported EBITDA margins witnessed a notable contraction – slipping from 17% in 2021 to 12.4% in 2022, signifying a more substantial decrease from the 20% recorded in 2020.
Given the significant scarcities in supply and the acute escalation in material costs over the past biennium, an increasing number of battery manufacturers are endeavoring to navigate the cost landscape by fostering robust associations with upstream counterparts. This strategic undertaking extends not solely within domestic borders but also spans international terrain (as outlined in Table 2).
The modus operandi of battery manufacturers is anchored in the strategic acquisition of fractional ownership stakes in mining assets or the formation of collaborative ventures encompassing mining and refining operations. This approach is particularly pronounced in the realm of lithium. These strategic moves confer upon battery manufacturers direct access to vital raw materials, thereby ensuring the stability of their upstream supply chains – a pivotal advantage in the face of market volatility.
Beyond the realm of lithium, battery manufacturers have channeled investments into other crucial raw materials, including cobalt and ferric phosphate. A distinctive challenge has arisen with Indonesia’s prohibition on nickel ore exports since 2020. This constraint, paired with a surging demand for nickel propelled by the accelerated proliferation of electric vehicles (EVs), has incited Chinese battery entities such as CATL, Sunwoda Electronic Co. Ltd., and EVE Energy Co. Ltd. to forge collaborative ventures with nickel mining and refining enterprises within Indonesia. The impetus for much of these investments stems from mounting costs. Consequently, as input costs stabilize and raw material availability normalizes, it is plausible that battery suppliers might curtail their upstream expansion.
Signs of this moderation are evidenced by the nearly 50% decline in the price of lithium carbonate in the first half of 2023, attributed to the easing supply scarcity and an anticipated deceleration in the growth of the Chinese EV market. Similar patterns of moderation are manifest in the prices of other pivotal inputs for EVs, such as nickel and cobalt sulfates. This transformative landscape is poised to foster a more cautious and discerning approach among battery makers, potentially redefining their strategies for upstream expansion if these pricing dynamics persist.
New Cold War – China’s Critical Minerals Hurdles in Developed Markets
Australia, once a favored destination for lithium exploration, produced 47% of global lithium raw materials (363,309 Mt LCE) in 2022, with Chile following at 26%. However, Australia’s lead is now challenged due to stricter foreign investment policies.
Yuxiao Fund’s stake increase bid in Northern Minerals Ltd. was rejected in February by the Foreign Investment Review Board (FIRB) on “national interest” grounds. Similarly, Tianqi Lithium’s A$136 million acquisition bid for Essential Metals Ltd. was dropped in April 2023 after inadequate shareholder support and concerns about FIRB approval.
Similar challenges are emerging in Canada, where new rules under the Investment Canada Act impact foreign investment in the critical minerals sector. “Significant transactions” by foreign state-owned enterprises now require “exceptional” approval, potentially leading to divestment orders for existing investments, amplifying financial risks.
Emerging markets are the new battleground for critical minerals in the era of the new Cold War
Facing stricter investment rules in developed markets, Chinese companies are exploring new avenues for critical minerals. Limited alternatives, mostly concentrated in emerging markets, pose execution and regulatory challenges, potentially requiring the sharing of resource benefits with local authorities.
Chairman Chen Jinghe of Zijin Mining reiterated the company’s intent to invest domestically and abroad in March 2023. Zijin secured stakes in two domestic projects and completed the Argentina-based Tres Quebradas acquisition in 2022.
Ganfeng is expanding in Argentina, China, Mali, and Mexico. BYD eyes lithium projects in Chile, Argentina, and Africa. CATL leads a $1.4 billion Bolivia consortium for lithium extraction. Private entities, too, are venturing into Africa’s mining with infrastructure.
China’s rapid asset acquisition in Africa, often alongside infrastructure projects, is notable. Latin American governments are also acting: Mexico’s lithium industry is state-owned, and Chile plans nationalizing reserves, impacting foreign investment. Latin America’s pivotal markets, including Chile, Bolivia, and Argentina, may stay less restrictive, owning 60% of global reserves.
Bolivia’s entry may be delayed due to political uncertainty. Nevertheless, CATL is investing $1.4 billion in a consortium aiming for 25,000 metric tons of battery-grade lithium carbonate annually. Conversely, Argentina’s established mining industry, favorable policies, and competitive assets make it a top destination.
China’s Expansive Influence in Critical Minerals Landscape
The ongoing global pursuit for enhanced control over critical minerals is poised to elevate China’s influence across industries that depend on these vital resources as essential inputs. This far-reaching influence is projected to expand and intensify as Chinese enterprises solidify their presence as proprietors, producers, or consumers within the market.
This phenomenon is most prominently observable within the domain of rare earths. With governmental support in the 1980s, Chinese firms swiftly secured a commanding position in the critical minerals sector during the 1990s. Leveraging this advantage, they subsequently expanded their influence downstream, as highlighted by the Center for Strategic and International Studies in Washington, DC. This strategic progression has facilitated China’s ascendancy, currently accounting for approximately 60% of rare earths mining, 91% of refining, and 94% of magnet production, as detailed by the Center for European Policy Studies in Brussels. The prominence of such statistics and analyses has profoundly influenced and will continue to shape policy measures in both the United States and Europe.
Another example is unfolding in the nickel market. China’s “going out” strategy under the Belt and Road Initiative and Indonesia’s nickel ore export ban in 2020 have prompted Chinese firms to pour billions of dollars into Indonesia’s nickel supply chain in recent years.
These investments include some of the biggest industrial parks in the country, such as Tsingshan Holdings Group’s Indonesia Morowali Industrial Park and Weda Bay Industrial Park. As a result, Indonesia has become the world’s largest nickel producer and will account for more than 40% of global primary nickel supplies in 2023.
China Dominates US Battery Import – Highlighting China’s Critical Minerals Dominance
Amid soaring US imports of lithium-ion batteries in the first quarter, China took the lead with a commanding share of 87.9%, surging from 77.5% in the prior year, based on Panjiva data.
Conversely, South Korea’s share declined to 3.2% from 4.7% in Q1 2022, while Poland elevated its share to 3.1%, up from 1.4% in Q1 2022. Japan faced a significant decline, plummeting from 11% in Q1 2022 to a mere 1.2% in Q1 2023.
The relentless growth in US lithium-ion battery imports echoes the nation’s dependence on international trade, particularly with China, as the demand for electric vehicles and electrochemical energy storage escalates.
In the initial three months of 2023, US lithium-ion battery imports surged by almost 66% compared to the prior year, reaching 235,386 metric tons. This trajectory marks the 11th consecutive quarter of surging battery imports and establishes a new quarterly pinnacle approximately 24% higher than the previous record set in Q4 2022, according to insights from supply chain research specialist Panjiva.
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