Abu Dhabi, UAEThursday 20 June 2019

Don't forget that China can levy sanctions, too

Embargoes over oil and gas may soon be replaced for the key minerals of new energy

Artisanal miners work at Tilwizembe, a former industrial copper-cobalt mine outside Kolwezi, in the south of Democratic Republic of Congo. The bulk of rare earth mining is done in dangerous and environmentally damaging conditions. Reuters
Artisanal miners work at Tilwizembe, a former industrial copper-cobalt mine outside Kolwezi, in the south of Democratic Republic of Congo. The bulk of rare earth mining is done in dangerous and environmentally damaging conditions. Reuters

China can do sanctions, too.

In response to the US’ tariffs and trade war against China, Chinese academic Jin Canrong has proposed a total ban on rare earth exports to the US. Some predict this marks the future, when embargoes over oil and gas are replaced by struggles over the key minerals of new energy.

Professor Jin’s proposal, made last Wednesday in the English-language Chinese newspaper Global Times, is focused on damaging the US’ high-end chip industry. However, rare earth elements (REEs) are also crucial for magnets and electric generators, such as neodymium in wind turbines (which can contain two tonnes of rare earths each); electric car batteries; and various advanced weapons systems.

China mines about 87 per cent of the world’s REEs, and Australia another 10 per cent. Chinese restrictions on exporting REEs, imposed in 2009, drove up the price of some by five times. In 2014, the World Trade Organisation ruled in favour of the US, EU and Japan against this practice, but now the US seems to have abandoned the WTO as a forum for resolving disputes. This means a ban by Beijing is not an empty threat.

REEs are not the only specialist materials in increasing demand because of the clean energy boom. Graphite is used in battery electrodes; lithium, nickel and cobalt in batteries; indium, selenium and tellurium in some kinds of solar panel; indium, gallium and selenium in highly-efficient LED lights.

Some of these materials are already mined in substantial quantities for other uses, but some, notably tellurium, are very rare and are by-products of other mineral extraction. And as with REEs, mining is very concentrated in a few, often unstable, countries. The troubled Democratic Republic of Congo produces about 60 per cent of the world’s cobalt, a lot of it done by small-scale artisanal mining in dangerous and environmentally damaging conditions. Along with its REEs, China extracts about 65 per cent of graphite and half of indium.

In the twentieth century, oil and sometimes gas repeatedly became the focus of geopolitical struggle, and on occasion triggered the rise and fall of nations. US oil sanctions on Japan were a key weapon that led it to attack Pearl Harbor in 1941; the quest for oil encouraged Hitler’s ultimately disastrous drive towards the Caucasus; Arab petroleum producers wielded the “oil weapon” to pressure the US over Israel in 1973; and Vladimir Putin sought to bring Ukraine to heel with cut-offs of gas supplies in the winters of 2005, 2008 and 2013.

This has drawn concerns that countries such as China might restrict mineral exports to ensure they dominate the new energy economy or damage a geopolitical rival. Progress towards green energy may also be delayed because of unrest or government money-grabs in an unstable mineral-producing country or transit route.

But applying the oil and gas paradigm to the strategic new energy minerals is highly misleading. Oil and gas are consumed to provide energy; REEs and the other minerals construct devices that produce or use energy for long periods. A cut-off of REEs would not prevent wind turbines from turning. Unlike fuels, expensive to store in large quantities, these materials can be stockpiled indefinitely.

Exploration for the new energy minerals has hardly begun, as they were not historically important. More could be discovered, whether in existing big stable mining countries such as Canada and Australia, or in new areas that would at least diversify supply. At the moment, China dominates rare earth supply because it is willing to tolerate the environmental damage that cheap mining causes.

Brazil, Russia, Vietnam and India have large reserves of REEs that could be developed if prices rise. And no one country dominates all the stocks of minerals: Chile and Bolivia have more lithium, Brazil graphite and REEs, Congo cobalt, Australia, China and Russia a smattering of several types. Of these, only Russia is also a leading oil and gas exporter.

And these energy minerals are not valuable enough to generate enormous rents. In 2017, the world’s largest producer of lithium, Australia, mined about $17 billion worth of the metal; Congo extracted $5bn of cobalt; while Saudi Arabia produced some $230bn of oil. Such earnings are not enough to sustain a full-blown resource curse, where a state’s institutions and other industries are hollowed out by easy mineral wealth.

Oil is still mostly irreplaceable for transport, though efficiency can improve. Batteries and turbines, though, can be made from alternative materials or use different designs, even if this leads to somewhat worse performance. After the Chinese REE export ban and consequent price spike, 20 to 50 per cent of neodymium in wind turbines was replaced, and waste in manufacturing was cut in half. Materials can be recycled, although this does not help much while the clean energy business is in a phase of fast growth.

Of course, producing enough of these materials to meet surging green energy industries is a challenge. At times prices will spike, Chinese companies will buy operations in other countries and be met by accusations of trying to monopolise supplies. New mines have to be opened, and host countries assisted to improve their institutions, environment and labour conditions. A variety of new technologies will be needed to avoid over-dependence on a single material.

But an export embargo by China or any other country would mark it as an unreliable supplier and encourage competing supplies, a lesson painfully learnt by oil exporters in the past. Access to materials might give a brief advantage, but technological savvy is more important in the long term. The move to green energy raises new geopolitical problems, not to be viewed through an old paradigm.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

Updated: May 19, 2019 03:22 PM