Today, we are discussing China's export controls and bans on critical minerals and minor metals. Why are these controls in place? What do they tell us about Chinese strategy? And is it truly anti-West, or is it simply China exercising soft power in much the same way other great powers have?
What can we infer from these controls about China's broader strategy, and what does it mean for merchants and traders in the sector and the wider industry? And what opportunities does it present?
Our guest lives these questions: David Sher, Group Managing Director of AMC. Nearly 100 years old, the group spans merchant trading, financial and risk management services, industrial services and operations, and increasingly provides investors with access to this critical sector.
Podcast Briefing: an Edited Q&A
The following Q&A has been adapted from the HC Commodities Podcast and edited for clarity and length.
How China came to dominate critical-minerals processing
Paul Chapman: Can you give us the backdrop to how and why China captured so much of the processing of the metals and minerals that are now fundamental to the electrotechnology and defence sectors?
David Sher: You can draw it back to the deindustrialisation of the West. Many heavy industrial processes were not tremendously valuable and came with social licence issues, both around labour and their environmental consequences. For 20 or 30 years, much of the wealthier West decided it preferred to grow in other ways and did not want to host these businesses. China made a different trade and said, “Let’s build it.”
The Chinese economy has also seen a huge amount of state planning. They gave significant thought to becoming powerful and globally important in mining and, particularly, midstream processing. Mining is partly determined by the geological lottery, but policymakers have much more control over the midstream because it is a choice about capital allocation, hosting and capability.
Strategy, state planning and industrial scale
Paul Chapman: Was control of these key raw materials the plan from the start, or did the strategic opportunity emerge later?
David Sher: I do not think you could claim it was the plan from the start. No one is that prescient. But China’s development has involved much more centralised state control, with ramifications for the speed and scale of what gets done.
If you want to build a large manufacturing economy, it makes sense to begin with the foundation industries. You do not need an initial view on global electrification. You simply need a view that you want to manufacture at scale. If you want to participate in manufacturing supply chains, you very quickly arrive at metals and minerals.
The power of controlling the midstream
Paul Chapman: What makes China’s position in these markets such a powerful geopolitical lever?
David Sher: People recognise that control over a significant minority of the world’s oil can provide a geopolitical lever. Now imagine that the concentration is 80%, 90% or, in some cases, more than 95% of the world’s supply of something.
This is the position China has reached across a suite of critical metals and minerals. Substitution also becomes harder when the same country may control the alternative material.
What COVID revealed about supply chains
Paul Chapman: How did the current wave of export controls and bans begin?
David Sher: I think it started accidentally during COVID, with supply-chain disruption caused by attempts to control the spread of the disease. Cars were piling up on production lines in the UK and Europe because manufacturers could not obtain key fobs from China. Aluminium-alloy plants were idling because they could not obtain magnesium.
What was discovered was that restricting one small but integral complementary product could cause a huge amount of economic disruption. The revenue loss for the supplier could be very small, while the economic damage elsewhere could be very large. A couple of years after this happened by accident, it began happening deliberately through export controls and bans on certain materials.
Why export controls are more powerful than outright bans
Paul Chapman: Why are export controls more effective than export bans?
David Sher: A ban produces an obvious first-order effect. Supply falls outside China, international prices rise and prices inside China fall. It reveals that China has a lever and is willing to pull it, but it does not necessarily achieve much beyond short-term disruption.
Export controls are far more sophisticated. In essence, the system says: tell us who you are sending the material to and what it will be used for, and we will decide whether you are allowed to send it.
That produces a huge amount of supply-chain mapping. It also allows China to decide which countries, industries and applications receive material. It can restrict inputs into a particular military product or support one country’s industry while withholding material from another.
Export controls are far more sophisticated and far more successful, in my opinion, than export bans.
How the export-control system works in practice
Paul Chapman: How does the export-control system actually work, and what information must buyers provide?
David Sher: Whoever exports from China must seek advance approval for materials on the export-control list, and that list is getting longer. The friction is not only whether approval is granted. It is also how long it takes, how much information must be supplied and how many follow-up questions are asked.
Useful inferences can be drawn from both the information provided and the information withheld. Even vague declarations can help to identify and map sensitive supply chains.
The implications for merchant traders
Paul Chapman: Where does the merchant trader fit into a system that requires declaring the final supply chain and use of the material?
David Sher: Some participants will try to capture price differentials and evade Chinese law, particularly if they have no intention of entering China. There may therefore be a darker market capturing those arbitrages.
However, most of the market is sufficiently well controlled that participants do not want to take that chance. If someone is caught providing false information, they may be cut off, while their Chinese supplier could face serious ramifications. This gives suppliers a strong incentive to verify what they are being told and is materially changing the flow and selective availability of metals around the world.
What antimony and tungsten reveal
Paul Chapman: What have the contrasting experiences of antimony and tungsten revealed about the effectiveness of export controls?
David Sher: Antimony showed that controls can ultimately weaken China’s position. When restrictions were introduced, the international price tripled. But building alternative processing capacity was not especially expensive or difficult. Within roughly 12 to 18 months, new projects began appearing, often without institutional capital. Several years later, prices had returned to more sensible levels and China’s dominance of the antimony midstream had been reduced.
Tungsten has been different. Its midstream is highly complex and costly, partly because of its exceptionally high melting point and the chemical treatment required. Alternative processing capacity has not proliferated in the same way, making China’s leverage more powerful.
China will nevertheless be watching for new supply-side responses and may loosen the controls before it fully stimulates competing capacity.
The return of the merchant as aggregator and allocator
Paul Chapman: What have these controls and wider trade frictions done to the metals-trading world?
David Sher: Businesses had become increasingly comfortable with global supply chains. Producers and consumers could deal directly across borders, supported by better communications, freight services and access to working capital. That worked when it was reasonable to assume a nation state would not intervene and disrupt the supply chain.
Today, that is no longer a reasonable assumption. China has export controls, the US and Europe have tariffs, and Europe has measures such as carbon taxation. As the world moves from a relatively free global market towards a volatile, regionalised market with significant trade friction, the aggregator and allocator in the middle becomes more important.
A merchant buying from ten countries and selling into ten countries is better able to reroute material, absorb a shortfall in one market and obtain more supply from another. The merchant provides a shock absorber for producers and consumers, taking on and managing risk in return for a premium.
Pricing risk in illiquid minor-metals markets
Paul Chapman: Is merchant trading in these markets essentially a form of insurance?
David Sher: It is a risk-transfer business. The merchant has to price the risk appropriately, understand how it is being priced and defray it as effectively as possible.
The challenge is that many of these markets do not have readily available derivatives to support price discovery or allow traders to offload risk easily. These are variations of longstanding trading problems re-emerging in a different form.
Bringing financial capital into critical metals
Paul Chapman: How is investor interest changing markets beyond the major base and precious metals?
David Sher: Much of the periodic table outside the base and precious metals has historically attracted almost no financial-player interest. These have been industrial markets, with merchants buying from producers and selling to consumers. Even when a consumer expects prices to rise, it may continue buying monthly because procurement is tied to production and the company does not have the capital allocation to purchase a year’s supply in advance.
That is now changing. Supply-side businesses are looking for capital, while investors are looking for ways to deploy capital into the sector. There may be $100 billion or $200 billion deployed into the supply of these materials outside China, while a financial asset class is looking for access but cannot simply enter through mature, liquid contracts.
Investors therefore need ways to navigate listed derivatives, mining equities, physical stock, warehouse receipts and other unlisted opportunities.
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