China’s Critical Minerals Strategy

China is a crucial player in global mineral processing, and its engagement in the critical minerals supply chain is likely to shape our collective future.

The demand for sourcing large quantities of critical minerals has never been higher. Given the increasing shift towards green technologies, the consumption of these minerals – including nickel, copper, lithium, and cobalt – is expected to rise even further in the years to come. Indeed, in order to meet the International Energy Agency’s Sustainable Development Scenario, demand could potentially quadruple by 2040 to limit the global temperature rise to well below 2°C and is projected to rise sixfold under a net-zero scenario. It comes as no surprise then that several nations – including the United States, European Union members, and China – are trying to increase the supply and rate of production of raw materials. These critical minerals are seen as essential for the energy transition needed to address climate change.

China is a key player in mineral processing, and its impact on the critical minerals supply chain cannot be disregarded. Given the country’s impact and level of engagement on the global stage, it is important to keep an eye on how its strategic position on critical minerals might evolve. China’s critical mineral strategy will probably be influenced by two factors in the years to come:

the growing concern that a high dependence on the Asian superpower for critical minerals and their derivative products might pose energy security risks
the need to put in place due diligence requirements so that the sourcing of these minerals does not have an adverse social or environmental impact

The geographic diversification of the critical minerals supply chain seems difficult as it would require significant investment towards this end by the US and Europe. However, the current administration does seem to be taking steps in this direction, especially with the call to form a global alliance called the Mineral Security Partnership (MSP). For the time being, it remains unclear whether this initiative will be enough to tackle global concerns. China for its part has taken some steps to strengthen due diligence in the past decade, but key standards, many of them voluntary, remain unenforced.

China at an advantage

China’s critical minerals strategy has ensured that it controls the vast majority of global critical minerals refining. It refines 68% of nickel globally, 40% of copper, 59% of lithium, and 73% of cobalt. China also accounts for most of the global production of mineral-rich components for battery cells – including 70% of cathodes which can account for half the cost of a manufactured cell. Most notably, China accounts for 78% of the world’s cell manufacturing capacity for electric vehicle batteries. The country hosts three quarters of the world’s lithium-ion battery megafactories. China also happens to be the world’s leading producer and processor of rare earth elements (REEs), which are used in motor technologies for EVs and wind power technologies.

Given that mineral supplies are tight, different stakeholders – from manufacturers to refiners – are targeting mining projects as part of their investment strategies to secure raw minerals. European and U.S. automakers have already shown a keen interest in collaborating with Chinese companies. For instance, Volkswagen recently announced that it would form a joint venture with Huayou Cobalt in the southwestern Guangxi Province (China) and with Tsingshan Holding Group in Indonesia to secure nickel and cobalt supplies. Similarly, Ganfeng Lithium has signed a long-term supply agreement with BMW and strategic cooperation agreements with Tesla and Volkswagen. Chinese companies are also striking new deals globally to secure raw mineral inputs for refining and battery manufacturing. This is being achieved through direct investments in mining projects and companies, part-equity-stake deals, and extended supply sales agreements with mining companies.

As things stand, the world depends on sourcing from China to facilitate its energy transition and decarbonization goals. However, there is growing concern about the risks posed by this concentration of the critical minerals supply chain in a single country. Indeed, the International Energy Agency (IEA) has highlighted that the high geographic concentration of production and processing operations in China is a key vulnerability for energy transition. Similarly, the European Union and the United States have recognized that dependence on China for critical inputs and technologies is a major reason to increase their own mineral supply chain resilience. Russia’s invasion of Ukraine has added to the urgency of these plans by underscoring that dependence on strategic rivals for critical resources is a glaring vulnerability.

High vs. Low Supply Chain Diligence

Broad transparency across the critical minerals supply chain globally seems difficult to achieve, especially given China’s reluctance towards mandatory due diligence requirements for

critical minerals and their derivative products. It is particularly important to ensure the enforcement of these standards for smelters and refiners as they occupy a strategic position in the supply chain. A high-enforcement scenario would entail China having clear statutory requirements for due diligence. This would include mechanisms which would allow the monitoring and sanctioning of smelting and refining companies for noncompliance. Furthermore, the Chinese government would have to enact and enforce legislation which mandates due diligence in the mineral supply chain in accordance with CCCMC guidelines.

These would require companies to disclose their due diligence policy, undertake independent third-party audits, and publish annual reports outlining the implementation of due diligence measures and the steps taken to mitigate risks in the supply chain. Conversely, a low-enforcement scenario would translate into a continuation of the status quo as most smelters and refiners would fall short of standards for mineral supply chain due diligence.