Unpacking China’s Mineral War, Global Response | China in Focus

Welcome to China In Focus. I'm Stefania Cox, in for Tiffany Meyer. Rare earth minerals are critical to everything from iPhones, to cars, to microchips, to fighter jets. But China dominates the processing of these minerals. How did we get here, and how do we break China's grip on the market? An expert breaks it down. What doesn't make them critical is geology, because rare earths can be found in many places. What's critical is control, and who controls the production and the extraction and the processing of these minerals. With growing attention on rare earths and critical minerals, what are they, and how do they impact everything from our daily lives to the military? Joining NTD's Tiffany Meyer to unpack all this and the geopolitical implications is Tomasz Nadrowski. He's a portfolio manager at Amvest Territon Critical Minerals Fund, and author of Mineral War, China's Quest for Weapons of Mineral Destruction. Tomasz, thank you so much for joining us. Thank you for having me. Well, as we've been seeing, stocks are going up and down with, you know, all the developments with rare earth, critical minerals. What even are these? Let's just first dive in. What is a rare earth? Rare earths are 17 different chemical elements that tend to co-occur together. In subsoil, in different parts of the world. And the main problem is that unlike other elements that we can just simply mine, like copper or iron ore or gold, we tend to extract all of them together. And the biggest problem is how to separate those valuable ones from those that are less valuable. And that's the big problem for the industry. And then when it comes to critical minerals, there's a lot of minerals, so what makes a mineral critical? So certainly what doesn't make them critical is geology, because rare earths can be found in many places. What's critical is control, and who controls the production and the extraction and the processing of these minerals. And there's one country that controls it. And that country is controlled by one party, and that party is controlled by one man. And therefore, that's pretty critical when it comes to control. And that's probably what matters these days more than geological occurrence of these minerals, of these elements, or even the processing capacity that's being rebuilt in the West. I'll not get into all that, but first for, say, the average Joe on the street, why should they care? How do rare earth critical minerals play into everyday life, but also our military? It's very important, because the main application for rare earths is in permanent magnets. Now you may say, why do I care about permanent magnets? Well, because about 60% of our electricity uses magnets, and 70% of those magnets use rare earths, which means that almost half of all the electricity that we use is dependent on rare earths, mostly because of electric motors that contain those. So imagine that someone could basically switch off half of our electricity. That affects all of us. Now, it's not going to happen for the existing infrastructure, but it also means that you cannot build anything new, whether it's infrastructure, industry, or of course the military. We saw that not long ago with Ford, when they had to stop production of a whole range of electric vehicles, or EVs, because of supply chain disruptions in terms of that. You mentioned earlier, right, there's a huge control by one country, one party, one man. I want to get to that, but first there's a couple developments, because it seems there's realization about that, and the concerns there. We saw President Trump launch something, a $12 billion project called Project Volt, which is to stockpile critical minerals. Another huge development is you saw Secretary of State Marco Rubio have something called the Minerals Ministerial, where he was meeting with delegates from 50 different nations, basically creating either bilateral agreements or boosting deterrence and reliance within these areas instead of, say, on China. How are you reading that? How successful could this be? This is too early to say how successful it would be. It's an important step forward, because unfortunately America won't be able to solve this problem alone. It's something that's been festering for three or four decades now, deindustrialization and loss of mining industry as well, and we are not the only country confronted with the restrictions of the dominant producer. Right now it's Japan, sometimes it's Europe, sometimes it's the United States, and each of the U.S. allies have different strengths, so coordination is really important. Say we have the largest capital market in the world, $72 trillion worth of equity market, so it could be infused partly into this sector. It's not the case right now. Japan and Korea have viable refining industry, and Australia and Canada are very strong mining countries, so together we represent a very important power to actually rebalance that production away from the dominant producer right now. But it will also require coordination and action, and not just talking about it, because this is not the first initiative like this. In 2022 the Mineral Security Partnership, MSP, was launched also by the U.S., also with the G7 members and other partners and allies. A year later at the G7 meeting in Karuizawa in Japan, there was an important meeting, and nothing much has happened, partly because business hasn't followed or was not incentivized to properly follow and help governments to solidify this coordination into something that's really viable from the economic perspective. I think that's a great transition now to how we got here, right? We're seeing these different movements, so how did we end up here where China has essentially monopolized this entire sector? What was China seeing? What did China do to become the dominant player here? To get into this in detail, I'll have to send you to my book, but let me just very briefly say that probably it's our own fault that we didn't pay attention to the economic structure imposed on China by the Chinese Communist Party, and that's a structure that's essentially Marxist. You have to control what they call means of production, so essentially different parts of the economy which are critical, not only for national security but for the economic control, and that has been done by operating in upstream sectors. The upstream sectors were never privatized, whether it's basic chemicals, mining and metals that concern us here, whether it's banking, telecom, oil and gas, that stayed in the hands of the state, and the state could therefore control input prices for areas which were more liberalized, especially in the 90s and early 2000s after China joined WTO. And so mining and metals were part of that scheme. And the second thing is that generally totalitarian regimes care a lot about metals, because when you think about metals, you think about defense and potential kinetic conflict and so on. So they viewed these minerals as a strategic asset, whereas in the West we view them as a commodity, something that we can trade. I want to dig into that, because you have some examples in your book, Mineral War, which is pictured right here, where you talk about going to different mines in different countries and seeing how the locals deal with it, maybe people who love geology deal with it, and then how the Chinese dealt with it. It's very different. So maybe break down some of the examples there, and then we can dig a bit more into your book. It is actually a very interesting contrast when you travel to Africa, parts of Asia, Pacific, South America. Mining industry in the West is structured in a very specific way. To find something, there will be a number of entrepreneurs who will raise money in stock exchange in Australia and Canada, and just then go and explore and get to know the locals and trying to manage the expectations of the locals, because, of course, not every project will become a mine in the future. In fact, there's probably a higher probability that most of them won't. And so that is the first process, and then you need to move this process to bankability, to find that these are resources, and they can turn into reserves and attract capital to eventually build a mine and produce. That's not how the Chinese system functions in those other jurisdictions, because they have a very strong tendency towards vertical integration, but if not vertical integration within one company, which sometimes happens, like in lithium, then within sort of an SPV, so Special Purpose Vehicles, that travel together and are able to reduce the risk of the operation in an exotic jurisdiction. First, because the Chinese government looks after them through initiatives such as FOCAC in Africa or China Cooperation in Latin America, so the jurisdictional risk is lower, and then those operators usually move to projects that will have lower risk, because the offtake, the future production is already secured, the market is secured by the local Chinese bank, by the local Chinese refinery, and so they don't have to go through all the process that a Western company has, being exposed to massive risks, including jurisdictional risks and other security risks. So this is a big change, because then you can value the projects in a different way, depending on what the level of risk is. And why has Communist China focused so much in this sector? What would happen, say, if a kinetic war were to break out over Taiwan and the U.S. gets involved? What would the world look like in that stage? I would not like to contemplate that, hopefully. But let's not forget the obsession, the general obsession of Stalinist systems with metals. You might remember Mao Zedong and his backyard steelmaking, right? That led to a massive famine in China. So this obsession about metals and metallurgy is not new. Not in PRC, not in USSR before, not in Nazi Germany. That's what these regimes really do. And so there's a very strong focus on these industries. Meanwhile, we focused on trade and markets, and this was just one of many hidden in the corner of the capital markets. Right now, though, we're also seeing, at least the past couple of years, a huge focus on, say, so-called green or clean renewable energies or electric vehicles. Obviously now there's a lot of talk about AI, and a lot of that needs these types of minerals that China has somehow monopolized over the years, or the West didn't realize that. So how does the future look if this is the direction Trump's trying to stockpile? There are moves in the direction to reduce the reliance on China, but if it's still the status quo right now, what does that kind of growth look like? I wouldn't be very optimistic right now. I mean, we are still way, way behind. And let's focus. It's the batteries. It's new energy technologies. It's semiconductors. It's robotics. It's defense systems. It's data centers. I mean, everything that's today and tonight and the day after tomorrow depends on these minerals. So somehow we missed that mineral moment in our technological development. Hardware is so important. Right now we're seeing this in the market. Software is going down. Maybe we won't need software with all the AI, but we will need this 3D little piece, even if it's small like in Taiwan or larger somewhere else. We will definitely need that. And without those minerals, we won't get there. Coming up, rare earths expert Tomasz Nadrowski breaks down for us that China's dominance of rare earth minerals today isn't a coincidence, but rather a longtime global scheme of the Chinese communist regime. More on what the West should do to counter it. That's what these regimes really do. And so there's a very strong focus on these industries. Welcome back to China In Focus. I'm Stefania Cox in for Tiffany Meyer. The global race for strategic minerals is reshaping technology, defense, and security from the United States and China to tensions around the future of supply chains and even concerns over Taiwan. We continue with Tiffany Meyer's interview with Tomasz Nadrowski, portfolio manager of Amvest Territon Critical Minerals Fund. He's also the author of Mineral War, China's Quest for Weapons of Mineral Destruction. How does the environmental factors play in? Because it does seem right in China, they're opening new coal plants. A lot of that is actually to do all these green or so-called energy things that they then ship abroad to other countries that are following emissions standards and all of these different things. So what does that playing field, if you will, look like right now? How is it different in China versus the West? Let me be very blunt. Mining is not benign. You're making a big hole in the ground and then you extract something. Not necessarily pretty. It's noisy. It's dusty. But you can manage all of these things. And you can return this ground to its status quo until it's possible. And there are measures and procedures and systems right now that allow Western operators to do this. You're right that the Chinese industry started in a very different place. And for a long time, there wasn't much concern about environmental spillage. The largest rare-earth mine in the north, Neimongoro, is an example of that. But I think it's not in the interest of the Chinese to have their own environment damaged to this point either. So I think their industry is also slowly learning. I'm not sure to what extent this is applied overseas, but at least to mines in China, a little more than in the past. Having said that, the approach that some anti-mining groups have, that we just don't want this, right? This is a dirty industry. We don't want this hole in the ground. I always ask them, well, do you all live in tents? Do you live in a building or a house? Because that also starts with a hole in the ground. That's not very constructive. We need this industry because, by the way, everything here, unless it was grown, cultivated, or farmed, or maybe made from oil and gas, otherwise it was mined originally. So we cannot function without mining, and yet we outsource our mining, and then we outsource our industry, and we are left with just designing things. That's not sufficient, especially not when the world has moved from this globalized competition into a different social operating system, which I call conflict. That's what it is, and that's why a different way of functioning is necessary. We have to pay more attention to what we actually do and how we foster development again, including industrial development. I want to get to the conflict part, but very quickly, because there's a big focus on, say, wind turbines, electric vehicles, now robots, right, who maybe take over. How much minerals do all of these sectors need, though? Because often people think, oh, these are clean, right? So how dependent on minerals are they? A lot. All of these elements you mentioned, wind turbines are very heavy and rare earths, batteries, of course, a lot of battery materials. These are minerals, both on the cathode side and anode side. An electric vehicle has about eight times as much by weight of critical minerals than an old ICE, internal combustion engine car. And it's the same with many of other technologies. In fact, as we're moving forward, the technology has become more hungry for minerals and more different minerals, including those small specialty metals that we never think about. When Intel came with Intel Insight in the 1990s, there were 17 minerals inside that. Right now in your computer is going to be probably 75 or 80 different minerals on the table of elements. That's quite extraordinary. That's where we're going. And semiconductors are the same story. So whether it's the green transition sector or other sectors, there's definitely the complexification of our technology has brought that demand on a much broader basis than before. And the same also affects our military. It's a perfect transition because I want to move now to conflicts because how does this fit into our military, say, our fighter jets? We see a lot with the B-2s with, say, Operation Midnight Hammer in Iran. Of course, there's the Venezuela operation recently. There's always the concern around Taiwan or in Asia. How do all of these play into that realm of conflict? And if conflict were to play out, what would happen? Again, I hope the conflict won't play out, or if it does play out, then it ends with a quick solution of a maneuver because an attrition war right now is not in the interest of our deficiency in this space, a prolonged attrition war. We know what happened during the first three years of the Ukrainian war. A lot of our stockpiles were also almost empty in certain materials. So there's definitely a problem here. I think what's more important, and we have to remember that, the civilian market in times of peace is always much larger than the military market. The military market is mostly state procurement, and yes, rent it. It's growing. Look at the budgets in Germany and Japan and Australia and India and the United States as well, but it's still much smaller. So here I have to give credit to the administration for thinking about civilian stockpile because that's what the new measure is. We've had a military stockpile, the Defense Logistical Agency, which under different names exists since the times of FDR, President Roosevelt. But this is the first time we have a civilian stockpile, which is much larger, and this is an important buffer. It's like a shock absorber that we need just in case because we need also civilian industry in times of conflict, not just the military. On that note, what would be the solutions here? What are the next steps needed to start moving away from having all the eggs in that one basket? I love music on vinyl. I'm going to sound like a broken record, but the record says capital market has to follow. We have to incentivize somehow by a tax system, by price floors, maybe reference prices, and then protect those reference prices with tariffs so that private capital really participates in rejuvenation of that sector because right now this is not the case. Right now, unfortunately, it's still a very marginal piece. Our administration really cares a lot about artificial intelligence and critical minerals for good reason. Artificial intelligence dominates our equity market largely. The top seven companies that wouldn't exist suddenly, if you ask about Taiwan, wouldn't exist anymore if we lost access to foundries in Taiwan. These are the top seven companies. They're about a third of our capital market. Critical minerals, not represented there at all. Tiny companies, by comparison to the others, improving a little bit since last year. There's a little more attention to this, but less than 1% of S&P 500 is represented by mining companies, and it's such a critical industry. So we have to do something, as I said, maybe through a tax system, maybe through coordination with other countries, to incentivize more investment into this space, and sooner rather than later. Right now with Japan, we're seeing they're mining in the seabed, in the mud for some critical minerals. What are you watching in that sphere, and maybe could we see that elsewhere? This is an excellent example how far or how deep certain governments will go to look for a solution to this problem. Japan currently is unfortunately yet again confronted with a problem with the Chinese embargo, so it's an interesting timing for that particular mission. The vessel is called Chi-Q, which means Earth, and has been around since the year 2000. It started actually as a seismological center, research center. Everybody who has been to Japan has seen this is a maritime country. We've all had sushi. They focus on their ocean. Also this particular vessel was looking for methane hydrate, which is a form of natural gas that could completely redraw the global energy maps if this was successful. Now it's reversed, and it's pretty far away from Japan proper, but it's in an area which belongs to Japan, Bonin Island, so the second island chain, not far away from Palau and Guam, further down to Papua New Guinea. Very interesting process. We had offshore oil drilling for a long time, but not for minerals. They used a new technology, sort of a riser system that allows them to pump this mud, rare earth-holding mud, hopefully without too many radioactive elements. This we'll see. This is now a one-month mission that will return, and if this is really prospective, then I think mining could start in a couple of months from now. Whether it's a lesson for others, it's certainly a lesson for others to co-invest with Japanese technological excellence in this, but not everybody has access to these special economic zones, that part of the Pacific, which is particularly prospective here. So something to watch, and I think it's a testimony to the crisis that we're all going through, that this is how far certain countries have to go to look for access to these minerals. Well, Thomas Nadrowski, thank you so much for your time. Thank you for having me. That's all for today's China In Focus. I'm Stephanie O'Cox, in for Tiffany Meyer. If you have any feedback on the show or have something you'd like to see us cover, send us an email at ChinaInFocus at NTD.com. We'd love to hear from you. For round-the-clock original news coverage, visit us at NTD.com or download our NTD app. Thanks for watching. See you soon.