Raw Material Commodities—Supply Risks and Security

Abstract

The Russia-Ukraine conflict has dealt a major shock to the global commodity industry chain, which has worsened terms of trade and pushed up inflation, bringing supply chain security to the forefront of international attention. The commodity market is prone to a natural oligopoly, which underlies the supply security concerns among commodity importers. However, historically, countries—including those in Europe as well as the US, have not always been at a disadvantage for their reliance on commodity imports given their market dominance, which can be attributed to their technological and capital strength. Amid intensifying geopolitical conflicts and an accelerating green transition, we explore how a major resource-dependent country like China should build strength in the market to mitigate supply risks and ensure supply security.

The mismatches between demand and supply in China are due to strong demand for resources, high dependence on imports, and high concentration of supply. Such factors constitute the major risks facing China’s commodity market, and are further exacerbated by cost disadvantages and slowing technological substitution. Supply–demand dynamics may tighten further amid the evolving landscape of the global commodity market and bring increased uncertainties to China. Resource nationalism refers to government intervention through control and dominance of natural resources within the country’s jurisdiction for political and economic purposes) has flared up and competition has escalated among commodity importers as the green transition has tightened supplies and inflated the prices of traditional energy and metals for renewable energy in international markets. Tensions in the international political environment may further fuel resource nationalism, and resource-dependent countries with dominant market power have intensified competition for resources, leading to fragmentation of the global raw material commodity market. China has entered the later stages of industrialization and is pushing forward high-quality development. The country’s share of global demand for traditional energy and metals has declined, while demand for new energy metals has increased substantially with low demand elasticity. We believe that a resurgence of resource nationalism will result in higher concentration of commodity supply, further amplifying risks.

To cope with the challenges of raw material commodity supply, this report proposes measures at both the industry and national levels based on international experience and domestic reality. At the industry level, we think China could tap its domestic potential while expanding overseas channels, strengthening reserve capacity, and accelerating recycling and technology substitution. At the national level, we think China could continue to upgrade the security of its supply chains for strategic minerals, participate in global cooperation, and safeguard raw material supply chain resilience.

Authors of this chapter: CHEN Ji, WANG Lin, LIN Xinyue, QIU Xiaofeng, CHEN Yan, QI Ding, GUO Chaohui. Other important contributors: LI Linhui, WANG Zheng, ZENG Can, ZHANG Shuwei, ZHANG Jiaming, YANG Wenyi. Translator: LI Wei. Editors: Kenneth HO, Robert PARKER, WANG Lin, LIN Xinyue, LIU Xinran.

10.1 Supply Security in an Oligopolistic Market

The Russia-Ukraine conflict has been a major shock to global commodity markets since the beginning of 2022. Global energy and food supplies have been disrupted, leading to continued volatility in commodity prices. The economic impact of the disruptions on commodity importers is twofold. First, commodity price volatility has caused imported inflation and possible economic recession.¹ The inflation rate in the Eurozone’s 19 countries, the countries most affected by the conflict, rose to 9.1% in August 2022, the highest since records began in 1997. Spain, Portugal, and the UK were among the countries with the highest inflation rates in Europe (Fig. 10.1). Second, volatile commodity prices have worsened terms of trade. In 1H22, terms of trade continued to deteriorate in manufacturing superpowers such as Germany, Japan, and South Korea. Germany recorded its first trade deficit since 1991,² while resource-exporting countries such as Australia and Canada saw significant improvement in terms of trade as commodity prices soared. Studies show that price hikes lead to a wealth transfer from resource-importing countries to resource-exporting countries.³ The stark contrast between resource-importing and resource-exporting countries reflects evolving market power in the international commodity market and its impact on the world economy, foregrounding the vital significance of ensuring secure and reliable supplies of commodities.

Fig. 10.1

Source iFinD, CICC Research

Inflation rates continued to rise in major European countries. Note Six-month rolling Consumer Price Index (CPI).

In fact, many countries have been paying increasing attention to the security of industry chains, with ensuring reliable supplies of critical resources remaining one of their core concerns. The Russia-Ukraine conflict has further amplified the geopolitical impact on commodity industry chains. The US, along with its trading partners—including Canada, Australia, and Finland—announced the establishment of the Minerals Security Partnership (MSP),⁴ and teamed up with Australia and Japan to develop rare earth projects.⁵ These reflect acceleration of Western countries’ global commodity deployment.

Resource importing companies are vitally concerned about securing their supply chains because the commodity market is prone to a natural oligopoly, and this underlies the supply security concerns among commodity importers. Classical theories consider a market structure in which there are few sellers selling products that have no close substitutes as an oligopoly. The commodity market happens to meet these two conditions: First, many natural resources are concentrated in a small number of countries due to uneven geographical distribution.⁶ Second, the elasticity of demand for upstream raw materials is low as there are few close substitutes.⁷ In addition, the long mining and construction cycle of mineral resources always results in a fixed quantity of supply at a given time. The lack of elasticity of supply further strengthens the market power of resource suppliers.

However, demanders were not always disadvantaged by the resource exporter oligarchy as suppliers have not always achieved full dominance in the resource market. In fact, they had been in a disadvantageous position between the Age of Exploration until the Industrial Revolution, and the situation persisted following the end of the Second World War. In contrast, European countries, as resource demanders, secured large amounts of low-cost resources such as oil. Even after the Second World War, resource-importing countries—including European countries and the US—maintained control over resources backed by their technological and capital strengths. Strong post-war demand for the reconstruction of Western Europe and Japan as well as economic expansion in North America drove prices higher during the 1950s and early 1960s.⁸ This in turn strengthened the control that such countries had over resource supply, leading to an oligopoly dominated by resource-importing countries. History shows that resource demanders have not been particularly disadvantaged for their reliance on commodity imports despite the advantages that suppliers have in market power endowed by a natural oligopoly such as the commodity market.

It is then natural to wonder what determines the market powers of commodities suppliers and commodities demanders. We believe that supply–demand dynamics underlie the distribution of power of buyers and sellers in the commodity market. If the supply–demand dynamics are tight, resource-exporting countries tend to strengthen control, putting sellers in a dominant position. In contrast, buyers may enjoy a stronger position in a more market-oriented trading landscape formed amid loosened supply–demand dynamics.⁹ In an oligopolistic market, stronger market power enables a participant to trade in its favor, which is the case for resource-importing countries in terms of ensuring supply security.

Market power also hinges on key structural characteristics of supply and demand such as supply concentration, cost competitiveness, and demand elasticity. In economics, the residual demand curve is used to describe the relationship between a reduction in the output of suppliers in an oligopolistic market and market prices. The slope of the curve represents the market power of the supply-side oligopolist, and is related to the concentration of supply, the gap in supply costs between the firm and its competitors, and elasticity of demand.¹⁰ First, the higher the supply concentration, the easier it will be for sellers to reach open or tacit collusion agreements, and thus the stronger their joint control over market prices. Second, the more competitive the supply costs of an oligopolist, the stronger its market power. This is because when this oligopolist announces a reduction in production, other competitors will have to mobilize higher-cost technologies and resources, making it less likely to quickly and economically fill the gap resulting from the output cuts. Third, the less elastic the demand is, the less likely it will be for supply cuts to cause sharp declines in consumption, thus helping sustain a steady rise in prices.

Political and economic influence on market power is realized by changing concentration of supply. Europe and the US, which have strong political and economic power, have significant influence in the international raw material commodity market given their high participation in such markets. When the global political and economic landscape changes, competition for raw material commodities will intensify. As a result, the dominant power will be more motivated to increase the concentration of supply of the resources under their control. The Thucydides Trap¹¹ becomes relevant in this context in which the established leader of market power will leverage its comprehensive strength to secure additional resources and enhance the concentration of supply, thus further amplifying its market power in strategic areas such as raw material commodities.

Technological innovation reshapes market power through demand elasticity and cost competitiveness. Technological innovations can increase elasticity of demand if related to commodity production and demand substitution, but they tend to boost commodity demand and tighten supply–demand dynamics if designed to diversify end-user applications. For example, the development of nuclear power and renewable energy power generation technologies has slashed demand for traditional energy sources and increased demand elasticity, while rising penetration of communication technologies and new energy technologies has boosted demand for materials such as copper, lithium, cobalt, nickel, and glass and reduced demand elasticity.

10.2 Risks and Causation

From a national perspective, commodity supply security is a measure of a country's status or ability to obtain the natural resources it needs in a sustainable, stable, timely, sufficient, and economical manner. It takes into account not only the quantity of supply,¹² but also the economics of obtaining the resources.¹³ From the standpoint of countries that import raw materials, we define factors that may cause a complete cutoff of resources as major risks, and define those that incur great costs for resource-exporting countries to ensure security of supply as secondary risks. We use this classification to analyze the risks of raw material commodity supply in China.

10.2.1 Risk Origin: Supply–Demand Mismatch

Global reserves and production of commodities are concentrated in a limited number of countries. North America, Russia, and the Middle East accounted for 70% of the global oil production and 63% of natural gas in 2020. In terms of conventional metals, 39% of production of iron ore is concentrated in Australia, 18% in Central and South America, and 11% in China. South America is the world’s largest copper producer, with Chile holding 23% of the global copper reserves and Peru 11%. Bauxite production is concentrated in Guinea, Australia, and Brazil. Global lithium reserves are mainly located in South America, Australia, and Africa. The Democratic Republic of the Congo produced 71% of the cobalt globally. Indonesia and Australia each hold 22% of the world’s nickel reserves, followed by Brazil (17%).¹⁴ The U.S. Geological Survey (USGS) reports that 90% of globally explored platinum reserves are in South Africa. Concentrated location of reserves and geographic maldistribution of natural resources explain the sharp imbalance between supply and demand across the globe (Fig. 10.2).

Fig. 10.2

Source IEA, BP, USGS, corporate filings, CAAM, EV Sales, CICC Global Institute

Mismatch between local commodity supply and end-market demand in major economies and regions (2020). Note The data in this figure represents supply–demand ratios, which is local supply divided by end-market demand. The darker the red color, the smaller the supply–demand ratio. The darker the green color, the higher the supply–demand ratio. The data shaded in yellow represent supply–demand ratios in-between. “- “ indicates data not available.

The geographic maldistribution has added to supply risks in China’s raw material commodity market. China is a manufacturing power, and raw materials play a crucial role in the development of its industry chain, the national economy, people’s livelihoods, as well as social and economic stability. China has relatively weak natural resource endowment with low self-sufficiency rates for most categories—i.e., a self-sufficiency rate of less than 10% for copper, cobalt, nickel, and platinum.¹⁵ However, the country has significant demand for resources to develop the industry chain, and its pillar industries such as chemicals, steel, and equipment manufacturing are heavy consumers of resources. China is the largest consumer of coal, accounting for 56% of global consumption in 2020. It also consumed 16% and 9% of global oil and natural gas production, and accounted for more than 40% of global demand for conventional metals (e.g., iron ore, aluminum, and copper) and metals used in new energy technologies (e.g., lithium and nickel). Its share of global consumption of platinum and cobalt reached 26% and 32%.¹⁶

10.2.2 Major Risks: High Dependence on Imports; High Concentration of Supply

China relies heavily on raw material commodity imports, and its export partners are relatively concentrated. It imports most of its raw materials, and the country saw its share of primary commodity imports in total imports continue to increase in recent years due to demand–supply mismatch.¹⁷ Its dependence on oil and natural gas imports reached 72% and 40%, and it imported more than 80% of its metals, including iron ore, copper, and platinum. The country’s dependence on importing metals used in renewable energy, lithium, cobalt, nickel, and platinum reached was 69%, 66%, 98%, and 87% in 2020 (Fig. 10.3)—demand that we expect to continue to rise. China’s imports of most categories are concentrated in a few countries: Australia supplies 68% and 61% of China’s imports of lithium and iron ore; Chile and Peru combined accounted for 50% of copper imports; and 51% of aluminum imports came from Guinea, with 32% from Australia.

This trade pattern makes the raw material commodity supply in China susceptible to the influence of market power of suppliers, as is confirmed by the history of China's iron ore trade. China is the world’s largest consumer of iron ores, which are used in downstream industries such as steel, construction, and automobiles. Two-thirds of China’s imports of iron ores are from Australia and Brazil, which are dominated by international mining giants Vale, BHP, Rio Tinto, and FMG. These big four miners are an oligopoly, putting China under considerable pressure from elevated iron ore prices.

Fig. 10.3

Source: UN Comtrade, World Steel Association, General Administration of Customs, CICC Research

China has high dependence on imports and high supply concentration of raw material commodities (2020). Note The size of the bubble indicates China's imports of the product from the selected country as a percentage of its total imports.

10.2.3 Secondary Risks: Weak Cost Competitiveness; Slow Technological Substitution

Weak cost competitiveness means that when prices of imported products are lower than the local production costs in China, domestic suppliers will face higher cost pressure, resulting in increased supply risk. We use China's position in the global cost percentile of major metal categories and the country’s share of global production capacity to depict the cost competitiveness of its major metal categories (Fig. 10.4). It can be seen that except for coking coal, China has high production costs of metals—especially for iron ore—which sits between 80 and 90th percentile of the global supply cost curve. The cash cost of iron ore in China (incl. cost plus freight) is about 2.2 × that of Australia and Brazil, suggesting significant cost disadvantages for domestically produced iron ores in China. Among metal categories aside from nickel, China stands at the higher end of the global iron-ore cost curve—especially for platinum group metals. The Ministry of Natural Resources reports that the grade of proven platinum ores in China is 0.34 g/t, only one-third to one-fifth of the industrial requirements for ores set by the National Commission of Mineral Reserves and well below the grade of overseas platinum ores.

Fig. 10.4

Source USGS, Corporate filings, CAAM, EV Sales, Wind, World Bank, Mysteel, CICC Global Institute

China’s metal mineral resources lack cost competitiveness. Note The size of bubbles indicates the size of global output value of the selected industry.

The feasibility of technological substitution of raw material commodities determines their demand elasticity. If the elasticity of demand is low, resource demanders cannot make timely and effective adjustments to prices amid external shocks, leading to rising supply risks. Theoretically, supply risks of metal ores can be mitigated by recycling and technological substitution. However, China's elasticity of demand remains low given its limited resource accumulation, under-developed recycling system, R&D that lags its global peers, and the country’s application of some alternative technologies. Typical examples include iron ore and platinum. Scrap steel can be recycled and substituted for iron ore, but the supply remains insufficient due to limited scrap steel resources in China. Platinum is mainly used in fuel cells and other fields. China may face a shortage of platinum with rising adoption of fuel cell vehicles. However, platinum-based catalysts used in proton exchange membrane fuel cells (PEMFC)—the most popular fuel cell technology—can potentially be replaced by either platinum-reducing or platinum-free products, but breakthroughs have yet to be made. Thus, we believe that this is unlikely to reduce supply risks through technological substitution.

10.3 Evolution of Risks Amid Changing Landscape

Green transition and the shifting international political and economic environment have gradually become the main forces reshaping the landscape of the global commodity market. Green transition has led to tightening commodity supply, sparking a commodity boom. Customary energy shortages drove the penetration rate of renewable energy higher than the market expected. As a result, prices of metals used in renewable energy technologies rallied due to shrinking supply. International political and economic instability intensified global competition for resources. The post-financial crisis world has seen increasing trade conflicts, which escalated amid the COVID-19 pandemic and the Russia-Ukraine conflict. Fluctuations in commodity prices have further prompted economies to pay closer attention to the strategic role of commodities. Resource nationalism has flared up in resource-rich countries, while competition for resources has intensified with an increase in the inclination to stockpile among resource-dependent economies. This has discouraged investment in the international commodity market, which in turn exacerbated price volatility and threatens to create a volatility trap. We believe that mounting internal and external uncertainties necessitate further investigation into the evolving trends of risks.

10.3.1 Risks Amid a Changing International Landscape: Tensions Between Supply and Demand to Intensify

10.3.1.1 Resource-Rich Countries: Resource Nationalism Flaring up Among Top Mining Players

Resource nationalism can take several forms, including nationalizing mineral resources or restricting foreign investment, raising of mineral royalty rates and mining tax rates, terminating or renegotiating existing mining contracts, and banning exports. History shows that the rise of resource nationalism is closely correlated with the global mining boom, as well as the financial position and political environment of resource-rich countries.

We believe the world may be facing a new wave of resource nationalism triggered by mounting fiscal deficits and changing political environments amid the current commodity boom. The 2008 financial crisis left most resource-rich countries financially vulnerable, leading to a powerful wave of resource nationalism. The COVID-19 pandemic since 2020 has further added to the strain on financial distress and public debt. The average overall deficits as a share of GDP in emerging markets in 2022 was visibly higher than pre-pandemic levels.¹⁸ Resource-rich countries in Latin America, the Middle East, and North Africa experienced significant fiscal deficits, and became more inclined to raise taxes on the mining sector to relieve fiscal pressure.

The impact of resource nationalism spans multiple sectors from traditional energy and metals to emerging strategic minerals. Resource nationalists are shifting their focus from traditional sectors such as oil, natural gas, and copper towards metals used in renewable energy technologies, with new cartel alliances taking shape. Mexico, Argentina, and Venezuela have established their own national oil companies, and Peru Mining Company and Chile’s CODELCO are both state-owned. The increasing strategic significance of metals used in renewable energy technologies is making the nationalization of lithium one of the strategic focuses of Latin American governments.¹⁹ Argentina, Bolivia, and Chile are known as the “lithium triangle” as together 56% of the global proven lithium reserves.²⁰ These three countries are mulling the creation of an OPEC for lithium,²¹ which, once formed, we think will intensify tensions between supply and demand and lead to lithium price rally.

10.3.1.2 Resource-Dependent Countries: Geopolitics Accelerating Global Market Divergence

We expect major economies to see a jump in demand for raw material commodities, but such economies tend to rely on highly overlapping resource requirements. This could lead to fiercer competition among resource-dependent countries. The International Energy Agency (IEA) reports that the aggregate mineral demand from clean energy technologies must at least quadruple by 2040 to reach the Paris Agreement goal, with demand growing by more than 40 × for lithium and 20–25 × for graphite, cobalt, and nickel.²² Thus, it is paramount that governments and industry work to ensure adequate supply of critical minerals. The World Bank also projects that global demand will increase nearly 500% by 2050 given the growing role of critical minerals in the decarbonization of the energy sector, and it expects the competition for strategic minerals to intensify as a result.²³ As part of strategic emerging sectors across China, the US, and Europe, their high-tech industries—including new energy manufacturing, information and communications and digital technologies—share important similarities in their demand for related raw material commodities, especially for lithium, cobalt, nickel, rare earths.

Resource-dependent countries are paying increasing attention to supplies of critical minerals and are competing more intensely for critical resources. They have increased investments in foreign mining projects while strengthening domestic stockpiling to secure access to reliable and sustainable supplies of critical resources. They also regard resource security as strategically important at the national level. We broadly classify the measures that these countries took into two types: First, they forged alliances to lock in raw materials. Second, they exert influence on the flow of raw materials by leveraging their market power along the industry chain. This has aggravated the fragmentation of the international commodity market.

We believe that the US is working with allies such as Australia and Canada to facilitate cooperation on mineral projects. The country is also seeking wider partnerships with resource-rich countries, while increasing its investments in critical mineral sectors in Latin America to strengthen upstream–downstream cooperation across the lithium. cobalt, nickel, and graphite supply chains. More notably, the US and key partner countries—, including Canada, Australia, Japan, South Korea, Sweden, the UK, and the EU—have announced the establishment of the Minerals Security Partnership (MSP).²⁴ The goal of these raw material supply alliances is to ensure the security of domestic supply chains for critical minerals such as rare earths and lithium when they are in short supply.

The US is also leveraging its market power in the industry chain to influence the flow of raw material commodities, which is dominated by the US, followed by other developed economies. The US intervention in the raw material flow through supply chains is mainly concentrated in industries such as photovoltaic (PV) and new energy vehicle (NEV) batteries. The US bans polysilicon from specific manufacturers. This has prompted PV power station developers and component suppliers in the country to adjust their supply chains and avoid the use of related products to comply with the requirements. Europe followed suit by adding requirements to review of polysilicon supply from specific manufacturers. The US has recently strengthened its control over raw materials used in NEV batteries. In the Inflation Reduction Act of 2022, the country requires that credit for vehicles should meet critical minerals requirement, that is 40% of the raw materials used in NEV batteries that will be put into use before 2024 should be extracted or processed in the US or a Free Trade Agreement country, or recycled in North America.

10.3.2 China’s Risks Amid a Changing Landscape

Against the background of the changing landscape of the international commodity market, China’s industrialization has also entered a later stage of transitioning to green and high-quality development. This should catalyze changes in the characteristics of commodity demand, which may lead to higher risks. Below, we analyze the characteristics of commodity demand and evolution trend of risks of the traditional energy and metal and new energy metal industries.

10.3.2.1 Traditional Energy and Metals: Weaker Bargaining Power on the Demand Side

The consumption intensity of traditional energy and metals is closely correlated with the stages of economic development. International data shows an inverted U-shaped relationship between commodity demand (e.g., energy and metal) and economic growth, and the demand will decline after plateauing at high levels when GDP per capita reaches around US$20,000–30,000. China’s consumption of traditional energy and metals remains stable, with new demand as a share of additional global consumption trending downward for some categories, though absolute consumption is still growing. Consumption of iron ore and coking coal experienced negative growth; energy demand growth has remained below 4% since 2012; annual consumption growth of oil has decelerated to below 5%; and coal consumption has largely been in a state of zero growth.²⁵ Natural gas maintained rapid growth for being cleaner than other energy categories, and China’s share in global oil and coal consumption have both shown a downward trend. The decline in China’s share in global energy demand has undermined its bargaining power in the global market, bringing additional risks to the stability of supplies and prices of traditional energy.

Historically, the US and Japan have also experienced weakened bargaining power resulting from falling share in global commodity demand in the mature stage of their industrial development. Since 2000, developing countries, including China, have become the core contributor to the increase in global crude oil demand, with the US share of oil demand gradually declining. The negative correlation between US crude oil inventories and global oil prices began to weaken since then, and West Texas Intermediate (WTI) crude oil price became more volatile with its premium over Brent crude rising sharply, signaling dwindling US influence in the global oil market. The liquefied natural gas (LNG) premium in Japan—the largest natural gas consumer in the Asia–Pacific region—remained largely stable over 1990–2008, but the natural gas premium in Japan began to trend upward in 2009 (when China’s natural gas demand surpassed Japan’s), and rose to a record high after its failed energy transition through nuclear power due to the Fukushima incident in 2011.

10.3.2.2 New Energy Metals: Stronger Control Over Resources on the Supply Side

As part of global green transition, China has vowed to vigorously promote new energy and enhance its manufacturing competitiveness through scaling the industry. However, China’s share in global demand for metals used in renewable energy technologies continues to rise as the sector expands—and so does the risk exposure. China imports most of its new energy metals used in renewable energy technologies. The country is more dependent on imports of new energy metals than on imports of traditional energy and metals, and is becoming increasingly so. We expect demand share and dependence on imports of metals used in renewable energy technologies to increase further, driven by expansion of the new energy industry. In a tight seller’s market, an increase in demand share implies amplification of supply risks.

At the same time, China lags behind in metal recycling technologies and applications, of which the country has yet to take advantage, to increase the elasticity of demand for new energy metals. The China Nonferrous Metals Industry Association reports that in 2020, recycled metals accounted for around 27.8% of China's consumption of aluminum, copper, zinc, and lead, which is 7.5ppt lower than the global average of 35.3% and a far cry from the 45% average in developed economies. Recycled copper and aluminum account for more than 50% and 70% of copper and aluminum consumed in the US, and 100% of aluminum used in Japan is now recycled. China still lags behind developed economies such as Europe and the US in recycling technologies and networks for metals used in renewable energy technologies including lithium. Low demand elasticity may lead to an increase in metal supply risks in China in the event of a failure to upgrade recycling technologies and strengthen industry deployment.

10.4 Supply Security Plan in Response to the Changing Landscape

Answering the question of how to ensure the security of commodity supply amid a changing landscape in China has become more pressing and challenging in the context of green transition, and an unstable international political and economic environment. Countries and have strengthened strategic assessment of critical raw materials in recent years based on their domestic or regional industrial development needs. Despite similar objectives, strategies undertaken by these regions tend to differ in focus.²⁶ Although China is large and resources rich with abundant mineral reserves, room remains for domestic exploration and participation in the development of resources in other countries. We believe that China should accelerate and increase the investment in its expansion in the raw material commodity industry chain given current international tensions. Based on domestic supply–demand dynamics and the aforementioned international experience, we present a plan to ensure secure and reliable supplies of raw material commodities in China at the industry and national levels.

10.4.1 Industry Measures: Five Key Measures

We evaluate the capabilities of managing supply chain risks of various sectors in China’s raw material commodity market from five perspectives—i.e., resource collaboration with other countries, domestic exploration, strategic reserve, recycling, and technology substitution. In order of magnitude of the need to strengthen supply risk measures, we see significant room for further domestic exploration of traditional energy (e.g., oil and gas) and copper, and suggest paying more attention to diversifying the source countries of coal imports. We believe that China should increase its recycling of traditional metals (e.g., iron ore, copper, and aluminum) and lithium, and strengthen the security of supply of new energy metals—including platinum, cobalt, and nickel—through deployment and application of alternative technologies as they gradually mature (Fig. 10.5).

Fig. 10.5

Source USGS, Corporate filings, CAAM, EV Sales, Wind, World Bank, Mysteel, CICC Global Institute

Assessment of capabilities of managing supply chain risks of various sectors in China’s raw material commodity market. Note Each layer of the pentagon represents a score (1–5). The farther out the layer of the pentagon, the higher the score, signifying a greater need for capability to be strengthened.

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First, we believe that China should tap the domestic potential of traditional energy sources further. Importance should be attached to the strategic significance of oil and gas exploitation, and dependence on foreign oil and gas resources should be reduced. Thus, further policy support is needed to boost investment in oil and gas exploration and development, revitalize existing oil and gas blocks, and accelerate the utilization of proven reserves. Supply chain resilience holds the key to supply security in the coal industry as in the oil and natural gas industry, in our view, and control over coal consumption should point to the direction of future development in China given transportation bottlenecks. Thus, we believe that optimizing coal transportation and increasing the supply elasticity of advanced production capacity are superior options to building new production capacity.

Second, we believe that China should expand metal reserves through overseas collaboration. China should learn from historical failures in overseas iron ore investment, in our view, and the country should invest in current or future overseas high-quality mining projects through buyouts or shareholding to acquire an agreed amount of ore supply or by establishing joint ventures with major ore producers for development of mines. By deepening cooperation with trading partners, we believe that China can secure stable access to resources despite concentrated overseas supply.

Third, we believe that China should build reserve capacity to complement existing resource reserves. China’s current commodity reserve system has shortcomings such as overreliance on one reserve method or insufficient reserve capacity. Thus, we believe that China should accelerate construction of a reserve system for critical and strategic resources while increasing reserves of minerals (e.g., oil and copper) as well as new energy metals—especially strategic metal resources.

Fourth, recycling plays a key role in enhancing the elasticity of metal supply and reducing risks. Recycled minerals have a multiplier effect on resource supply,²⁷ and can add to secondary supply of metal resources while reducing the consumption of primary metals. Metal recycling is environmentally friendly and opens up a new way of ensuring national metal security.

Fifth, technological substitution is a supplementary measure to address the supply shortage of critical categories. The traditional demand analysis of metal mineral resources is based on the premise that no fundamental technological innovation takes place. However, a new round of technological revolution marked by information technology is exerting a significant impact on the demand and supply of metal resources in terms of conservation, substitution, application expansion, and recycling.²⁸

10.4.2 National Support: A Two-Pronged Approach

China should continue to upgrade supply chain security for strategic minerals, in our view. Drawing on the experience of developed countries, we think China should create a list of critical minerals in a scientific manner and include the list in the national strategic mineral catalog. The list should be based on comprehensive analysis of supply–demand dynamics and China’s ability to ensure reliable and secure supply of the minerals essential in key areas such as new energy, high-end equipment manufacturing, and new-generation information technology. The catalog should be updated dynamically based on factors such as the importance, supply–demand dynamics, and supply risks of the minerals. We believe China should also promote classified management of key minerals. For rare mineral resources such as cobalt and nickel, both domestic resource exploration and overseas cooperation on development should be adopted. China could also accelerate the approval process for release of newly established mining rights, and encourage qualified private capital investment in exploring and developing critical minerals, thereby injecting vitality into the mining market.

We also believe that China should safeguard supply chain resilience through global cooperation. First, China could build a system to ensure supply chain security along the corridor economies that link supplier countries and consumer countries through high-quality collaboration in the mining industry with the countries of the Belt and Road Initiative. Second, we think China could improve the coordination mechanism for overseas mineral exploration and development, and support mutually beneficial cooperation.