COLUMN-China can only fire the big gun of refined metals restrictions once: Russell

By Clyde Russell

LONDON, Oct 14 (Reuters) - China is once again rolling out the big cannon of curbs on metals and minerals vital to the global energy transition, as well as key components in weapons and electronics.

There is little doubt that every time China places restrictions on exports, or threatens to do so, it causes much consternation among Western governments and companies, which have come to rely on China's dominance of the processing and production of refined metals.

The latest instance is China's decision to expand export controls on rare earths, adding five new elements to existing restrictions that have resulted in tighter scrutiny on products such as critical minerals used to produce magnets.

But there are also risks for China in this behaviour, as the cannon of export curbs can effectively only be fired once in anger.

If China does eventually decide to cut off Western buyers from metals such as rare earths, lithium, cobalt, antimony, tungsten and others, it would cause massive disruption to Western supply chains.

But it would also prompt a rapid build out of new supply and processing facilities across the Western world.

The raw ores used to make many of these metals aren't necessarily rare or difficult to mine, and between them Western nations would have adequate supplies.

The challenge would be to build refining capacity, but this could be accomplished quickly in the event of a genuine emergency created by China ending its supply to Western buyers.

This would obviously come at a high cost, but Western governments would have no other option other than to stump up the cash as obtaining new sources of supply would trump any financial considerations.

The ultimate risk for China is that in cutting off Western buyers from refined metals it would risk eventually destroying its own industry through massive overcapacity as Western buyers build out their own supply chains.

China currently produces about 90% of refined rare earths, more than 90% of graphite, just under 80% of cobalt and nearly 70% of lithium.

Its share of nickel is considerably less, but if its control of Indonesian nickel refining is added to what is produced in China, around 70% of refined nickel is under Chinese control.

Copper is often cited as a critical mineral, but China only accounts for just under half of refined metal output, meaning the Western world could rely on sources of supply outside of Chinese control to meet its needs.

POLITICS DRIVING

The question for the market is why is China placing restrictions on the exports of critical minerals and metals, when ultimately doing so only encourages its current customers to built alternative supply chains?

It would seem that the answer is largely political.

China is engaged in a tricky trade war with U.S. President Donald Trump and both sides are making threats to use what leverage they have to try and improve their negotiating positions.

The problem for Beijing is that the more it rolls out the big guns of export restrictions on critical minerals, the more it encourages the Western world to bite the bullet and build alternative supply chains.

China doesn't even have to fire the cannon, the repeated threat of doing so will be enough to spark the necessary Western investment, especially in refining metals.

As Trafigura Chief Executive Richard Holtum told the LME Week seminar in London on Monday, processing minerals is more important than mining them.

"You do not have national security if you just have stuff in the ground," Holtum said.

If his message is increasingly being heeded in Western capitals, it's likely that more cash will be ploughed into metals refining, as well as subsidies and incentives to keep existing refineries operating even though they can't compete with China at current prices.

The end result of China's export restrictions is likely to be the development of a two-tier global system for refined critical metals, a more expensive but secure supply chain for Western consumers and a cheaper Chinese system that is subject to Beijing's political imperatives.

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The views expressed here are those of the author, a columnist for Reuters.