CHAPTER FOUR
The West under embargo
CELEBRATIONS WERE IN FULL SWING. THE WEST CONGRATULATED ITSELF ON its new ecological conversion, while deep in Jiangxi province the Chinese slaved in the gullies to crush the ore needed for this very transition. The lowliest work went to China, while in the West we focused on high-value-adding industries. We were winning at the game whose rules we ourselves had written and imposed.
That was before some geologists armed to the teeth with quantified reports turned up to break up our party. Indeed, this endangered species — for their numbers have dwindled in step with mining activities in the West — confronted us with an unpleasant and inconvenient reality. China, a preponderant producer of certain rare metals, could for the first time ever decide to cut off exports to the countries that most needed them.
Beijing: the new rare metals master
Every year, the United States Geological Survey, a government agency of the United States Department of the Interior, does an assessment of mineral resources for the preparation of its vital Mineral Commodity Summaries. In the report, analysts pore over ninety raw materials considered critical to our modern economies. Its 200 pages provide detailed statistics on resource availability, global stocks, and, most importantly, where in the world resources are mined.
The latter statistic is alarming: the 2017 report finds that Beijing produces 44 per cent of the indium consumed worldwide, 55 per cent of the vanadium, nearly 65 per cent of the fluorspar and natural graphite, 71 per cent of the germanium, and 77 per cent of the antimony.1 This concurs with the findings of the European Commission: China produces 61 per cent of the silicon and 67 per cent of the germanium, 84 per cent of the tungsten, and 95 per cent of rare-earth metals. The conclusion from Brussels is sobering: ‘China is the most influential country in terms of global supply of the majority of critical raw materials.’2
Following China’s lead, myriad countries applying a specialist mining strategy have also acquired majority, if not monopolistic, positions. The Democratic Republic of Congo produces 64 per cent of the world’s cobalt; South Africa 83 per cent of the world’s platinum, iridium, and ruthenium; and Brazil 90 per cent of the world’s niobium. For its beryllium needs, Europe is dependent on the United States, which accounts for over 90 per cent of production. There are also countries whose share of global production is substantial enough to trigger temporary shortages and wild price swings. For instance, Russia alone controls 46 per cent of the world’s palladium supply, and Turkey 38 per cent of the world’s borate supply.
Having the upper hand on rare metals is a question of survival for Beijing; the United States is not the only country very concerned about its supply security.3 The reason is that China is not only the world’s biggest minerals producer, it is also the world’s biggest minerals consumer.4 To meet its needs, it guzzles as much as 45 per cent of global industrial metals production5 — an appetite equally voracious for agricultural commodities,6 oil, powdered milk, and even Bordeaux wine. (See Appendix 9 for China’s share of global consumption of certain commodities.)
Chinese strategists are well versed in the challenges of mineral sovereignty. As a student in France, Deng Xiaoping worked in an iron foundry of Le Creusot.7 As for his successors: ‘The last six presidents and prime ministers — apart from the current prime minister [Li Keqiang], who read law — were all trained in engineering — electrical, hydroelectrical, geology — and in process chemistry,’ a natural resources strategist tells me.8 Wen Jiabao — Hu Jintao’s prime minister from 2003 to 2013 — was a geologist by training. Consequently, and with the support of a stable authoritarian political system that values patient and consistent decision-making, Deng Xiaoping and his successors were able to lay the foundations of an ambitious policy to secure the nation’s supplies.
The method was comparable to that of a steamroller: in the space of a few decades, China multiplied the number of mines in its territory, and launched works for a second ‘silk road’ on land and sea as a raw materials supply route from Africa, while acquiring and merging companies in the commodities sector. Global markets and the geopolitical status quo were steadily upended as Beijing’s sphere of influence grew. More than simply taking its place on the global rare metals market, China underwent a complete transformation to become a maker of these markets.
It has become so powerful that any decision made in Beijing today has unavoidable global repercussions. One dip in local mining production, and the well-oiled wheel of supply and demand jams. A sudden jump in domestic demand is enough to trigger massive shortages. This is what happened with titanium — a mineral 50 per cent supplied by China globally. An unexpected rise in Chinese consumption between 2006 and 2008 increased titanium prices tenfold,9 and put French aircraft manufacturer Dassault Aviation in a serious supply predicament.10
Chinese foreign policy’s ‘weapon of choice’
Beijing quickly realised the power it possessed from its stranglehold on rare metals. To put this into perspective, we can look at OPEC, the Organization of the Petroleum Exporting Countries. For decades, its fourteen members have been able to significantly influence the barrel price, yet they represent ‘only’ 41 per cent of global oil production. China, on the other hand, has staked its claim on 95 per cent of global production of the coveted class of certain rare-earth metals. In the words of an Australian expert: ‘It’s OPEC on steroids.’11 So what does a nation do when it realises just how powerful it is? Naturally, its intentions begin to take on a far more aggressive hue.
This is precisely what China is doing. The precepts of a hostile rare metals trade policy were reportedly outlined by Deng Xiaoping during a tour of the Bayan Obo rare-earths mine in the spring of 1992. ‘The Middle East has oil; China has rare-earth metals,’ he presaged. Chinese businessmen are known to smugly quote these words at raw-materials meetings and summits — words that say all that needs to be said.
At the beginning of the 2000s, close observers of the rare metals market noticed something not quite right. China’s export quotas, set at 65,000 tonnes in 2005, began to drop a year later to just under 62,000 tonnes. By 2009, Beijing had further reduced this to 50,000 tonnes, and official figures for 2010 put exports at only 30,000 tonnes.12 The same trend was observed for all the rare metals disproportionally produced by China. For instance, in August 2001, China enforced quotas on its molybdenum exports to the European Union. It then imposed a series of exorbitant export taxes between 2007 and 2008.13 The WTO’s analysis of the complaints against the Chinese was unequivocal: over the previous two decades, China had engineered a policy of systematic restrictions on rare-mineral exports, ranging from fluorspar, coke, bauxite, magnesium, manganese, yellow phosphorous, silicon carbide, and zinc.14
In the 2000s, everyone from Jakarta, Los Angeles, Johannesburg to Stockholm began to feel the pinch from China. ‘Every month, we worried about what quotas we could next expect,’ says Jean-Yves Dumousseau, who worked in China at the time.15 The hardest hit by the Chinese offensive was Japan — a major consumer of rare earths on account of its high-tech industries. Speaking anonymously, a Japanese diplomat I met in Tokyo told me: ‘I attended many meetings between the Japanese minister of industry and Chinese government representatives. Whenever we raised the issue of rare earths, the Chinese made it plain that they could at any point turn off the tap [of exports].’
‘There was no doubt that sooner or later a much bigger crisis would blow up in our faces,’ an expert in the industry confirms. After all, isn’t the twentieth century full of examples of states with a dominant position in strategic resources imposing embargos for commercial, diplomatic, or military gain?
One such example takes us back to the 1930s, when the United States imposed a helium embargo (of which it was the sole producer) on Germany for fear that the Nazis, already using the gas for their Zeppelin airships, would eventually put it towards aggressive ends.
Then, in 1973, OPEC declared an oil embargo against Israel and its allies in response to the Yom Kippur war, sparking the first oil crisis in history.
In 1979, US president Jimmy Carter halted the export of 17 million tonnes of grain to the Soviet Union in response to its invasion of Afghanistan.16
And, more recently, Russia cut off its gas exports to Poland and Ukraine due to diplomatic tensions — a dispute covered extensively by the international press.17
After gas, oil and then grain were wielded as weapons, it was inevitable that China would weaponise its metals. And so, in September 2010, it launched an embargo on rare earths that defies belief.
It was also to be the first embargo of the energy and digital transition.
Trade manoeuvres with global repercussions
Behind the massive trade fallout is a longstanding dispute between Japan and China over the Senkaku (or Diaoyu) Islands — an archipelago of five small islands and three rocks in the East China Sea, north-east of Taiwan. While it might not sound like much, the area conceals vast amounts of oil and gas, which is why the two Asian powers have coveted the islands since the end of the nineteenth century.
Japan took the Senkaku Islands from China after the First Sino-Japanese War in 1895. They were then placed under US control at the end of the Second World War, before being handed back to Japan in 1972. This has not stopped China from asserting its sovereignty over the territory — and incurring the wrath of the Japanese. So, when a Chinese trawler dared to cast its nets near the coasts of the islands on 7 September 2010, the Japanese coastguard saw this as a provocation and gave chase. The scene that followed — filmed and available online — is captivating: refusing to comply, the Chinese captain steered his trawler into a collision with the Japanese patrol boat.18 His detention by the coastguard caused an uproar in China. Quick to tug at any nationalistic thread, the Chinese media had no difficulty in sustaining the nation’s indignation over the incident.
Was it any surprise, therefore, that two weeks later, on 22 September, all deliveries of Chinese rare-earth metals to Japan were halted, and without any official declaration of an embargo? ‘The incident with the trawler sharpened our nationalistic instincts,’ Chen Zhanheng, vice secretary-general of the China Rare Earth Industry, told me in Beijing. ‘Several Chinese companies took it upon themselves to suspend their deliveries to Japan!’ Astonishingly, Chen Zhanheng made no bones about the fact that the Chinese authorities, not wanting to upset the WTO, denied that any official embargo had been imposed.
A year after the events, Japanese businesses still did not believe a word of this. So I headed 2,000 kilometres away from the Forbidden City to Japan. Pulling out of Tokyo station in the Shinkansen high-speed train, I slowly skirted round Mount Fuji and its conical outline jutting into the autumn sky. Four hours later, I began to make out the tentacles of Osaka, the country’s third-biggest city, extending out along the Pacific coast. I had come to talk to Kunihiro Fujujita, a rare-earth metals importer, at his factory warehouse to hear his version of events.
‘China has always used its natural resources as political leverage,’ he said. Wearing a dark suit and a hard hat, Fujujita showed me his stockpile of yttrium — a rare earth used for precision electronics. But in September 2010, his orders were suddenly no longer honoured by his Chinese suppliers. ‘The Japanese industry was in a panic,’ he said. Rare-earth metals are the ‘vitamins’ of its high-tech industry. They are so vital that ‘even a cleaning lady knows what they’re about’.19 What had started as a banal incident at sea turned into a catastrophe for Japan.
Soon the crisis took on an international dimension. In the days that followed, many European and US rare metals importers also began to worry about the sharp decline in Chinese exports. The Western media, up till then largely unfamiliar with these tiny metals, sunk their teeth in as well, headlining ‘international tensions’, a ‘showdown’ between China and Japan, and a ‘war’ over the acquisition of this ‘crucial category of minerals’20 that are ‘more precious than gold’21 and used in cutting-edge industries. The EU trade commissioner’s spokesperson stressed that rare earths were a ‘major concern’ for the European Commission, and appealed to China to ‘allow the markets to operate without hindrance’.22 The US secretary of state, Hillary Clinton, spoke on the matter at a press conference in Hawaii, and announced an imminent visit to China to resolve the crisis.23 Some weeks later, Jean-Louis Borloo, the French environment minister under the Nicolas Sarkozy presidency, published a ministerial order to create the Committee on Strategic Metals to address the risks of shortages of metals critical to French industry. And on the steps of the White House, President Obama announced America’s submission of a trade complaint to the WTO against China.
The rare metals war had begun.
Back in Osaka, Kunihiro Fujujita tells me how he continued to suffer the effects of the ‘informal’ embargo for six months after the arrest of the captain of the trawler. That is, until it occurred to China that it, too, might find itself short of high-tech consumer goods ‘made in Japan’ that could no longer be exported due to a lack of resources!24 But in the meantime, the rare metals market was gripped by panic as it was hit with the reality of the supply shortage. This, and the hand-wringing over Beijing’s moves, together with the speculative behaviour of certain Chinese traders, caused prices to skyrocket, with a host of other rare metals following suit.25 Brokers, traders, and importers in all four corners of the globe spent most of their time trying to extract any semblance of a promise to deliver the materials or, failing that, passing on the consequences of these unprecedented disruptions to unsuspecting customers.26 ‘It was utter chaos!’ says Fujujita. ‘The natural course of supply and demand no longer had its place.’
Journey to the queen of platinum
The new ‘metals risk’ is not linked to China’s export policy alone. A surge of nationalism over mining resources is sweeping across Asia, Africa, and Latin America, and is increasingly weakening Western positions.
Nowhere is the groundswell more apparent than in some of the most hidden parts of southern Africa. Johannesburg, the economic capital of South Africa, was my next port of call. From there, I drove three hours along vast expanses of savannah to Phokeng, in the North West Province. At first glance, everything in this isolated town of 22,200 inhabitants in the middle of the bushveld appeared normal. Yet it was anything but. Gigantic totems and multicoloured flags bearing the official emblem of the crocodile reached into the sky, while a group of men wearing the blue uniforms of the Royal Bafokeng Reaction Police Force patrolled the pristine streets.
There was no customs house or border post. Nor any sign indicating that, just a few kilometres earlier, I had crossed the invisible border of the Royal Bafokeng Kingdom — a territory covering 1,400 square kilometres, almost the land area of Greater London.
While the kingdom is an integral part of the ‘rainbow nation’, it has also established its own governance, administration, clan structure, budget, and customary law system. The reason for this, and also why I had come, lies several hundred metres underground: the most extraordinary deposits of platinum group metals — ruthenium, rhodium, iridium, platinum, and more. These rare and precious metals have multiple applications, ranging from jewellery and laboratory equipment to catalysts for cars.
From Phokeng, we cut a few kilometres north through the veld to reach the Rasimone mines, its ground pocked and swollen by the extraction of rocks from below the surface. Standing before us, in the middle of the bush against a rolling landscape, were the towering iron behemoths of the platinum refineries. Railway tracks interlaced the facilities, their carts of waste rock hauled by trundling locomotives overhead.
‘When I started here, we only mined on one level. Now we’re ten levels down!’ exclaimed Dirk Swanepoel, a white South African miner working for Anglo Platinum. A stone’s throw from his office, a dozen or so miners wearing overalls and hard hats climbed off a conveyer belt coming out of a chasm made in the rock. They had been using pneumatic rock drills to bore holes that would subsequently be blown up using explosives. The ore brought to the surface is crushed and reduced to particles of rock containing platinoids. They are then plunged into water containing special reagents, decanted, dried, melted, and purified to obtain platinum. ‘Every month, we extract 200,000 tonnes of rock,’ Swanepoel told us. ‘Each tonne contains about four to seven grams of platinum.’
The Bafokengs happen to be sitting on the biggest platinum deposit in the world — a treasure that the ‘People of the Dew’ were unaware of when they settled in the fertile lands in the fifteenth century. In 1870, King Kgosi Mokgatle acquired the first 900 hectares of the current territory, using the fortune amassed by his subjects in the diamond mines of neighbouring Kimberley. The precious metals were discovered in 1924.
After the birth of democratic South Africa, the Bafokengs — wronged by the segregationist regulations of apartheid, which prohibited them from owning their land — entered into a long legal battle with Impala Platinum (Implats), which had been pocketing the proceeds from mining on the territory. The Bafokengs emerged triumphant, and now receive 22 per cent in royalties, and even took a stake of nearly 13 per cent in the company.27 It was the first time a South African ethnic community had come up trumps against a mining company.
Leruo Molotlegi, who has been the kgosi (king) since 2000, and the thirty-sixth monarch of the dynasty, is overseen by the queen mother, who has a symbolic role. Semane Molotlegi is one of the last queens of the ‘dark continent’. She is virtually invisible in the media, and it is almost unheard of for a foreign journalist to meet her. I was fortunate to be granted an audience with her.
I dressed up to the nines to meet with the exquisite woman in her fifties, who was draped in elegant, colourful traditional dress, her voice the essence of poise. She is known respectfully as Mmemogolo (meaning ‘grandmother’ in Setswana). We spoke about her travels around the world to spotlight the success of her people.
The Bafokeng contradict the curse of raw materials, by which Western societies ship in, use up the local resources, and ship out. Instead, the Bafokeng became the richest tribe on the continent, and even plan to diversify their sources of income.28 The strategy they implemented is textbook-worthy: by standing up against mining companies, the people of platinum asserted the supremacy of the producer over the buyer, and of the owner — sovereign over its resources — over customers around the world. This case is also unprecedented in that it was a mere ‘tribe’, rather than a state, that took on a multinational.
While the Bafokeng baulk at the idea of resource nationalism, this is nevertheless a case study of a rebalancing, if not a reversal, of the traditional power relationship. The mining companies, often acting on behalf of Western consumers and used to imposing their terms, understood they would increasingly be outplayed and would therefore need to adapt. The landmark example of the Bafokeng captured the attention of international organisations, and the nation was paid a visit by the World Bank, the World Economic Forum, United Nations agencies, and US academics.29
The resurgence of mining nationalism
This is far from being an isolated case. Today, more and more states are refusing access by foreign industrial companies to promising mining areas. In 2013, the Mongolian government halted the operations of Rio Tinto in the Oyu Tolgoï copper mine in the Gobi Desert.30 Other countries banned foreign companies from buying local mining companies: in 2010, the Saskatchewan province in Canada stymied an attempt by Anglo-Australian company BHP Billiton to buy out the Canadian group PotashCorp, the world’s leading potash producer. States are also investing in traditionally private mining groups. This is what Qatar did in multiplying its holdings in mining groups such as the Swiss multinational Xstrata via the state-owned Qatar Mining Company.31 The minute Gulf state seems to be on a quest for metals for which it has no apparent need.32
Lastly, and most importantly, restrictions on the free trade of metals are on the rise. Indonesia, like China, offers another eye-opening example. In 2009, the undeniable mining powerhouse declared a series of embargos on the export of more or less all the raw minerals produced by the archipelago. In 2014, it upped the ante by including nickel, tin, bauxite, chromium, gold, and silver. ‘We had to ensure the sovereignty of our raw materials,’ explains a senior government official I met in Jakarta. ‘Any political action concerning our mining wealth must be determined and executed by our government and not by foreign states.’33
There are many more examples, as observed by the Organisation for Economic Co-operation and Development (OECD). Its most recent report on trade in raw materials gives an inventory of all basic product export restrictions declared around the world, and identifies 900 such cases between 2009 and 2012.34 The report includes a fascinating chart that shows how measures have increased since 1961: they were at relatively low levels until 2005, but then the curve went up sharply, and has not come down since.
We see these restrictions in almost all the minerals and metals included in the OECD inventory. Argentina has imposed barriers on the export of thirty-seven mineral resources, while South Africa has done the same with copper, molybdenum, platinoids, and diamonds; India with chromium, manganese, iron, and steel; Kazakhstan with aluminium; and Russia with tungsten, bauxite, copper, and tin. What is driving this widespread trend?
Most mineral-producing countries have developed to become emerging countries. Governments now have to consider their burgeoning middle class and the more prosperous and resource-hungry consumers they represent. The growing sentiment is that locally mined resources should be used for domestic consumption rather than to satisfy the appetites of buyer countries. There is also a growing ecological conscience and activism — once the domain of the West — that oppose local mining plans. This has resulted in states having to tighten social and environmental regulations, which makes it take longer to bring a mine into operation.
More broadly speaking, a culture of resistance is taking root from Jakarta to Ulaanbaatar, from Buenos Aires to Pretoria, as a newer and savvier middle class is wiser to what they see as a sell-off of their resources. They are spearheaded by political leaders who observe an economic rebalancing between developed countries, often bogged down in stagnation, and dynamic emerging countries craving wealth. Protectionist measures are therefore demonstrations of power in a ‘de-Westernising’ world.
This is not new: from the 1960s, the wave of independence in the third world came with claims for sovereignty over resources.35 In Africa, in 1958, Ghana nationalised the Ashanti goldmines that were formerly under British control. The Democratic Republic of Congo followed suit in 1965, as did Tanzania in 1967, Zambia in 1970, and Zimbabwe in the 1980s. Then came the liberal wave of open trade. But it took the Chinese policy of slapping quotas on rare metals exports to reignite — and amplify — resource sovereignty across five continents. ‘China galvanised the nationalism of resources,’ says an American expert, ‘not only on its own territory, but all over the world.’36 From that point, it was no longer a question of if new trade crises would occur, but rather when they would occur.
Between taking sips of tea in the bar of a luxury hotel in the Shanghai suburb of Xuhui, Vivian Wu, a highly authoritative voice in the rare metals industry, tells me that such a scenario has every chance of coming true: ‘Rather than embargos, I prefer to talk about action measures against Japan and other countries. These actions form part of a strategy led by the Chinese government to restore our image. And they may be applied again in the future, be it for rare earths or other metals.’37
Metals of influence, metals of crisis
The specific qualities of the rare metals markets could make matters worse:
Making any kind of forecast about these ultra-sensitive markets is therefore near impossible. ‘The rare-earths market is neither stable nor predictable,’ Vivian Wu emphasises. Gone are the days when, even without regular supplies of rare metals, governments and businesses could at least count on constant market prices to sketch out a strategy. As a specialist from a European geological institution says: ‘Rare metals are crisis metals.’