CHAPTER FIVE

High-tech hold-up

MONOPOLISING MINING WAS BEIJING’S FIRST VICTORY. BUT IT WASN’T LONG before China began to turn its sights to downstream high-tech industries that use rare earths.

Battle of the super magnets

This process started with magnets, the metals of which I first encountered in July 2011 when visiting Peter Dent, the director of magnet manufacturer Electron Energy Corporation, at his company’s headquarters in the small town of Landisville, Pennsylvania.

During my visit, Peter guided me past the warehouses to a storage area bathed in pallid neon lighting. ‘There you have it: rare earths!’ he exclaimed as he turned on the timer light. Dotted across the polished concrete floor were greenish barrels containing lumps of grey and slightly corroded material: samarium samples, gadolinium pellets, and other metals with perfectly unpronounceable names. After years of tracking these metals without ever laying my eyes on a single one, I felt like a buccaneer before Blackbeard’s bounty. I had every intention of taking my time to explore this treasure trove.

More interesting still were the adjoining workshops. Dent continued the tour: ‘This is the machine room.’ In its din, workers spent all day machining small, round electromagnets containing rare metals. ‘This is where we shape and size our magnets. We produce hundreds of thousands of them every year,’ Dent said. After a well-oiled manufacturing process, the magnets were lined up on trays like bread loaves fresh out of the oven, and carefully loaded into carts.1

Until the mid-1970s, there were only a handful of industrial applications for rare earths and other rare metals — for their luminescent properties, they were used in lighters and camping lanterns.2 Their scope of application first grew with the advent of colour television screens.3 The real game-changer, however, was rare-earth magnets: developed in 1983, these pure marvels of technology have become indispensable in all products equipped with electric motors, reputed to be pollution-free.4

We know that an electrical charge coming into contact with the magnetic field of a magnet generates a force that creates movement. Traditional magnets made out of the iron derivative ferrite needed to be massive to generate a magnetic field powerful enough for more sophisticated applications. ‘Remember how we used to walk around with mobile phones the size of bricks?’ jokes an expert. Just one of the many shortcomings of an oversized magnet.

Meanwhile, in the mobility industry, the race for lighter and more efficient energy had begun. Engines needed to be as light and compact as possible — reducing the calibre of an engine meant reducing the proportions and weight of the object in which it was used. Such progress would without a doubt generate massive energy savings.5

This very progress was made possible by rare-earth magnets, revolutionising modern electronics. In fact, without even realising it, you have probably already come into contact with these super magnets, especially if you happen to have a magnetic knife-holder on your kitchen wall. Have you ever wondered how a single magnet can defy gravity to suspend a 20-centimetre steel blade in the air? Certainly not with the help of ferrite. ‘At equal magnetic strength, a rare-earth magnet is 100 times smaller than a ferrite magnet,’ an industry expert explained. ‘This is about miniaturisation; rare earths make objects smaller.’6 It’s also about making electric engines powerful enough to challenge the dominance of internal-combustion engines. It gave the energy transition and digitalisation a formidable kickstart.

This is also precisely where the trouble started.

Rewind to the 1980s. Rare-earth magnets are all the rage, and have colonised manufacturing sectors the world over — giving Japan, and its electronics company Hitachi, which holds the patent, the unassailable lead in the industry. So much so, in fact, that ‘the Japanese banned the export of this technology to China’, Chen Zhanheng told me.7

Beijing wasn’t put off in the slightest by the embargo. It decided that, in addition to making off with virtually all rare-earth resources, it would start to take control of the miracle technology behind the end products. In this way, explained Chen Zhanheng, ‘China’s own industries could benefit from the added value of rare-earth minerals.’ And by whatever means.

In the 1980s, magnet manufacturers were mostly situated in Japan, from where they supplied the bulk of global demand. But they could no longer resist the siren song of their Chinese counterparts, who offered to take over the menial work of machining the least-sophisticated magnets. ‘The Chinese said, “Come to Canton! Relocate your low-value rare-earth applications, and we’ll take care of your low-tech!”’ an Australian consultant told me.8

The Japanese may have had the technology, but the Chinese had the allure of cheaper production that would allow Japanese businesses to expand their profit margins. The Japanese didn’t hesitate for long. Boasting full employment and a strong currency at the time, the island nation considered it a sound decision. The history books will look back at this and say that Japan, the second-strongest global power at the time, knowingly exported to its competitor the technologies it lacked.

As related in Chapter Three, French chemical company Rhône-Poulenc was enticed by the prospect of low-cost rare-earths transformation, and also moved part of its refining operations to China. It did this by setting up joint ventures with Chinese partners from the 1990s. This had trade unions up in arms, and it would have taken an insurrection and a fight to the bitter end to keep their jobs in France. But Rhône-Poulenc had other priorities. Its pharmaceutical branch was about to be privatised to become Aventis. Therefore, ‘the strategic and geopolitical importance of this small [chemical] business was completely lost on them’, recalled a former employee.9

Jean-Paul Tognet, who worked at Rhône-Poulenc at the time and made several trips to China at the end of the 1970s to look into future partnerships, knew what was brewing: ‘The technical assistance our partners wanted from the West was a one-way street: they expected everything to be handed over to them. They found it completely normal to be helped … without giving anything in return.’10 He assured me that Rhône-Poulenc did not divulge any industrial secrets. But by abandoning their refining sector to the Chinese, only to then become their most loyal customers, the West — and France in particular — handed China the market on a silver platter.

In the 1990s, low-end refineries began to mushroom — first in the Baotou region and then in the rest of China. ‘Across the country, rare earths had become the goose that laid the golden egg. Money flowed, and factory bosses drove around in Lincolns!’ Jean-Paul Tognet recounted.11 Essentially, we had created the ecosystem our opponents needed to reproduce Western knowledge, make massive profits, invest in their own R&D activities, and thus break into the downstream industry at full force. Jean-Yves Dumousseau, a chemist who worked in China at the time, shot straight from the hip: ‘Rhône-Poulenc slipped China’s foot into the stirrup.’12

But where was the harm? After all, Rhône-Poulenc believed it had a twenty-year head start on China. By discontinuing the more trivial aspects of its refining business, it could move up the value chain to more sophisticated intermediary products (particularly in luminescence). But in 1987, one of its engineers noticed the staggering progress being made by Chinese refiners, and put his foot in it: ‘I told them we were only three years ahead of the Chinese at best. It caused an uproar!’13 Only his timeline was off. ‘By 2001, Chinese refiners were all on a technological par with us,’ Dumousseau said.14 ‘We might have underestimated this competitive risk for too long,’ Tognet ventured. ‘The Chinese wanted to move up the value chain, and we couldn’t stop them! We cared more about rock-bottom production costs, especially with customers breathing down our necks … And of course, today nothing has changed.’15

Today, only a few rare earths are still transformed in La Rochelle. The separation workshops have closed their doors, and the site’s operations are a shambles. The group’s revenues have decreased, and headcount, which was at 630 employees in 1985, has halved.16 Can Rhône-Poulenc (today Solvay) at least take pride from new downstream prospects that sustain jobs in France? ‘Even those businesses were transferred to our facility in China … It all comes down to cost!’ Tognet said. Perhaps we can take comfort in the fact that Solvay still has interests in joint ventures with its Chinese partners. This may be, but, as Tognet bitterly put it, ‘Solvay now sees itself as a Chinese company as well!’17

China’s awakening set in motion unavoidable economic disruptions. But did we really need to give Beijing that extra leg-up? Our poor assessment of China’s competitive streak, combined with our outright quest for profit, without a doubt precipitated the transfer of labour, work units, and, most importantly, technologies to China.

A chronicle of impending de-industrialisation

Underlying our apparent blindness are numerous instances of wishful thinking. The West has long held to the illusion of eternal scientific progress — a philosophy that has irrigated several economic sectors since the 1980s. We believed that by abandoning our heavy industries, we could focus our efforts on high-value-adding manufacturing sectors while maintaining healthy profit margins. Some believed that emerging countries would continue to be the factories of the world, churning out jeans and toys, while we would hold sway over the more lucrative segments. ‘I think most people continued to believe that only blue-collar jobs would be affected by the shifts [brought on by Chinese competition],’ a trade unionist from the US metal industry told me. ‘We didn’t realise that we were going to lose more than coffee-cup production, and that the more skilled jobs would be hit much harder economically.’18

Added to this is the pipedream of manufacturing fading into the background in favour of a service economy. The focus should be on knowledge and the immense added value it generates. This belief, echoing the utopia of a dematerialised world discussed in Chapter Two, was heavily subscribed to by the business world at the turn of the twenty-first century. Like Alcatel-Lucent’s CEO Serge Tchuruk, many US and European business leaders could not resist the allure of ‘factoryless companies’. Grey matter was more valued and therefore given more support, to the detriment of the tool that is the lowly factory. This line of thinking led to the separation of business from factory, as the former opted for outsourcing. In France, this trend was largely driven by the love lost between citizens and industry. ‘At the start of my career,’ Régis Poisson, a former engineer at Rhône-Poulenc, told me, ‘a factory worker could become famous for something he designed. Then came the rejection of enterprise and the deterioration of the company image. Today, the working class no longer likes factories, which symbolise exclusion.’19

Thus, the West and China took this path hand in hand. But from the 2000s, the Chinese began to use far less conventional methods: rare metals quotas that rattled the magnet manufacturers that hadn’t relocated their factories (to guard their industrial secrets). As their rare-earths provisions ran dry, they were faced with a difficult choice with equally painful outcomes: keep their industrial activities at home at the risk of having to slow down production for lack of raw materials, or relocate to China and have access to abundant supplies.20 For Japan, the dilemma was short-lived, a London analyst explained to me: ‘They were starved of raw materials. So they took their technologies to China.’21

Beijing’s treatment of those determined to hold their ground was cruel: price distortion. This was much to the fury of Sherrod Brown, a US senator from Ohio, who, in a fiery speech in 2011, said, ‘China is organising artificial shortages and export quotas to raise prices internationally while keeping them low domestically. How can we compete when the Chinese are so brazenly cheating?’22

This tactic was equally unjust for the vast majority of magnet manufacturers outside China. At the end of the 1990s, Japan, the US, and Europe made up 90 per cent of the magnet market, but now China controls three-quarters of global output. Using blackmail in the form of a technology-versus-resources trade-off, China expanded its monopoly in mineral production to include mineral transformation. It therefore dominated not one but two stages of the industrial value chain. This is confirmed by my Chinese expert Vivian Wu: ‘I’d even go as far as saying that in the near future China will have an entirely integrated rare-earths industry, from one end of the value chain to the other.’

In fact, this wish has already partially come true. And nowhere more so than in the city of Baotou, in Inner Mongolia.

Journey to the ‘Silicon Valley of rare earths’

In Chapter One we saw behind the scenes of the world’s rare-earths capital, Baotou. We saw its toxic lakes and its cancer villages, whose inhabitants are dying a slow death. Let us now examine its glittering exterior.

It’s a Saturday, and by day the city’s elegant glass towers cut a sleek figure against the mineral desert. By night, when darkness falls over the plain, ‘the little Dubai of the steppes’ adorns itself in blinking lights and glowing lanterns, repelling the cold obscurity of the surrounding landscape. Jianshe Road, Baotou’s main stretch, fills up with people who have come to admire the shop window displays and to peruse the fragrant food stalls lining the pedestrian alleys. There is a sense of triumph and conquest here; I can see it in the smug smiles of passers-by, and even in the buildings still wrapped in plastic sheeting — all symbols of a victorious metropolis convinced of its fantastic destiny.

It’s an idyllic setting for a delegation of eighty international businessmen invited to Baotou to attend an international conference on rare earths in October 2011. Their hosts are clearly out to impress, having put up their guests in a luxury hotel with suites overlooking the verdant parks of the city centre. Even the cloudless skies seemed to have been ordered for the occasion.

In the conference room, Sun Yong Ge, a high-ranking official in charge of the Baotou Economic Development Zone, continues the charm offensive: ‘Baotou is the rare-earths capital! We welcome technology industries — we can supply them with virtually all the minerals they need.’

The city has made technology the cornerstone of its development, its centrifugal force being its close proximity to the rare-earth deposits where China takes its fill. ‘We want to be more than just suppliers of raw materials; we want to supply more elaborate products,’ Yong Ge says. Western businesses that, like the colonisers before them, sought only to mine resources to generate added value back home are no longer welcome in Baotou. However, the apparatchik says, ‘we are very open to transformation companies wanting to move their technologies to China’.

Whether out of interest or for lack of choice, numerous foreign manufacturers have already converged on the mineral refineries in the 120-kilometre free zone on the city’s outskirts. An international presence is reflected in the numbers: according to Yong Ge, ever year Baotou produces 300,000 tonnes of rare-earth magnets — one-third of global production. As it happens, the delegation was invited to visit the plants. Journalists, however, were kindly requested to stay behind. So I entrusted a small camera to Jean-Yves Dumousseau, who came back with images of a power display. ‘This is where they make the magnets you have in your iPhones and iPads,’ he commented as we watched the video. ‘The Chinese paid an absolute fortune for these technologies copied from European know-how.’23

By orchestrating the transfer of magnet factories, the Chinese accelerated the migration of the entire downstream industry — the businesses that use magnets — to the Baotou free zone. ‘Now they’ve moved onto producing electric cars, phosphors, and wind turbine components. The entire value chain has moved!’ confirmed our witness. Sun Yong Ge added to the list: ‘10,000 tonnes of polishing material, 1,000 tonnes of catalytic converters, and 300 tonnes of luminescent materials.’

This makes Baotou much more than just another mining area. The Chinese prefer to call it the ‘Silicon Valley of rare earths’. The city hosts over 3,000 companies, fifty of which are backed by foreign capital, manufacture high-end equipment, and employ hundreds of thousands of workers who generate revenues of up to €4.5 billion every year.24 At this rate, boasted Sun Yong Ge, ‘in ten or so years, our standard of living will be similar to that of the French’.25

When China decided to assume the burden of the ‘oil of the twenty-first century’ three decades ago, it did not focus on manufacturers on the decline nor turn its back on the high-tech sector. It chose to cross swords with the West over resources so that, one generation later, it could set its sights on the high-end digital and green-tech industries. Thus, rare-metal restrictions did more than serve China’s sporadic embargos. The second stage of its offensive is far more ambitious: China is erecting a completely independent and integrated industry, starting with the foul mines in which begrimed labourers toil, to state-of-the-art factories employing high-flying engineers. And it’s perfectly legitimate. After all, the Chinese policy of moving up the value chain is not dissimilar from the viticulture strategy of winemakers in the Napa Valley in California, or the Barossa Valley in South Australia. As one Australian expert put it, ‘The French don’t sell grapes, do they? They sell wine. The Chinese feel like rare earths are to them what vineyards are to the French.’26

This strategy of moving up the ladder is not limited to rare earths. As early as the 1990s, a wave of concern rippled through the fabric of German small-to-medium-sized enterprises (known as the Mittelstand) specialising in the manufacture of machine tools. (Machine tools are used for factory work automation, from basic milling machines to ultra-connected machining centres.) The Mittelstand acted pre-emptively by gradually replacing humans with robots, allowing it to remain competitive to the extent that German industry still represents 30 per cent of the country’s GDP.27

Except that industrial robots require terrific amounts of tungsten. China has always produced this rare metal in abundance, but there are other tungsten mines around the world, ensuring supply diversity for manufacturers. During the 1990s, the Chinese machined their own cutting tools — ‘Some hammers, a few drills … really crumby tools,’ said an Australian consultant.28 But they wanted to move up the value chain in this area as well. ‘They drove down tungsten prices [from 1985 to 2004],29 hoping that Westerners concerned about getting their raw materials at the best price would buy exclusively from the Chinese, and that competing mines would shut down.’30

We can guess what could have happened next: the Middle Kingdom — now the hegemonic power in tungsten production — would have used the same blackmail tactic to force the Germans to move their factories as close as possible to the raw materials. The Chinese would have crushed any German lead in the cutting-tools industry, and would then have made off with the machine-tools segment — a pillar of the Mittelstand. It would have been the hold-up of the century!

But the Germans saw the Chinese coming, and aligned instead with other tungsten producers (Russia, Austria, and Portugal, among others). ‘They preferred paying more for their resources to sustain the alternative mines and not depend on the Chinese,’ the Australian consultant told me.31

No matter. China applied the same modus operandi to the graphite market, where it is also a notoriously preponderant player. The mineral graphite, the purest form of carbon, is used to produce graphene —a nanomaterial a million times finer than a single strand of hair, yet twice as strong as steel. Its discovery by physicists Andre Geim and Kostya Novoselov earned them the Nobel Prize in Physics in 2010.32 Recognising the massive markets that graphite was creating, China ‘pursued a strategy similar to that of developing the downstream value chain’, explained Vivian Wu. China’s commercial policy already includes export duties and quotas to protect its domestic market.33 Recognising the danger, the US filed a new complaint at the WTO in 2016 against Beijing’s practices that ‘disadvantage US producers by raising the prices of these raw materials for manufacturers outside of China, while lowering the prices paid by China’s manufacturers that use these same raw materials’.34

By now a pattern is emerging, and it is being applied to molybdenum and germanium, a journalist I met in Beijing told me.35 Lithium and cobalt should go the same way.36 ‘They’re using the same industrial policy for iron, aluminium, cement, and even petrochemical products,’ warned a German industrialist.37 In China, there is even talk of applying this policy to composite materials — new materials resulting from alloys of several rare minerals. What if it developed a miracle composite material that the rest of the world could not do without? China certainly wouldn’t sell it any less sparingly than its other resources. In addition to keeping a blacklist of critical minerals, the European Union should list all critical alloys whose supply could be threatened.38

The West is starting to put words to what has happened with China: whoever has the minerals owns the industry.39 Our reliance on China — previously limited to raw materials — now includes the technologies of the energy and digital transition that rely on these raw materials. ‘Is this a non-military conflict? The answer is most assuredly yes!’ said one US rare-earths expert.40 Are we on the winning or losing side? The answer of a specialist from the French mining industry is cutting: ‘We’re not even putting up a fight!’41

Unsurprisingly, other mining states around the world are following China’s lead. A case in point lies in the middle of the island of Java, in the Indonesian capital of Jakarta.

Indonesia’s new ‘non-aligned movement’

If there is one capital in the world that could be given the title of Hell City in the twenty-first century, it would Jakarta. Located in the immense archipelago of Indonesia in South-East Asia, and nicknamed ‘The Big Durian’ in reference to the foul-smelling fruit eaten by Indonesians, Jakarta is a city you endure rather than visit. And of all the senses vexed by this intolerable megalopolis of 30 million people, touch was without a doubt the most affected: the muggy heat saturating the air; the unrelenting rainfall harassing this city of glass and concrete; and the close shaves of my motorcycle taxi with the hordes of vehicles tearing down the main roads.

Because it was impossible to distinguish north from south, or to familiarise myself with any particular landmark — be it a tower, intersection, or major road — I mentally choreographed my own: cable-constricted bamboo trees; an armada of motorcycles straddling the torrents of water gushing out from the drains; the pungent smell of garlic invading the palm tree–lined alleys; the cadence of a train trundling overhead; the vestige of a forest forgotten between two buildings. And on it went.

A few days later, while coming in to land at Bangka, 400 kilometres further north, I had my first glimpse of the purpose of my trip that winter in 2014. From the plane, I saw thousands of craters — as if a meteor shower had rained down on this island the size of the Greater Paris area. They are in fact tin mines, below whose surface thousands of miners play their part in a thriving black market. There are also mines offshore, recognisable by the thousands of small wooden barges on the surface. From these crude vessels, young men plunge 20 metres deep with nothing more than a breathing tube connected to an air compressor. They scrape the seabed, sending the sand to the surface, with the help of a makeshift vacuuming device. From their barges, raw material is separated from minerals using a small sorter.

Bangka is the world’s biggest producer of tin — a grey-silver metal essential to green technology and modern electronics, such as solar panels, electric batteries, mobile phones, and digital screens.42 Every year, over 300,000 tonnes of tin are mined around the world. Indonesia represents 34 per cent of global production, making it the biggest exporter of this high-tech mineral, which is nevertheless not considered rare. The archipelago recognised the value of this outstanding mineral: from 2003, as a spokesperson for one of Indonesia’s biggest mining houses, PT Timah, explained: ‘Tin became the first mineral to be used in an embargo.’43

It would be the first of a very long series of embargos. From 2014, all of Indonesia’s mineral resources — from sand to nickel, and diamonds to gold — were no longer exported in raw form. As explained by Indonesian authorities, ‘The minerals we don’t sell now will be sold tomorrow as finished products.’ As in China, this policy was a powerful way to generate wealth. By some calculations, preserving the added value in this way quadrupled profits on iron, increased profits on tin and copper sevenfold, bauxite profits by a factor of as much as eighteen, and nickel profits by as much as twenty.

The Indonesians did far more than replicate the Chinese model: they innovated by laying the foundations of financial nationalism. In 2013, Jakarta established the Indonesia Commodity and Derivatives Exchange (ICDX) to fix the tin price, shunning the ‘diktat’ of the world’s biggest metals markets, the London Metal Exchange (LME), in doing so. ‘Our goal is to control and stabilise the market price,’ explained Megain Widjaja, the young director of ICDX, who felt that the tin price was regularly manipulated. As such, all tin exported by Indonesia would first have to go through the Jakarta stock exchange.

The impact of this policy is still being debated. According to Widjaja, tin prices fluctuated by only 8 per cent, compared to 20 per cent and 30 per cent previously. But according to a London analyst, the prices set by the LME still serve as a benchmark, and he didn’t believe that it would change anytime soon.44 He did concede, however, that ‘Indonesia applied a very original idea’. Indeed, to support its industrial policy, the nation needed to build road networks, electricity grids, ports, train stations, and airports. It would take strong and stable mineral prices to pay off and maintain these investments.

So Indonesia warded off the invisible hand of the market by using the controls of the stock market. This inspired other Asian markets. In 2015, the Shanghai Futures Exchange included tin among the metals for trade on its futures market,45 and announced in 2018 that it would soon include copper.46 Malaysia followed suit in 2016.47 Other trading floors also introduced trading platforms for copper, nickel, and zinc.48

But Indonesia’s nationalisation of its mining resources did not meet with the same success as its Chinese counterpart, for it failed to put the necessary means behind its policy. The colossal investments needed to build the downstream industry were delayed, and the country’s trade balance began to teeter as budget shortfalls accumulated. In 2017, the country had no choice but to loosen its strategy by allowing several minerals to be exported again.49 The drop in commodity prices was largely responsible for this setback, as this nationalistic approach was for the most part implemented during a global ‘commodities super cycle’ — fifteen years of plenty that began in 2000, during which market prices skyrocketed. It was a boon for buyer countries, but also put seller countries in a position of force that aroused their nationalist instincts.

But the super cycle ended in 2014. The consumer-producer trade power returned to an even keel, and producer countries began to think twice before investing higher up the value chain. Some say that the old world is resilient, and that it will have the last word. That is, unless emerging countries begin to consume as conspicuously as OECD countries do, giving rise to a new world that will eclipse three centuries of Western order.50 Yet how do we make ourselves heard by billions of individuals who dream of eating meat at every meal, of drinking champagne, and of travelling to Europe and the US with their families to take a selfie in front of the Eiffel Tower or the Empire State Building?

For emerging countries, rare metals are more than ever a means to a better way of life. It is an unstoppable reality that is only growing: in 1998, after years of struggle, the Kanak separatists of New Caledonia obtained the majority holding in a refinery in the Koniambo massif — the world’s biggest nickel reserve. Local populations therefore benefit from local processing of the mineral — synonymous with added value. A similar trend is emerging in Cambodia, Laos, and the Philippines. According to Mostafa Terrab, the CEO of the OCP Group, Africa is also joining the trend: ‘There is a growing phosphate-processing industry in Africa to manufacture fertiliser for Africans. It is likely to spread to other sectors. Africa has no choice but to industrialise.’51

This intuition is consistent with the 2050 African Mining Vision advocated at the twelfth summit of the African Union in 2009.52 The aim is to make mines a driver of inclusive growth by capturing a bigger share of their added value. To date, only 15 per cent of African mining production is believed to remain on the continent, so we are far from an optimal result. But given Africa’s growing contribution to global GDP, change is inevitable. More importantly, the stakes are no longer purely industrial or political. The fair distribution of minerals — a shared global asset — has become a moral imperative, and a cause in which international institutions are now united.53