West seeks to 'regionalize' metals supply but won't easily by-pass China: LME seminar

Despite new Western legislation which seeks to regionalize metals supply chains for the energy transition, it will be hard, perhaps impossible, to bypass supplies from China, according to speakers at the London Metal Exchange's seminar Oct. 24.

"The regionalization trend is real... but in the long term may almost inevitably reverse," said Robin Martin, head of Market Development, LME, noting that globalization in supply chains may eventually prove more practical.

"The reason for globalization was to make value chains more efficient," said BMO Capital Markets Managing Director and commodities analyst Colin Hamilton on a panel on globalization and regionalization at the event at the start of LME Week. "For a number of reasons now we seem to be going the other way, there's a lot of segmentation, but economics will eventually dictate we go back to globalization."

Kwasi Ampofo, head of metals and mining at BloombergNEF, said that the US had "sounded the whistle" with its recent Inflation Reduction Act, which seeks to incentivize the growth of US industries by effectively avoiding China and selecting a few other countries as alternative suppliers.

The IRA gives renewable energy installation and other producers in the US tax credits if they don't use materials, including metals, from China.

China's relationship with the US is crucial: however, China is unlikely to change its EVs strategy or metals strategy as a result of legislation elsewhere. It's US policy which will now see the biggest changes, Ampofo said.

It will be impossible for the US to rely on domestic minerals supplies to decarbonize and Europe simply doesn't have the mineral reserves to do so, the BloombergNEF analyst said.

Secondary processing to grow

By 2035, however, recycling will supply about 15% of lithium demand for batteries, as well as 20% of nickel demand and 10% of cobalt demand, according to Bloomberg's research.

According to Thomson Reuters columnist Clyde Russell, it's a "fantasy to think we can cut China out of our supply chains."

Some fear that new restrictive legislation, coupled with the ramifications of the Russia-Ukraine war, may divide the world into two camps: authoritarian states that will do business with each other on one side and western democracies on the other that will want to do business amongst themselves and their partners, Russel said.

"We do have trade barriers being put in place," BMO's Hamilton said. "We've been used to getting access to what we want but now we have to worry about security of supply. We're just not investing enough to ensure the supplies."

Traders have a big role in setting up long-term contracts, Hamilton continued. The commoditized supply scenario is changing into individual supply relationships, and we may see more primary facilities in Europe converting to processing secondary or scrap, he said.

Panelists on a China session at the seminar considered that China is not only leading the world's energy transition but also supporting global energy transition, due to the resilience of its electric vehicle production and sales, including exports. China's investments in renewable energy are the largest in the world, they said.

Julian Kettle, vice chairman, metals & mining at research organization WoodMac, said China is one country that will manage to achieve its net-zero goals because of its previous investments and policies which have already been in place for years. "Over the next 10 years I see the continuing and increasing dominance of China" in critical minerals supply chains because of their investments, he maintained.

Legislation such as the US' Inflation Reduction Act and the EU's Carbon Border Adjustment Mechanism may be "too little too late," as far as establishing effective regional minerals supply chains are concerned, Kettle added.

China is looking increasingly at lithium units and already has 70% of the world's lithium refining and 80% of the world's lithium precursor production, Kettle said. It is also a major producer or processor of other metals.

"We will need to ask China for access to its supply chain – but maybe it wouldn't want to let the west share in its energy transition because the West didn't invest," he said.

Jinny Yang, chief China economist at ICBC Standard Bank, said that Chines President Xi Jinping stressed over the weekend that China and the rest of the world continue interdependent in trade. Any changes in this respect would potentially take decades, she said.

China is meanwhile building partnerships with other nations in the global south to build infrastructure to help protect against global climate catastrophe as part of its expanded Belt and Road initiative, Yang noted.

Panelists also noted that base metals prices have in recent times trended largely with the China Real Activity Index, indicating China's continuing dominance of metals markets.

Sven Smit, senior partner, McKinsey & Company, said in a keynote address that "vast underinvestment" in energy and commodities in the West has led to a "depletion" of supply chains.

We've got to fix the physics of supply," Smit said. "This is a crisis we can only solve by engineering."