The Copper and Nickel Dilemma for China’s Rise and USA Sanctions

I wrote this story based on a recent news report about China’s security pact with the Solomon Islands. Under the backdrop of the USA’s and Australia’s Indo-Pacific Strategy, this security pact indicates how critical Australia’s role in going for the Free and Open Indo-Pacific (FOIP) concept.

What makes this story even more suspenseful is that it came out on the same week as ANZAC DAY 2022. While the FOIP itself is a future-oriented concept that should be explored, it’s in the Indo-Pacific maritime area where competition is taking shape between the world’s two biggest economies.

I argue that one of the key issues between China and USA is about competition for Electric Vehicles (EV) markets and supply chain security for critical metals needed to produce batteries (“battery metals”). This means that USA sanctions on China could be targeted for this issue in the future.

China’s Copper: Las Bambas, Peru

China currently has tremendous political and economic interests to maintain the strong momentum of their copper industry well as into the future. With copper prices hitting an all-time high in 2020 the world’s largest consumer of copper raised the level of its production activity to its highest levels since 2011, while importing 656,483 tonnes in June 2020.

Strictly speaking, these are some scary figures for the metals industry, because the rollout of EV production and renewables haven’t even been accounted for in China’s production to date. These numbers are generally going to get higher and higher as the world turns to “future facing commodities” as a result of growing demand for Energy Transition.

In addition to the expansion of its domestic copper production, China’s international influence over metals can be seen from in Africa (cobalt and lithium), Southeast Asia (nickel) and South America (copper). The Las Bambas mine in Peru is a case in point. Already this year China’s MMG is facing restraint from the local indigenous population in Las Bambas.

The history of this relationship between the People’s Republic of China (PRC) and Peru’s indigenous groups is very relevant to the copper industry.

Ever since China’s MMG bought the Las Bambas mine from Glencore for $5.85 billion in April 2014 the mining company has faced continuous opposition from Peruvian indigenous groups over the control status of the mine’s production — e.g. force majeure declared in 2019 and roadblock obstruction in 2021 — that has devestated output for a country who consumes over half of the world’s copper.

There have been many reasons cited for why Las Bambas’ indigenous groups have put up a struggle against China’s mining activities and businesses, such as labor and payment concerns; environmental issues and local grievances toward the destruction of the mine itself.

But China’s MMG has stated that it wants to take this opportunity to contribute to Peru’s economy. They have trived to give the indigenous groups ample reasons to cooperate. They were consequently invited to have talks with the company on May 6, 2022.

China’s Nickel: Tsingshan Holdings in Indonesia

Now let’s look at a case about the nickel industry where the world’s biggest producer and supplier is based in China, with plants and facilities throughout Southeast Asia, that are critical to stainless steel manufacturing and Electric Vehicle (EV) battery supplies.

There was a crisis for China’s metal trading giant Tsingshan Holding Group, led by Chinese Wenzhounese billonaire Xiang Guangda who bet zealously on the growth of nickel production and supply this year at the London Metals Exchange (LME). When the price of nickel surpassed $100,000 per tonne the LME had to stop nickel trading at an instant.

In response to the EV battery production shortages, Tsingshan Holding Group devised a strategy that would keep prices lower, and thus allow for cheaper production of battery ingredients, especially from areas of Southeast Asia like Indonesia. But unfortuantely the events in Ukraine have caused the markets to act in an extraordinary way — a way that was adverse to Tsingshan’s nickel production investment strategy.

Since March 8, 2022, international investors and bankers have been awaiting Tsingshan’s response. It wasn’t until March 15, 2022, that they finally announced an agreement with bank creditors, such as JP Morgan and CCBI Global Markets, to discuss a “standby secured liquidity facility” arrangement to solve the company’s problems. This agreement is being referred to by most sources as a standstill agreement for which it is expected that the haphazard nickel trading will once again stabilize.

The company released a statement, saying “As an integral feature of the agreement, there is provision for the existing hedge positions to be reduced by the Tsingshan group in a fair and orderly manner as abnormal market conditions subside.” However, it has yet to be determined when and if the LME will be approved for nickel trading again under the same rules as before. It’s already been speculated that new rules will be applied, with an ensuing investigation carried out accordingly. Any new rules will be applied by regulatory authorties in Great Britain: the Financial Conduct Authority (FCA) and the Bank of England.

For a more technical and financial point of view, read here: https://www.finews.asia/finance/36507-tsingshan-reaches-standstill-agreement-with-banks

I’ve already written how the People’s Republic of China (PRC) influences the global metals market, and what this means for the Chinese Communist Party’s future. This story about China’s Tsingshan Holdings Group sheds light on how critical the metals markets are becoming for global finance and investment banks.

With China’s capabilities to produce cheaply in Southeast Asia, and raise capital from the world’s largest international banks and financial institutions, I’d call this a recipe for stability and disaster offset by the production and supply of metals. This essential truth is even hidden within this story about the nickel industry: the whole point of the standstill agreement is to stabilize pricing and trading mechanisms to prevent a disaster in global markets.

China Sanctions Risk

The world has seen numerous export bans on critical inputs to fertilizer and food production since the outbreak of Covid-19 in 2020. This circumstance has created a massive ripple effect on economies of the underdeveloped and undeveloped worlds, where civil unrest has become a source of tension for government stability in many countries of Middle East, Sub-Saharan Africa and South Asia.

Ukraine’s agriculture production has had an impact on the world’s food supply, notably due to wheat cultivation and production. Sanctions on China would only exacerbate the ongoing global food crisis which has seen significant strain to economic production all over the world, including in developing economies, where the historical highs in fertilizer prices has led to high crop prices and thus higher consumer prices at the wholesale and broader marketplace levels.

Thus, imagine if the same tactics were applied by countries to target China’s metals production and supply? It would be disastorous for the global economy, as the massive rollout of EVs, renewable energy installations and more construction projects require massive amounts of copper and nickel — among other metals.

I wrote an extensive Medium story about Australia’s BHP Group and how the CEO is leading the mining indsutry’s future facing commodities — copper, nickel, potash — while on the front lines of ESG. Read more about this here: https://readmedium.com/why-is-the-worlds-largest-metal-miner-bhp-group-pushing-for-future-facing-commodities-on-the-1c6dd34ce681

Furthermore, rising prices for food and fertilizer will cause Ukraine’s agriculture industry to take a major hit, thus deteriorating Ukraine’s Global Domestic Product (GDP) growth. In Ukraine, food prices are going to be a long-term problem for the government’s stability in the aftermath of Russia’s invasion. This is a scenario that would play into Russia’s favor, whereby it is one of the world’s largest fertilizer producers and exporters. Russia is already engaging countries dependent on fertilizer imports with “fertilizer diplomacy.”

I argue that China could possibly do the same thing, if they increase exposure to Russian commodities, particularly metals such as copper and nickel, for which Russia has production capacity and ample reserves to keep supplying China.

As mentioned, China has been experiencing issues with its largest copper mines in Las Bambas, Peru, and the Democractic Republic of Congo, which means it is critical for China to look for other areas of copper production and supply to meet its growing demand both securely and safely. Russia is a highly likely option to meet China’s demand for those metals supply agreements.

When should we anticipate copper and nickel diplomacy? In the future, this could be a strategic flashpoint betweeen China and USA in the Indo-Pacific.