Critical Minerals Securitization and Canada’s China Dilemma

The past year has been tumultuous for the Canadian mining and minerals industry. Western countries’ increasing focus on energy security and discussions of decoupling from China have led to a rush to secure supply chains of minerals critical for the green energy transition. In response, Canada has promoted itself as a secure supplier of critical minerals and sought to boost production while limiting Chinese involvement in the sector, creating both risks and opportunities for Canadian miners.

These recent developments have also created a dilemma for the Canadian mining sector. As a US-aligned democracy with a wealth of critical minerals, Canada may stand to benefit in the long run from US-backed efforts to overturn China’s dominance of critical minerals supply chains. Nevertheless, Canadian policies limiting China’s participation in its critical minerals sector may create short run problems for the industry, including regulatory uncertainty, funding shortfalls, and production capacity issues. If not addressed by the government and private sector, these short run problems may threaten the sector’s long-term performance.

Canada’s Changing Critical Minerals Policy

 Western countries are increasingly aware of the economic and geopolitical importance of minerals that are key for the transition to a low carbon economy – in particular nickel, copper, lithium, cobalt, and rare earth elements. Simultaneously, tensions with China have heightened focus on energy security, especially as China has historically shown a willingness to weaponize its critical minerals supplies in political disputes. China’s global critical minerals dominance, therefore, has led to a rapid securitization of the sector, as the US and its allies have scrambled to lessen their reliance on China and establish alternative critical minerals supply chains.

Because of its democratic government, alliance with Western countries, and substantial minerals reserves, Canada has emerged as an alternative to China in mining, developing, and processing critical minerals. In response, Canada’s government ordered several Chinese companies to divest from Canadian critical minerals operations and promoted critical minerals in its Indo-Pacific strategy (see our November 2022 piece for more analysis).

Since November, the Canadian government has implemented several other policy directives aimed at promoting critical minerals security and development. In December 2022, the government announced the Canadian Critical Minerals Strategy, which warned of the consequences of relying on “non-like-minded countries” for strategic commodities. It also sought to strengthen infrastructure, investment, and approval processes for critical minerals development. That same month, Canada proposed a strengthening of its foreign investment rules with the goal of limiting Chinese investment in critical minerals and other sensitive sectors. Canadian cabinet ministers have further emphasized the country’s potential role as a secure critical minerals source for its allies, and on a recent trip to Canada, President Biden promised that Canadian companies will receive US funds for critical minerals projects that help to decrease reliance on China. The aim of these policies, according to some, is to make Canada a key supplier in “an emerging metallic NATO of like-minded countries looking to reduce their dependence on China and Russia.”

How Can Canada Benefit from this Increased Security Focus?

Critical minerals securitization and US-led attempts to diversify supply chains away from China could bring potential long-term opportunities for Canadian companies. This is significant because Canadian energy and mining companies need new markets and sources of investment as they shift their operations toward the development of green energy. 

Security concerns provided an impetus for the Canadian government to implement policies promoting Canada’s mining and minerals sector which, despite its wealth of reserves, remains under-developed. Analysts have described Canada as being “asleep for years and years” with regard to critical minerals. This has put Canada at a disadvantage in extractable reserves compared to its vast potential holdings, and exacerbated Canada’s limitations in processing ability and facilities. Canada also suffers from regulatory barriers to financing and approving mining projects, and currently it can take up to 25 years for projects to become operational. According to Photinie Koutsavlis of the Mining Association of Canada, there is a perception among investors and global partners that “Canada has the most complex, the most confusing, and potentially longest process” for approving mining projects. The increased focus on security, therefore, may benefit the Canadian mining sector long-term, as Ottawa is finally prioritizing critical minerals as strategic resources, courting investment, and seeking to shorten mining approval timelines.

As countries seek to shift toward carbon neutrality, critical minerals demand is predicted to explode in the coming years, growing by as much as 600% by 2040. Currently, China controls between 60-80% of supply chains for key critical minerals, while Canada controls a negligible share. Emphasis on security has led the US, Japan, and the EU - three of the largest future customers for critical minerals - to implement policies seeking to move supply chains away from China. At the same time, these countries have all entered into partnerships with Canada to secure and develop critical minerals. Therefore, critical minerals demand will increase at the same time as some of the world’s largest consumers look to Canada as an alternative to China’s dominant position. This means that if Canada were to develop the necessary capacity to become a leader in this sector, Canadian mining companies would have an enormous and enthusiastic potential long-term customer base.

Security considerations may also provide Canadian mining and resources companies with access to new sources of investment. Canada’s Critical Minerals Strategy provides for a C$3.8 billion investment package directed at research and development. President Biden also announced that Canadian mining projects would be eligible for money from a $250 million fund under the US Defense Production Act. Given that critical minerals demand and security concerns regarding supply chains will certainly increase in the coming years, it is likely that these recent influxes of cash are only the beginning of increased investment opportunities – both public and private – for Canadian mining companies.

Therefore, Canada and other Western countries’ focus on critical minerals security may provide long-term benefits for Canadian mining companies through emphasizing critical minerals as an area of policy priority for the Canadian government, ensuring a large and enthusiastic potential customer base, and providing new sources of investment.

The question remains: whether Canada can get mines and production facilities up and running in time to take advantage this boon.

The Cost of Decoupling from China

Canada’s appeal for countries seeking critical minerals supply chain diversification conflicts with the reality that Chinese companies play an important role in the Canadian mining sector. This creates an dilemma for the Canadian government, which may feel compelled to limit China’s participation in the mining sector in order to reap the long-term benefits of its allies’ focus on energy security. Doing so, however, will bring short run instability for Canadian companies, which could threaten the sector’s long-term performance.

Even with the government’s recent decision to force the divestment of three Chinese lithium firms from Canada’s mining sector, Chinese companies still play a prominent role in the Canadian mining landscape. Chinese state-owned-enterprises have significant ownership stakes ranging from 10-26% in several of Canada’s largest mining companies, including Teck, First Quantum, Ivanhoe, and Lithium America, and 27 Canadian public mining companies have Chinese-affiliated major shareholders. According to data from the CIUA’s China-Canada Investment Tracker, between 2004 and 2022, Chinese companies made 322 investments in Canada’s metals and minerals sector, totalling over CAD $21.6 billion. Natural Resources Minister Jonathan Wilkinson recently clarified that Canada would not force Chinese state-owned-enterprises to divest their shares in Canada’s largest mining companies. Therefore, despite recent divestiture orders, Chinese companies will likely continue to play a major role in the Canadian mining sector moving forward.

While distancing itself from Chinese ownership may enable the Canadian mining industry to demonstrate its importance to global energy security, in the short-term, it creates regulatory uncertainty and fiscal pressures for Canadian mining companies. For instance, the Canadian government’s forced divestments of Chinese lithium companies received significant backlash, as mining analysts warned that limiting of Chinese investment would make it more difficult for junior miners to attract investment while driving capital and mining entrepreneurs elsewhere. Similarly, the Toronto Stock Exchange argued that the Trudeau government’s limiting of Chinese investment hindered the free flow of capital and failed to providing companies with adequate replacement funds. This issue of inadequate replacement funds is particularly noteworthy, as Ottawa’s CAD $3.8 billion in planned investments will pale in comparison to the CAD $ 21.6 billion investments from Chinese companies in the Canadian mining sector.  

Critical minerals mining, refining, and production projects are also notoriously difficult to get off the ground, requiring huge amounts of up-front capital investment with high levels of risk and price volatility. This puts companies in traditional market economies at a disadvantage compared to state-dominated economies such as China’s, where the government is able to provide guarantees for higher-risk minerals projects. Consequently, China has carved out a key role within the Canadian mining industry as the “investor of last resort” to bankroll high risk projects and bail out struggling mining companies. Limiting Chinese investment in the sector may, therefore, deprive Canadian companies of “last resort” influxes of capital, which could lead to a greater failure rate for mining companies and projects.

In addition to funding shortfalls, cutting China out of Canadian critical minerals supply chains threatens to limit Canada’s access to critical minerals know-how and production capacity. Currently, Canada’s mining sector output is dominated by gold, coal, iron ore, and potash, which are not considered critical minerals by most governments - including the US. A report from the Canadian Parliamentary Standing Committee on Natural Resources further stated that Canada’s ability to process critical minerals remains under-developed, and Canada lacks the companies and machinery needed for domestic value-added processing. This is in part because some critical minerals are complicated to process and require specific expertise and scale-up capacity. For example, processing lithium for use in batteries can require several more steps and three to four times as much energy compared to base metals such as gold.

Chinese companies, on the other hand possess a wealth of know-how and production capacity in minerals processing and battery technology, which will be nearly impossible to replicate domestically in the near- or medium-term. While China possesses significant critical minerals reserves, its real strength is in downstream production and processing of other countries’ minerals, where it possesses competitive advantages in cost, regulatory environment, and expertise. China is also a leader in battery technology. For example, CATL, a Chinese company, is the world’s largest maker of electric batteries, licensing and supplying EV battery technology to Ford, Tesla, BMW, and Volkswagen – among others.

“Friend-shoring” critical minerals production will also be difficult. Allied countries such as the US, Japan, and Australia are enacting their own critical minerals strategies and gradually catching up to China in production and processing, however, they remain well behind. Therefore, even if Canada were to ramp up upstream extraction operations for critical minerals, cutting out Chinese companies may limit Canadian companies’ access to Chinese downstream know-how and production capabilities, which would have severe impacts, especially as Canada’s allies face similar issues in production capacity.

Conclusion

Security concerns surrounding China and critical minerals create a dilemma for the Canadian mining sector. Undoubtedly, the world’s advanced economies seeking to decrease reliance on China and find new sources for critical minerals presents a long-term economic and geopolitical opportunity for Canada. In order to realize these long-term benefits, however, Canada is incentivized to lessen its own dependence on China as a source of capital and expertise, which will create major short- to medium-term challenges for Canadian miners.

Therefore, Canada is caught between a rock and a hard place. Demand for Canadian critical minerals is at an unprecedented high, however, to supply those minerals, Canadian mining companies will need access to significant quantities of up-front investment, expertise, and personnel. In the past, Canadian companies have looked to China, which is well positioned to fulfil those needs, however, given energy security considerations, this proposition is made increasingly difficult.

The key for Canada, therefore, will be to find a way forward that allows continued engagement with China as a customer and business partner for mining and minerals projects to limit short-term pain. At the same time, it must focus on protecting energy security and promoting domestic production to ensure that Canada can take advantage of the long-term opportunity to become a key supplier in powering a new green global economy.