How can the American trade finance companies manage present (and future?) Chinese mineral export control measures?

Thomas LAGRIFFOUL, Regional Director of Compliance APAC, Coface [EPA: COFA]

Escalating Export Controls: China's Retaliatory Measures and their Impact on Critical Industries

As a retaliation measure against US export restrictions targeting Chinese semiconductor, China has banned on December 3^rd minerals export to the US. The targeted materials are vital for industries like semiconductors and green technologies. For example, China has imposed export licensing requirements on gallium, germanium, and graphite, which are critical for semiconductors, batteries, and military applications.

China has tightened Chinese export control measures since 2023. In August and September 2023 the Beijing government required an export license on gallium, germanium, and then on antinomy and superhard materials. This month the government converted these licensing requirements to a total ban on the US.

A significant Chinese export control measure

It is not the first time China bans export minerals to the US. However, this ban set a new precedent: China makes accountable any organization or individuals which may export directly or indirectly (through transshipment) from China to the US banned minerals. That escalation will affect international trade and supply chain. That will also affect its industry.

This move marks a change in China’s long strategy. China has consistently criticized efforts by other nations, especially the United States, to enforce extraterritorial sanctions (like restrictions on the re-export of goods by companies operating outside their jurisdictions). Beijing's restrictions will further fragment global supply chains and international trade, and what analysts call ‘decoupling’, compelling businesses to decide whether products containing specific materials and components will be restricted to the U.S. market or the Chinese market.

The driver of these restrictions may also be for Beijing to attract European and Japanese companies to prioritize investing and building supply chains within its borders rather than in the United States.

Likely next sanctions on minerals

The escalation of restrictions is likely as tensions with the U.S. persist over national security and trade concerns. Analysts suggest that additional sanctions may target:

1. Tungsten: Used in aerospace, automotive, and military sectors, with China dominating global production.

2. Rare Earth Elements (REEs): Essential for electronics, magnets, and lasers, where China holds a significant processing advantage.

3. Vanadium: Vital for high-strength steel and advanced batteries

(https://triviumchina.com/research/gaming-out-chinas-next-export-controls-on-critical-minerals/)

Beijing will avoid affecting its own industries but will focus on restricting exports of minerals that he is the top producer. Supplier countries will have to be aligned about export controls on minerals like lithium hydroxide.

“American companies are diversifying suppliers and ramping up domestic production to mitigate the risks posed by China's export controls on critical minerals.”

Mitigating action by American companies

The American companies are working with allied countries such as Canada, Germany, and Japan to diversify suppliers’ source these critical materials. For instance, Canada and Australia but also Malaysia (https://theedgemalaysia.com/node/737495) is ramping up their capabilities in mining and refining these minerals, reducing reliance on China.

American companies also aim to develop domestic production and refining. Gallium, often derived as a byproduct of bauxite (aluminum ore) processing, can be produced locally, though this requires significant investment. Similarly, germanium is being recovered from domestic zinc mining and recycling efforts.

Until the US become independent from Chinese imports, American companies have made stockpiles of germanium which already exist in the US. Conversely, Gallium lacks a substantial strategic stockpile.

Finally, recycling may also be a way for increasing the recovery of minerals from discarded electronics and defense equipment.

(https://www.usitc.gov/publications/332/executive_briefings/ebot_germanium_and_gallium.pdf)

These measures aim to de-risk supply chains and reduce vulnerability to geopolitical tensions. Further diversification of sectors, such as exploring rare earths or niche metals like tungsten and molybdenum, could provide additional resilience if China expands its export controls

Impact on American trade finance companies

Chinese export restrictions on critical minerals like gallium, germanium, and graphite are impacting U.S. trade finance companies in several ways:

The bans create volatility in global supply chains, disrupting established trade flows. The trade finance companies face greater credit and operational risks as importers scramble to find alternative suppliers. Semiconductors and defense industries which rely on these minerals may be the first victims of it.

Furthermore, the restrictions have driven up prices for minerals globally due to reduced supply. This price volatility complicates trade financing because it increases the value and risk of inventory-based financing, letters of credit, and other financial instruments tied to these transactions.

With U.S. companies seeking to diversify suppliers away from China, trade finance firms must expect a shift in client demand toward alternative markets like Canada, Australia, and Africa. This reorientation involves additional compliance, currency risks, and longer financing cycles

Industries dependent on restricted minerals face potential disruptions, increasing the likelihood of defaults on trade loans. This particularly affects tech companies, manufacturers, and firms in the renewable energy sector, which are key borrowers in trade finance. The borrower’s creditworthiness will be downgraded.

Mitigating Actions

Trade finance companies are likely to:

● Diversify Financing Portfolios: Shift focus to emerging suppliers and invest in financing sustainable mineral production globally.

● Strengthen Risk Management: Use tools like political risk insurance and dynamic pricing models to handle volatility.

● Adapt to Policy Incentives: Align financing services with U.S. government initiatives to secure alternative supply chains and boost domestic production

The broader impact emphasizes the need for strategic planning and innovation in trade finance to adapt to these geopolitical shifts.

The views expressed in this article are solely those of the author and do not represent the opinions, positions, or policies of the company in which the author is currently employed. The author assumes full responsibility for the content of this article.