Strategic minerals

Chinese companies in Arctic mining are gaming the master plan — but Western needs often drive Chinese involvement

September 01, 2022

Looking for Chinese state ownership in Arctic extractive projects misses the point, and politically framed rhetoric from Chinese companies may be misleading. Some Western companies downplay their Chinese relations, but Western companies are often reliant on Chinese partners.

(📸: Hudson Resources)

Patrik Andersson, Per Kalvig & Ulrik Pram Gad


Key findings
■ Rather than directing specific investments, the CCP prefers to design policies that encourage companies to contribute to state objectives.
■ The main incentives are generated by domestic development ambitions, but companies enlist geopolitical objectives as arguments for marginal projects.
■ Both geopolitical arguments and standard Chinese political rhetoric easily backfire when translated to Western audiences.
■ Western project developers’ need to demonstrate a way into supply chains monopolised
by China often acts as an important driver for Chinese involvement


In Western media, Chinese companies are sometimes discussed as being parts of a well-oiled state machine. They are not, but neither are they left to fight on their own without any support or guidance. Rather, they follow their own business priorities while eagerly seizing opportunities provided through supportive state policy. Interaction and integration with the state varies between different types of companies. The Chinese Communist Party (CCP) has a complex set of levers which make it possible to secure specific strategic investments. The likelihood of state intervention varies depending on the commodity involved as well as geopolitical factors. However, the preferred mode of governance is to issue general policies that encourage companies to contribute to state objectives.

The main incentives are generated by the domestic development ambitions as laid out in five-year plans, trickling down from the general level to the sector-specific level. For instance, China has an industrial policy for developing so-called “strategic emerging industries” — a set of nine high-tech industries deemed crucial for driving economic growth and investment in the future. Advanced rare earth materials and products have been identified as crucial for developing several of these industries. At the same time, the Chinese government has categorised rare earths as not just “strategic minerals” but also as “advantageous minerals” due to the de facto Chinese monopoly. Mining and processing are therefore regulated by a quota system to which only four large state-owned enterprises have access.

This regulation has incentivised some Chinese companies to bypass the quota system by securing rare-earth resources overseas through partnerships with Western miners. From a central-planning perspective, this has facilitated the outsourcing of the upper parts of the supply chain. This is a way of conserving domestic reserves and moving some of the pollution of rare-earth mining overseas while ensuring that Chinese industry gets the rare-earth resources it needs. Western miners continue to rely on Chinese facilities and expertise for downstream processing of rare earths and manufactured goods embedded with rare-earth elements, such as permanent magnets. However, the very labelling of the commodity as “strategic” presents a chance for Chinese companies seeking rare earths abroad to argue that their projects contribute to state goals.

Playing the language game when competing for support
The “go global” policy, launched in the late 1990s, served to encourage companies to invest overseas. However, tighter control over capital outflows means that companies and government agencies now compete over increasingly scarce state funding. Presenting a solid business case has become increasingly important following a series of wasteful investments during the mining “super cycle” years from 2006 to 2013, but companies also try to show how they deliver on different policy agendas. Political language informs companies of state priorities and provides them with opportunities for framing.

Chinese mining companies have in the past oriented themselves first and foremost on the basis of China’s industrial-development priorities and the demand for different minerals and raw materials. However, framing can be tailored strategically to target other sector policies. In the past decade, the Arctic has become part of major Chinese foreign policy initiatives. The Arctic is now part of the Belt and Road Initiative (BRI) in the form of a “Polar Silk Road”. Becoming a “polar great power” is one component of the broader goal of becoming a “maritime great power”. The Chinese state also classifies the polar regions as one of its “strategic new frontiers” (together with the deep sea, outer space and cyberspace). These are spaces where great powers compete over resources and geopolitical influence, where sovereignty is often contested or ambiguous, and where China seeks to (re)shape global rules and standards. All these initiatives have been accompanied by an increase in state funding.


Investments by Shenghe Resources
The Chinese company Shenghe Resources has invested in the Kuannersuit / Kvanefjeld rare-earth project in Greenland.

In Chinese-language external communication, Shenghe labels itself a “practitioner” of the BRI. Shenghe’s largest shareholder, a sub-unit of China Geological Survey, has framed its overseas engagement as both a contribution to the BRI and as serving the company’s development needs.

In annual reports, Shenghe has stressed that rare earths and the rare-earth sector are classified as “strategic” by the Chinese state. The company has also framed its activities as supporting Chinese industrial objectives, such as the “strategic emerging industries” development plan.

Likewise, Shenghe embraced “Made in China 2025” in its annual reports — until the CCP instructed companies not to mention the strategy because of its negative reception in the West.


Investments in each part of the world come with their own set of political and economic risks. However, state support is arguably especially important for Arctic projects because of the unique logistical, environmental, and technical challenges these projects present. The emergence of the BRI has opened possibilities for companies seeking support for investment in marginal projects in regions deemed strategically important. In parallel, some mining companies seek to hook up with priorities signalled by the inclusion of the Arctic in this and other foreign-policy initiatives.

Chinese investors may enrol foreign policy priorities as arguments for engagement. But forgetting about the differences between Western and Chinese priorities in the minerals sector can lead to an oversimplified understanding of their motives. Some of those who raised concerns over Shandong Gold’s bid to acquire a gold mine in the Canadian Arctic read the project as an attempt by the Chinese state to gain a foothold in the Arctic for its Polar Silk Road. However, the Chinese state categorises gold as a “strategic” resource, in contrast to Western ideas of this commodity. This suggests that incentives generated by state interest in the resource itself may have played an important role for the company as well.

Framing backfires, but supply chains remain
The self-promotion by Chinese companies as carrying out state objectives seems, however, to be backfiring on several levels. It may cause the Chinese approach in the Arctic and elsewhere to appear more coordinated than it actually is. For example, during the 2019 Arctic Council ministerial meeting, Mike Pompeo, the US secretary of state at the time, portrayed all Chinese activities — whether state or non-state, civilian or military — as forming part of a co-ordinated approach in the region. This alarming reception is causing Western states to initiate security screenings of foreign direct investments in critical infrastructure which are often necessary but might also hamper the prospects of projects when funding and technology is unavailable elsewhere.

Moreover, Chinese companies’ desire to reap the benefits of overseas investments has dovetailed with Western firms’ need to pitch to investors how they have access to Chinese-controlled supply chains. However, the increasingly strained relations between China and the West make advertising Chinese partners problematic. And threats in Chinese state media of China weaponising its control over supply chains of rare earths and other strategic minerals — something which it has been accused of doing in the past — have further strained the value of Chinese involvement. As a result, some companies seem to downplay Chinese involvement in their projects, while others promote themselves as part of or potential contributors to “China-free” supply chains, even if such supply chains are not realistic in the short term.

On the one hand, leaders in Beijing are aware of how the country’s foreign-policy strategies and industrial policies are portrayed in the West and have taken steps to reshape the narrative. They have, for instance, asked companies to stop referring to Made in China 2025. They also insist that the Belt and Road project be referred to as an “initiative” rather than a “strategy”, because the word “strategy” implies a co-ordinated and ordered plan of action and is thus more likely to raise concern in Western countries. On the other hand, under the tightened rule of Xi Jinping, China’s president, the companies might feel an increased need to justify their activities in relation to official priorities and ambitions, not only to enhance their chances of state support, but also to avoid state clampdowns. And to the degree that such rhetoric and self-labelling amounts to more than paying lip service, Chinese companies will — not always, and not everywhere, but increasingly — contribute to state priorities, even if not explicitly directed to do so.

Rhetoric aside, Chinese technologies and supply networks are still globally dominant, and Western firms’ need to secure access to these supply chains remains a key driver behind Chinese involvement in projects. Mine ownership in itself has little significance for where the raw materials go to be processed. Industry demand and supply security hinge more on highly processed materials and advanced products than bulk raw materials. Security screenings focus on the geopolitical risks of allowing Chinese state or semi-state actors to take over mines in sensitive regions such as the Arctic. But from a supply security perspective, Chinese ownership of mines possibly under the CCP’s guiding hand is less important than control over downstream processing and manufacturing.

Patrik Andersson is a researcher with Diis
Per Kalvig is a senior analyst emeritus with Geus
Ulrik Pram Gad is a senior researcher with Diis

Further reading
Does China control Arctic mineral raw materials?
Diis
Northern mines could provide most of the EU’s strategic metals
Arctic Today
Chinese Mining in Greenland: Arctic Access or Access to Minerals?
Arctic Yearbook

Resources
2022 Final List of Critical Minerals
US Geological Survey
FACT SHEET: Securing a Made in America Supply Chain for Critical Minerals
The White House
Chinese involvement in the Arctic minerals sector (video recorded 23 May 2022)
Diis


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