Governments and companies in key industries are hedging against geopolitical tensions.

When Japan decided to get back into the chipmaking game, trading house Sojitz saw a chance to grab a piece of the action.

The Tokyo-based company is looking to build a plant in Kyushu, the same region where chip titan Taiwan Semiconductor Manufacturing Company (TSMC) is building its first Japanese factory, to process fluorspar into anhydrous hydrogen fluoride. The idea is to meet as much as 40% of Japan’s annual demand for the key chipmaking chemical, slashing the country’s dependence on China for the chemical and its key ingredients.

“We want manufacturers of semiconductors and battery materials who use hydrofluoric acid to join and build the supply chain together with us,” said Takashi Mizukami, manager of Sojitz’s fluorine business development section.

A joint venture with Mexichem Fluor of Mexico, the project is a prime example of the push to diversify supplies of key tech materials amid growing political uncertainty. But even with governments and companies throwing their weight behind such efforts, tangible progress has been slow to materialize.

The Japanese government is spending JPY 527 billion  (USD 3.4 billion) to back projects aimed at building domestic production facilities related to areas such as digitization and the “green” industries, including the Sojitz project. The industry ministry, meanwhile, has developed a strategy for critical minerals that emphasizes securing battery metals, rare earths, gallium, germanium and uranium.

South Korea’s Ministry of Trade, Industry and Energy, meanwhile, classified 10 minerals, including lithium, nickel, cobalt, manganese and graphite, as “strategically critical” last year, with the aim of reducing reliance on any one country to less than 50% by 2030.

Seoul has also been reaching out to Canada, Australia, Chile, and African countries through forums and meetings between high-ranking government officials in an attempt to secure minerals such as lithium, nickel, cobalt, and copper.

One of the driving forces behind the shift away from China supplies has been US President Joe Biden’s flagship Inflation Reduction Act (IRA), which has spurred action from companies looking to serve the American market by, for example, incentivizing purchases of electric vehicles made without Chinese inputs.

LG Chem of South Korea excluded China in the minerals and materials supply chains for its cathode materials factory in the US state of Tennessee, which is to be completed by 2026. The company plans to source from countries that have signed free trade agreements with the US to benefit from the IRA tax credits for EV buyers.

Rival POSCO built South Korea’s first lithium hydroxide plant in the southern port city of Gwangyang last year through a joint venture with Australian miner Pilbara Minerals. The plant can produce 21,500 tons of lithium hydroxide per year.

The IRA has also prompted some upstream investments. Japan’s Mitsui & Co has invested in Canada’s Nouveau Monde Graphite, which is working on building a new battery material plant.

Another impetus for shifting away from China supplies, however, comes from China itself, which has not been shy about weaponizing its control of key materials. On November 16, the commerce ministry said it will tighten export restrictions on a range of supplies, including tungsten, graphite, and aluminum alloys.

Japanese companies are also increasing their domestic lithium hydroxide output, even if they do not necessarily intend to sell to domestic customers. Toyota Tsusho built a plant in 2022, and a project by Sumitomo Corporation is undergoing a feasibility study. The two plants together would likely be enough to cover Japan’s current lithium hydroxide demand of about 40,000 tons per year.

An executive from a Japanese company explained that reaching that level of self-sufficiency can serve as a kind of insurance policy against political tensions. “It is important that Japan has the ability to cover its demand [without China], so that China would not bother restricting exports of these minerals,” he said.

While governments are largely working from a national security perspective, suppliers and manufacturers are also concerned about relying too heavily on a single source for key inputs.

“Some customers are trying to reduce their China dependence,” particularly in the chip industry, said Ikumasa Kinoshita, general manager of the purchasing department at Central Glass, a supplier of fluorine products.

But there is a reason China has come to dominate the supply of so many materials.

As Sojitz’s Mizukami said, when production of something is concentrated in one country, “that is usually because of economic principles.”

In other words, whatever anyone else can supply, China can probably do it cheaper. The country is not only the key producer of raw materials, it is also the processor of many of them. While Australia is the key producer of lithium, for example, countries like Japan and South Korea import most of the processed products from China.

China’s cost advantage is such that even initiatives like the IRA may not be enough to move the needle.

Central Glass is preparing to produce the IRA-compliant products for batteries, but “various materials from China are the most competitive, so you can’t immediately switch to other sources,” said Masaaki Kawakami, general manager of the company’s energy materials sales department. “And it is not like customers are OK with higher costs.”

The impending return of Donald Trump to the White House makes things even more uncertain. He has promised to gut the IRA and threatened to impose hefty tariffs on Chinese imports on his first day in office. How exactly his policies will impact supply chains remains hard to gauge.

On the economic side, volatile prices are another hurdle for companies outside of China thinking about investing in producing commodities. The Chicago Mercantile Exchange’s lithium hydroxide futures have been hovering around USD 10,000 per ton this year, much lower than the 2022 high of more than USD 80,000. Lower market prices mean it is more difficult for companies to turn a profit selling commodities.

Some materials, such as magnesium, come almost exclusively from China, with no notable projects underway to change that.

Magnesium is used in alloys to strengthen aluminum. It is a key material for making cars lighter, which is especially important for EVs, given the great weight of batteries.

At present, 99% of Japan’s high-concentrate magnesium comes from China. “We need to change the dependency rate, because it is too high,” an official from Japan’s industry ministry told Nikkei Asia. But “companies cannot go in [and invest in projects outside of China] because the cost is high and the demand is not increasing.”

Even ongoing projects face an uncertain future.

“We need support from the government and we need understanding from the customers [about higher prices] and our effort to reduce costs,” said Tatsuya Murakami, deputy manager of Sojitz’s fluorine business development section. “We are trying to make it work through all these factors.”

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