Almonty CEO Lewis Black discusses supply chains that affect the electronics industry, more specifically tungsten and the effect of China's dominance in the market on the West.
EE Times sat down with Almonty Industries’ CEO Lewis Black to discuss supply chains that affect the electronics industry. Almonty is the world’s largest supplier of tungsten outside China. The rare metal is used as an interconnect material in semiconductors.
Lewis, how has your business changed since we last spoke 18 months ago?
There have been some surprises and some shocks. The shocks start with the strangest things. Supply chain disruption is now in full effect, affecting some of the most obscure parts of your business.
The freight rates between the EU and the U.S. are completely off the charts. I suppose governments are again caught between a rock and a hard place.
I’ll give you an example: Spain.
Valencia is by far the largest export port in the country. I think 74% of all goods going in or out of Spain go through that port. It’s an important part of Spain’s economy. Yet in August, more than half of the workforce are on vacation. Everything grinds to a halt. When you’re trying to recover from shutting everything down for two years, you would think there would be some sense of urgency to address this problem. This cannot continue because there will be just catastrophic failures across the board.
What are some specifics?
The largest employer in Germany is the car sector. They have an extraordinary number of vehicles that are sitting idle and unfinished because they’re missing their electrical connectors. Parts that previously were assembled in Ukraine are becoming a bottleneck that is actually going to shut automakers down.
What does the government do when the largest employer, the largest contributor to tax and social security, can no longer ship because there are still enormous issues in supplies and in parts?
In the past, automakers would manufacture cars pretty much in house. But now because of the global economy, you don’t make the wiring assemblies yourself. You don’t make the gearbox. You don’t make the engine block. Everything comes from somewhere else. If you’re missing one part, you have a huge problem because you can’t shut the lines down. It’s catastrophic—not just for the company, but also for the country.
This semiconductor shortage has been around two years, and the best thing that we’ve managed to come up with was the bill that the U.S. administration did, providing $52 billion to build semiconductor plants in the U.S.
It doesn’t really address your current problem. It also doesn’t help when you think it’s a prudent approach to throw some gasoline into the South China Sea. Sixty percent of your semiconductors are coming out of that place.
Supply chains have been left to the wayside. And now the U.S. government has introduced this bill called the Inflation Reduction Act. It sounds better than what it really is. You’re going to provide these subsidies on electric vehicles (EVs) that must have over 40% of their content made in America, including raw materials. The problem is that only 30% of the cars produced in the U.S. will qualify. You’ve no way of changing that anytime soon.
You’ve not really addressed the fundamental problem. The shortages of semiconductors haven’t gone away. With an EV, you need to double the number of semiconductors that you need with a gasoline vehicle, and you exacerbate the problem.
What about the supplies of materials for electric vehicles? People are ramping up production aggressively. Is the supply of raw materials going to constrain the growth of that business?
Operating in a democracy, there are a lot of hoops you have to jump through. And quite rightly so. You have a responsibility not just to the environment but to the community. The problem is you’re competing with nation states that obviously allow the state to trump everything. Ultimately, you cannot develop raw materials faster (than the state-run economies).
Think about what’s happened in Ukraine and Russia. Ninety percent of all the raw materials Russia produces are for export. The world can’t replace them. In the Inflation Reduction Act, they’re saying, “this is going to encourage raw material supply,” and you’ve got to have this 40% (quota for American content), yet you have no chance of getting it any time soon.
China produces 83% of the world’s tungsten while 10% of all tungsten consumed in the world is for defense. It’s a rather unusual situation to be in.
In the South China Sea, you may have an issue keeping things moving along in the event of any real engagement. The supply chain is still finding its feet. One of the surprises we found is that demand is extraordinarily strong in the U.S. for tungsten.
No one’s asked this question publicly: What do you think China will do if you try and diversify supplies? That could reduce China’s market share.
They bought this market share in the eighties. Early in the eighties, you had nearly 100 tungsten mines, and by the early nineties, you had 200. It was a complete decimation of that sector because China was giving the tungsten away and that drove everyone out of business.
Because China is so dominant, they ultimately control the price. They keep prices in a band that discourages any real capital coming in to challenge their market share.
But now governments are starting to get involved. What can China’s response be? One is to collapse the price, which, of course, is a strategy that also affects their own producers, requiring further state funds to weather that storm.
Western democracies struggle at the best of times to coordinate on anything. We couldn’t even agree on lockdowns for Covid.
If you are a company and a major consumer of tungsten, for instance, you have to be extremely careful in what you say or do regarding diversification. You don’t want to wake up one day and find out that China says, “no more tungsten for you”. Twelve months ago, if I said to you that Russia would restrict the flow of gas into the EU by 80%, you would have said I was out of my mind.
Apple has been probably the most vocal in this, where they’ve said some weeks ago that they would no longer consume Russian tungsten. So that’s, I suppose, a win in their book. If you’re a consumer of tungsten, or any commodity that’s dominated by China, you have to tread very carefully.
Governments also face the same problem. If the U.S. government now has a huge program to develop a raw material base for lithium or tungsten or rare earths, all of which China dominates, what would China’s reaction be?
What are the pinch points for materials used to make batteries and electric vehicles?
China controls certain strategic metals, and no one has really tested them to see how they will react.
It’s a question, politically: How easy is it for you to go to your electorates, your voters, and say, ‘Guys, we’re going to have to tighten our belts because we’re going to have a battle?’
That’s not going to win you votes because people are not going to give up all the nice things in their lives. ‘I’m not giving up my phone. I want a new phone every year.’
When you look back at the hardiness of previous generations, that conversation could probably have floated. That’s not going to float with anyone today. Nor is building a mine going to win you any votes.
The major semiconductor manufacturers are going to have some presence in the U.S. But the criteria for electric vehicle subsidies—reaching more than 30% U.S. content in EVs—is unlikely for some time.
They’re saying a subsidy will encourage people to buy EVs. Even with a $7,500 subsidy, you’re still paying $55,000 for the vehicle [in some cases].
Also in this bill, there’s the corporation tax. On the one hand, you say you need more independence. But on the other hand, you just raised the tax on mines by 4.5%. That doesn’t really make much sense.
I don’t think you operate any tungsten mines in North America.
Does the environment look more attractive to you to invest in a tungsten mine in the United States?
The question is: Are there deposits that are interesting? All of the resources that are really known in the U.S. are depleted or very low grade. Not economically worth doing. I would love to operate in North America for my North American customers.
But I just don’t see any real consistency in the approach by U.S. administrations regarding raw material production in the country because it doesn’t win votes. Nobody wants these mines. We’re lucky in the jurisdictions we’re in because we happen to be in communities that have had mines for generations. And we’re very much part of those communities.
Mines are not very popular in a lot of places.
Mines nowadays have far less impact on the surface. Environmentally, they’re extremely well put together, but they have a terrible image problem. Politicians are going to get elected by building a semiconductor factory but not a mine.
Going back to China, it seems like the leaders there have been more farsighted in terms of building supply chains.
It’s taken them 30 years, but they understand the power that you have with a vertical supply chain. If you can take a commodity from the ground and you can make it into a downstream product with a profit margin, you build a very healthy economy.
If you look at where raw materials came from… the money was always further down the process. With tungsten, the margin is in making an insert for the manufacture of a motor vehicle, rather than the production of the concentrate. The concentrate has margin, but every time we go downstream, it increases the margin.
China identified certain areas that they could very simply dominate because in the eighties, there was a unique situation in the world. Mines had fallen out of favor in the West. You had miner strikes in the U.K. You had terrible strikes in the U.S. Appalachians. Those mining communities were no longer of importance to anybody. On the back of that, China had an opportunity.
What about other parts of the electronics supply chain that could be affected by shortages of materials like tungsten?
Right now, all of our customers are making up shortfalls in the availability of tungsten concentrate that we produce. They’re buying downstream products from China because they have no choice.
There is less talk of supply diversification right now because all of them are essentially feeding from China, and they have no choice. They have great demand, but there are obviously issues with meeting that demand, with concentrate from the West. It just doesn’t exist. China won’t sell you concentrate. They will only sell you a downstream product.
Even though WTO rules say they can’t stop the export of concentrates, it’s not exported. It’s just one of those dilemmas.
The issue is governments started strong regarding diversification and realized the decisions that would have to be made were not going to be terribly popular. I’m sure corporations said to them, “Look, just tone it down because if we get a restricted supply, we’ve got problems.”
That energy has gone. In the U.K., they’ve finished a government study showing an acceleration of deaths as a consequence of no one going to hospitals for checkups during Covid. They’re expecting this to happen all over the world. There are problems coming.
This unfortunately was a really bad idea.
What do you mean by ‘this’?
Lockdowns. The whole idea of lockdowns was a really bad idea, because there was no way of knowing what this was going to do—not just health wise, but also economically.
And then, dumping trillions of stimulus money into the market just created a super storm of inflation. I think we’re in for a tough 12 months. It would be nice to think people would dial down a bit of the political rhetoric and really focus on what’s important, which is bringing some stability back to everything.
There are some big problems with the supply chains still. I don’t think that the current Inflation Reduction Act is even close to dealing with this. Nor will the semiconductor bill. This has to be a big focus for governments because the impacts are going to be felt for a number of years. We’ve got to nip it in the bud now.
Maybe you could clarify what the impact is going to be?
While you have continuous shortages, you’re going to fuel inflation. Not all the stimulus money has been burned up or distributed.
Going back to commodities, you have cycles—you have bear markets and bull markets. And the concept behind them is that a bear market will essentially get rid of all the dead wood. All those companies that weren’t strong enough or well-run enough or managed correctly would die in a bear market. As a consequence of their death, a bull market would then return.
This last time was a total anomaly because for the first time in history, cheap money was being loaned, willy-nilly. That meant that a lot of the dead wood, a lot of the companies that should not have survived, did. They took on a lot of debt to do so.
The correction that should have occurred is still going to occur, but now it’s going to be a lot more dramatic because as inflation drives rates up, all these companies are going to struggle to survive.
Ultimately, bizarrely, this is only going to strengthen the Chinese domination of certain sectors. This is because inflation rates do not have the same effect on Chinese companies because most loans there are state loans.
You could end up doing damage to existing supply chains in the West and therefore further strengthen those countries that are not so exposed.