According to a report in German newspaper Handelsblatt, German investors are avoiding China, and German direct investment in China has declined sharply. Some large companies, however, are going against the tide, expanding their businesses in China.

A study commissioned by Handelsblatt and conducted by the Cologne Institute for Economic Research shows that German investment flows to China plunged in the third quarter of 2023, reaching a six-year low of negative €2.2 billion. German equity investment in China fell particularly sharply, with a flow of negative €3.9 billion.

Funds flowing to China from other countries also decreased. During the third quarter of 2023, total foreign investment was negative for the first time in a quarter century, meaning more capital flowed out of China than flowed in. Some large companies like BASF, however, are going against the flow and continuing to expand their business in China.

On the other hand, there were positive signs regarding reinvested profits. Although German reinvestment in China was lower than during prior periods, German companies still reinvested some €1.7 billion of profits earned in China back into their Chinese operations in Q3 of 2023. The study found that many foreign companies operating in China are transferring profits out of the country.

Observers cite several reasons for the investment downturn in China, including a significantly worsened investment environment in recent years as the Communist Party exerts greater control over the economy. China’s economic growth and consumption have also slowed. Many Western countries are also pursuing de-risking strategies to reduce dependence on China.

Source: Radio France International, December 14, 2023
https://rfi.my/AB83

A report by IW Consult and Fraunhofer ISI, commissioned by KfW Research, highlights Germany’s reliance on imports for critical raw materials such as copper, lithium and rare earth elements (REEs). Nearly a third of Germany’s manufacturing gross value added comes from copper products, 10% from lithium products, and 22% from REE-containing products. Automakers, electronics and optics manufacturers are particularly reliant on imports.

The German markets for such products are dominated by a few major suppliers. The report says that a third of Germany’s lithium as well as 19% of its copper and REE imports are subject to supply chain risk. The largest known REE deposits are in China, while reserves in Greenland, Canada and Sweden remain underexplored. Germany’s top three lithium and REE suppliers control over 80% of German market share for those commodities. Furthermore, Russia’s copper and Chile’s lithium carbonate (which comprises 72% of German lithium carbonate imports) are crucial in Germany’s supply chain. Altogether, China accounts for 84% of German REE imports.

Matthias Wachter from the Federation of German Industries (BDI) compared Germany’s dependence on China for raw materials to the dependence on Russian natural gas [before the 2022 Russian invasion of Ukraine]. He said that imports have reached “the highest level of risk” and that the danger lies “not in availability of such materials but in the [geographic] concentration within China of their production.” He added, “this high degree of dependence makes people vulnerable to threats and blackmail. China has shown that it can regulate these key areas by imposing export controls on some rare earths.”

Fritzi Köhler-Geib, Chief Economist at KfW, said that there may be initial costs to pay in securing resilience throughout Germany’s supply chain, but the resulting stability and flexibility are necessary prerequisites for enabling the green transition and digital transformation. Cornelius Bähr, Senior Advisor at the German Economic Institute, stressed the importance of German supply chain diversification, exploration of substitutes for key raw materials, expansion of domestic resources, and recycling [of key supply chain inputs]. He cautioned that there could be economic consequences, e.g. forgone EV production, if imports such as lithium are disrupted.

Source: Deutsche Welle, March 17, 2024
https://p.dw.com/p/4dWaS

South Korea appears to be accelerating its efforts to reduce dependence on China for critical mineral imports. This comes as the Korean government has unveiled a strategy to secure supplies of key minerals, while major companies are actively pursuing diversification of import channels for mineral resources.

In 2023, 79.6% of South Korea’s lithium hydroxide imports, a key material for EV batteries, came from China – down 8.3 percentage points from 87.9% in 2022. Imports from Chile rose to 17.5%. For neodymium iron boron, used in EV permanent magnet motors, 84.7% came from China in 2023, a slight dip from 87.5% in 2022, while imports from the Philippines increased to 14.3%.

Analysts attribute the trend of reduced dependence on China for lithium and rare earth minerals to the  South Korean government’s policies supporting supply chain diversification, as well as to intense “de-Chinaization” efforts by companies adapting to factors affecting the trade environment (e.g. the U.S. Inflation Reduction Act).

Major moves in the sector include the completion by Korean steel giant POSCO of a new lithium hydroxide plant, the first of its kind in South Korea. The plant will use Australian lithium. POSCO is also planning a lithium carbonate plant in Argentina. Other moves include a deal signed by LG Energy Solution with an Australian firm for 85,000 tons of lithium concentrate.

Source: Yonhap News Agency, March 13, 2024
https://cn.yna.co.kr/view/ACK20240313000900881