In late 2001, when much of the world – especially the US and the West – was preoccupied by 9/11 and the resulting military campaigns, China acceded to the World Trade Organisation. This marked a shift in its global trade and China’s alternative playbook began to emerge.

Although it entered the global trade stage with full authority, it did not sign up to all dimensions of the WTO – including its Government Procurement Arrangement, the Paris Club of official creditors, or the Development Assistance Committee. And when it came to securing its supply chains, over the last 25 years Chinese state and private companies alike used very different tactics to leverage their trade compared to other major economies. We have seen these differences in many places, not least across the Eurasian supercontinent.

Research has shown just how successful Chinese state entities have been at leveraging their risk in trade and financing deals. We have analysed many investment trends in the region using data from ClearPic and compared these with results from economists at Georgetown University who reviewed hundreds of contracts from Chinese state entities in developing countries. Findings show leveraging tactics carefully woven into contracting – from stipulating special bank accounts as a security for debt repayment, to banning Paris Club-led restructuring – to more egregious macro moves on major markets.

Sometimes dismissed as ‘debt trap diplomacy,’ close analysis of Chinese financing shows the effectiveness of hardened leveraging – even weaponising – of counterparty risk. Conversely, western governments have been increasingly regulating overseas trade and appear more concerned with eliminating risk than evaluating it in a cold light.

We see this trend in Eurasia – from Eastern Europe to Central Asia – with countries like Serbia and Kyrgyzstan entering agreements with Chinese counterparties, often with major lender Eximbank. Serbia has over $3.5bn in such structured agreements, with Kyrgyzstan over $1.5bn. The interests of Chinese firms are enmeshed into cross-default clauses and standard contract tools are expanded and adapted to suit their context – which can be anywhere from infrastructure to extractive industries.

An even bigger increase in supply risk comes from the Chinese dumping of commodities on the market to drive out competition. Iron, steel, magnesium and other key materials have been dumped in massive quantities, leading to a significant negative impact on some steel producers from developing nations – such as plant and mine closures, labour strikes, and the extraction of political and strategic concessions from governments. Outside Central Asia, governments in Africa and Latin America often struggle to balance the interests of domestic steel production with those of other industries that rely on Chinese commodities.

Minerals and CRMs in focus

In the last couple of years, as supply chains have tightened globally and the commodities ‘super squeeze’ kicked in, clients of ours have reviewed their supply-chain risk. In focus has been Central Asia, where classic trends – such as luring local firms to western capital markets, or collective lobbying from major European states – have given way to more strategic and individualistic ideas of how to leverage risk. Commodity companies in the west tend to exploit risk differently from their eastern peers, taking advantage of market and price risk to acquire key supply chain assets, depriving the possibility of acquisition by their competitors – under a mantra ‘explore, expand, exploit, extinguish.’ CRMs such as those going into batteries are suddenly of particular importance. But in some areas of trade this is not enough to ensure protection from more unforeseen risks.

Magnesium stands out

Nowhere has become more important than the supply chains of key minerals included by various states like the EU in lists of critical raw materials (CRM). Notably, we have seen expanding concern around magnesium: it is a CRM with diverse and growing applications, from most renewable energy machinery, to drones, smart phones and satellites. Yet magnesium tends to exhibit greater price volatility than other similar minerals. China’s egregious dumping of magnesium has become a major problem with the US Department of Commerce and the ITC determining that revocation of the antidumping duty order on pure magnesium from the PRC would likely lead to “continuation or recurrence of dumping and material injury to industry in the United States.”

The supply chains providing magnesium to downstream customers are an unusual case – due to the geographic distribution of extraction, production and transportation. Within Central Asia, unlike other CRMs, which have drawn considerable investment from both foreign and domestic actors in CAREC commodities sectors, magnesium extraction, production and transport appear to have attracted minimal entrants. Kazakhstan sits in the top five annual primary producers of magnesium, and leading the charge in-country is a national mammoth that is listed on the KASE and controlled by a Belgian holding company.

A recent request by a European client of ours makes for a fascinating case study on how to leverage risk on its supply of Kazakh magnesium – something Chinese rivals do naturally. Putting it into context – China dominates global magnesium output, while as of 2023, China's dominance in the REE and CRM markets is striking. Chinese entities held financial interests in 63% of global REE production, 11% of cobalt and copper production, 13% of lithium production, and 6% of nickel production. Additionally, China controls 40% of the world's REE reserves. This dominance has heavily oriented global supply chains toward supporting Chinese production, positioning it as a central hub in the global market. In contrast, the next largest producer and refiner of REEs, MP Materials Corp., the only US producer, accounts for just 15.8% of global REE production and refining.

Looking more closely in Central Asia, there is a general lack of information regarding magnesium production, including within the region’s biggest producing nation of Kazakhstan. The best publicly available data – housed by ClearPic – date back to 2019, and list one major firm as the only primary producer of the metal. Of the primary magnesium production that originates in Kazakhstan, only one mine was listed as a source for the year 2019, run by that same company.

Leverage the risk in your favour

Our client’s position of weakness and its exposure to the Kazakh firm’s position made it what we call a problem owner in its trade.

By positioning the problem owner relative to the target’s commercial risk exposure, we could structure a framework to identify which risks could be utilized to achieve strategic objectives. This profile was synthesized into different distinct risk leveraging vectors, borrowing from the Chinese playbook with some key moves, to ensure the Client’s long term strategic success.

Our evaluation of the client’s position showed us that it could significantly strengthen its position by adopting even a few tactics, in very broad terms including:

• Squeezing company margins by increasing demand (thus the price), for carnallite – a mineral vital to its integrated magnesium/titanium production cycle.
• Leveraging contractual risk by entering a new project, via the extension of a loan to the magnesium producer, with repayment facilitated via jointly controlled currency accounts with unequal access.
• Hedging on development of alternative transport infrastructure.
• Releasing excess supply of magnesium commodities on the regional market, significantly driving down the price and increasing price volatility.

While this gave the client a major boost to its strategy vis-à-vis its supplier, the problem owner can in fact any number of players in a given trade system, from a legal entity or actor with strategic objectives, who defines the problem to be addressed.

We have developed an entire methodology and client-led approach – based on engineering and Design Science Research principles that can assist players needing to protect their interests down the line. In this case, the client needed to influence the actions of Kazakhstan’s key magnesium producer in a meaningful way, and to its advantage.

Generally, the Kazakh company in the above scenario appears to be well insulated from supply-shocks due to its monopolistic status in Kazakhstan, the availability of cheap energy, and its business model focusing on an integrated dual magnesium/titanium production system. But some simple tactics from our client would massively even out the relationship in the event of shocks to the client’s supply system.

The actions and outcomes of this analysis are of course left for the problem owner to execute – and the methodology is clear. Leveraging, nay weaponizing, risk in the supply-chain context is an approach that does not need to be aggressive or hostile to be effective and safe-guard commercial interests. A broad-minded approach means any global actor can benefit from the more strategic behaviour that China has developed so effectively.

The bigger picture

In the global context, China produces more than 30 times as much magnesium than any other country – with Kazakhstan the second-largest producer. Kazakhstan’s soil is said to contain most elements from the Periodic Table, and so it is not just magnesium that could count to any country or company concerned by its access to the list of CRMs.

In such a case as this, Chinese firms in Central Asia may not even need to deploy tactics of leveraging risk over Kazakhstani supply chains – given their own domestic dominance. But any other, non-Chinese, regional or international players who don’t do it could end up drastically exposed.

Just as we have seen companies prepare for and adapt to sanctions and de-risk, so we have seen clients in Europe now preparing for all kinds of eventualities as we enter Trump’s second US presidency. Competition may rise through tariffs and trading blocs – albeit perhaps, eventually, with fewer sanctions. For some parts of the world such a scenario could render leveraging risk an irrelevance – but in others it could make such an edge more vital than ever. Not least in the mineral-rich territories of Eurasia.

Urus Advisory is a risk intelligence consultancy working across Eurasia. urusadvisory.com

ClearPic.ai is a screening platform for investors in Eurasia.