An explainer on Pax Silica

In today’s Finshots, we tell you how China has dominated the global critical mineral supply chain and the US’s Pax Silica initiative it believes could counter it.

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The Story

In 1964, Chinese geologists made an interesting discovery. An iron ore mine near the city of Baotou also held the world’s largest rare earth deposit.

At the time, rare earths were not fashionable. Most countries ignored them. But Chinese leaders did not. They saw rare earths as strategicespecially for defense and advanced materials. Therefore, the country’s military wing quietly funded research into their customs.

But they also ran into a problem. Purifying rare earths was anything but easy. They were not “rare” because they were hard to find, but because they were hard to separate from each other. To solve this, the Chinese military turned to a pharmacist named Xu Guangxian. Xu and his wife developed an inexpensive, scalable way to purify rare earths using basic chemicals and plastic tanks, essentially creating the first industrial “assembly line” for rare-earth separation.

The breakthrough changed everything. Large-scale refining became viable. Costs have fallen. And because the technique was never patented, it quickly spread across China.

From there, the state doubled. Rare earth mining and refining were folded into five-year plans, closely monitored and regularly revised. China simply put its head down and built hundreds of refineries.

Meanwhile, the US and other countries made a very different choice. They saw rare earths as dirty, low-margin material that wasn’t worth the environmental damage. China, on the other hand, has accepted that pollution as the price of dominance. By 1986, that bet paid off. It was the world’s largest producer of rare earths.

Another turning point came from the US. Engineers at General Motors’ Magnequench have figured out how to turn rare earths into super-powerful magnets – essential for electric vehicles, wind turbines, smartphones and fighter jets.

But here’s the twist. GM wanted to get approval for car production lines in Shanghai. So it sold Magnequench to investors that included Chinese firms linked to influential political families. The deal worked for GM. But it also meant that Chinese companies now possessed critical US-developed magnet technology and the ability to manufacture it at scale. So even if China didn’t invent magnet technology, it bought it. And then it scaled it down.

Add cheap labor and low production costs to this mix, and you’ll see why China has begun to use its dominance to influence global prices of rare earths and other critical minerals.

Sidebar: Rare earths are a specific subset of critical minerals, essential for defense, automobiles and electronics. But the broader group of critical minerals also includes materials such as lithium, cobalt and nickel, which have become essential to today’s technological advances, from batteries and clean energy to electric vehicles, chips and the computing power behind AI.

But because China was able to use its scale, it overproduced, drove down prices, made Western projects uneconomic and scaled up even further as competitors in other countries closed shop. Even companies in emerging markets that tried to invest in critical minerals found themselves pinched by collapsing margins and uncertain buyers. Once that happened, China was able to tighten supply and regain pricing power.

The end result was that over time China was more than in control 90% of global refining capacity for graphite and rare earth elements and now processes approximately 60% of the world’s lithium and cobalt.

And the world got a taste of how difficult it would be to break this dominance last year, when China began imposing export controls on rare earths and other critical minerals. Some of it was because he didn’t want his technology to be used in defense sectors of other countries, while the rest was in retaliation to tariffs the US slapped on Chinese goods.

The impact as you would imagine was no surprise. Supplies tightened and countries suddenly scrambled to find alternative sources of minerals they had quietly taken for granted.

Now it is worth noting that although the US and China later agreed to a one-year truce where China would suspend export restrictions, and the US would ease tariffs, it was clear that it was a serious risk to be so dependent on one or two countries for materials that are at the heart of modern technology.

So now the US thinks it has a plan.

Instead of going it alone, it wants to bring friendly countries that mine, process, or rely on the same building blocks of technology and AI on the same page, through a new alliance called Pax Silica.

What is it, you ask?

At its core, the name is quite literal. Pax is Latin for “peace,” and silica is a key compound used in chip manufacturing. Put the two together, and Pax Silica is about keeping the peace in the tech world by controlling the stuff that powers it.

So, instead of each country trying to lock down critical minerals and supply chains on its own, Pax Silica is meant to be a trusted club of allies that coordinate with each other. The idea is simple. Countries share access, plan supply chains together and reduce dependence on China by treating things like silicon chips, rare minerals, data centers and electricity as strategic assets. Much like oil or military alliances were treated in earlier eras.

Currently, countries such as Australia, Greece, Israel, Japan, Qatar, the Republic of Korea, Singapore, the UAE and the UK are officially part of the alliance. Others such as Taiwan and the EU still keep some distance, maintaining their own policies or reservations about formally joining.

And now India could be next.

Last month the US India officially invited to join Pax Silica. And the reason this is important is that India has already started positioning itself as an alternative manufacturing hub under the “China plus one” strategy. And while its AI infrastructure and scale is still very, very nascent, this could be a chance to land new investments and deeper partnerships under the initiative.

It also helps that many of the original members of Pax Silica already sit near the top of the AI ​​and semiconductor supply chain. In that sense, it is a give and take arrangement. One country brings strength to one strategic area, another fills another gap, and both walk off better.

You can already see hints of this materializing. For example, Microsoft recently announced plans to spend $17.5 billion expanding its AI infrastructure and cloud computing capacity in India over the next four years. Google has followed through on plans to invest more than $15 billion over five years to set up an AI data center in Andhra Pradesh.

India, for its part, also brings something valuable to the table. It has the world’s third largest reserves of rare earths, growing manufacturing capabilities and a massive workforce. Together, this makes it a viable alternative supply chain, albeit early days.

Which brings us to the real question: Can Pax Silica actually break China’s dominance in critical minerals?

Well, to answer that we need to go back to the story of how China dominated the global mining and refining space for critical minerals. What we told you earlier was only half the story. The other half is how it did it.

See, China didn’t take control by owning everything outright or by announcing grand strategies. Instead, it moved quietly by building what was effectively a “silent poster” of companies and opaque contracts.

For context, between 2000 and 2021, Chinese banks issued approximately $57 billion in mining and processing loans across 19 countries, including the Democratic Republic of the Congo, Indonesia and Kazakhstan. Using this money, China began to control the flow of minerals in these countries through shell companies, offshore registrations and minority interests. On the face of it, it must have seemed that these countries had control over their mineral resources. But at the bottom, Chinese-linked firms have secured effective control over cobalt, copper, tin and chromite without openly owning the assets.

Many of these deals also include private contracts that guarantee Chinese buyers first access to mineral exports through Right of First Refusal (ROFR) agreements. In simple terms, China gets first dibs, often at market prices or even below market prices, before anyone else can bid. And because these agreements are not public, Western companies often do not realize that the offer is already being talked about.

What’s even more important to understand is that mining is only half the battle. Most minerals still need to be refined before they can be used in batteries, electronics or weapons systems. And it is here that China’s grip is further strengthened. It dominates the refining stage and processes the majority of the world’s critical minerals. And that gives him the power to decide who gets access, when inventory slows and which industries feel the pressure first.

This is why it is so difficult to simply mine, process or finance China, even if alliances like Pax Silica succeed in bringing countries together. Because for years the rest of the world let China do the dirty, polluting work while enjoying the cheap inputs that came with it.

So yes, those one realistic way forward now lies in secondary sources such as the recovery of minerals from mining waste, the use of new technologies to extract rare earths from tailings, coal ash and industrial by-products, or even the tapping of waste water from oil and gas extraction. The recycling of old electronics and e-waste will also have to play a much bigger role.

But it also raises another uncomfortable question: Who bears this burden?

Emerging economies like India or countries that want to contribute more to global GDP, play a greater role in strategic alliances and attract new investments.

China has finally cleaned up its pollution mess by closing illegal mines, containing bodies of water contaminated by critical-mineral mining, and consolidating the industry under state control. But are countries like India thinking as hard about the after-plan, about how to deal with the pollution that comes with this event?

This is something that no one really knows.

Or maybe, deep down, we do.

Until next time…

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