In Focus: Critical Chemicals

SPEAKER_1 (0:09)

Welcome to this episode of JP. Morgan's At Any Rate podcast series. In this episode, we will be interviewing two experts about the subtle yet foundational role played by chemicals and their significance to the US and China.

Now for your host and head of content strategy here at JPMorgan, Samantha Azzarello.

Samantha Azzarello (0:30)

Today's episode showcases industry and policy thematics, a global research effort focused on economy-wide industry and policy topics, including those related to the security and resiliency initiative at JPMorgan. After focusing on critical minerals in an earlier episode, this episode looks at critical chemicals. Our guest today is Grant Harris, who leads industry and policy thematics, and Steven Palacio, senior researcher also on the team. We're going to unpack why chemicals are foundational, but at times invisible and neglected, where the most important US vulnerabilities sit, and how China's dominant position has developed, and what cautionary lessons can be drawn.

Grant, welcome to the show.

Grant Harris (1:12)

Thanks so much for having me.

Samantha Azzarello (1:14)

So let's set the stage. Before we dive into details, why do you describe chemicals as the invisible quote, mother of all industries, and why does that matter for the industrial economy?

Grant Harris (1:24)

It's a great starting point. Chemicals are the mother of industries in that they are ubiquitous, they are everywhere, but they're hard to see. And they're hard to see not just literally oftentimes, but they're hard to see in one supply chain.

It's hard to know the dependency, it's hard to measure them. And we should unpack what that means exactly. But chemicals, there are tens of thousands at least, they go by different names, they can present themselves differently along the supply chain. And when we think about economic resilience and technological competitiveness, and national security, it is a real blind spot if we don't collectively understand where those dependencies are, why they matter, and what we need to do about them.

Samantha Azzarello (2:05)

Okay, so let's bring that dependence to life. Steven, I'm going to bring you in here also.

Grant Harris (2:10)

Sure.

Samantha Azzarello (2:10)

But Grant, in the report, which is fantastic, so I'm going to suggest that everyone head over to JPMorgan Markets to read it, sectors like semiconductors, pharma, agricultural, and defense, this seems to cut across sectors.

Grant Harris (2:23)

Yes. And those are just some of many examples of how strategic sectors are dependent on the chemicals that they require. If you take a semiconductor, it takes something like 500 chemical processes to make that work. If you think about ammonia and fertilizer, Steven, you've been looking a lot of these particular examples.

Steven Palacio (2:43)

Yeah, no, no, I completely agree with you.

You've covered earlier the systemic importance of them. They gate many strategic industries, as Grant was saying, semiconductors, 500 process chemicals. You've got the key starting materials for medicines, gate all the way, and China controls most of those. As Grant was saying, you've got ammonia synthesis, which helps feed basically half of the planet. And you've got also very strong defense dependencies building on, for example, Europe cotton imports from China, roughly 70%. So they gate strategic sectors, not only their systemic importance, I would say.

Grant Harris (3:22)

Those are really important examples, too. Like the cotton lenders, if Europe has as a stated goal to increase its defense industrial base and its amount of ammunition, if you don't produce that, then you have a dependency on China for that, that means literally that ammunition cannot be produced.

Steven Palacio (3:38)

That's right.

Grant Harris (3:39)

And your example also on medicines is great, too. We talked about this a little bit in the report, but as it notes, China has control over the raw or key starting materials for 94% of amoxicillin. These are really staggeringly high numbers when we think about where those dependencies are, and it means that it's very concentrated, and it means that if it's not understood or if you're not planning against that, that you can be left really exposed.

Samantha Azzarello (4:06)

So it's interesting then to think through a comparison with critical minerals. I think rare earths, it's part of the zeitgeist. I mean, I think most people have heard of rare earths now and how we're dependent on them. If chemicals are so important and vulnerable, as the report does posit very well, why do you think they've escaped strategic attention?

Grant Harris (4:27)

I think they are hard to measure. They're hard to understand. They're easily looked past. In some of these supply chains, it is a very small component in terms of the absolute cost or even the relative cost in that supply chain. But a factory can go down because of lack of access to one molecule. And people can use critical minerals to try to understand that or even semiconductors or anything else. There was a time when cars would not come off the line because there was a semiconductor chip, a single one, worth less than $20 in most cases, and it could not move.