“The Middle East has oil, while China has rare earth.” We first cited that Deng Xiaoping quote in April 2009, and we suspect that for many readers at the time the significance of these metallic elements – essential for the manufacture of smartphones, F-22 fighters and much else – was little known. Most people were also unaware that China accounts for more than half the world’s total reserves of rare earths.
Our first article on the subject (see WiC13) was a bit of a scoop. We picked up from local media that a Chinese official wanted to consolidate the domestic industry, so as to drive up the prices of the 17 rare earths (and also rein in some of the nastier environmental practices of smaller miners). Not only did this come to pass, China’s hold over rare earths became a politically-charged subject when Beijing and Tokyo fell out over a disputed island and the latter detained a Chinese trawler captain. As a reprisal, China embargoed the sale of rare earths to Japan, forcing frantic manufacturers to fall back on their limited stockpiles of the materials (see WiC81).
This also raised awareness of rare earths in the US, particularly when China capped the volume of its exports of the metals (leading to a World Trade Organisation case). Beijing eliminated the export cap in early 2015, but the move encouraged American policymakers to focus on reopening the country’s own rare earth mines to curb reliance on Chinese supplies.
Events now look to have gone full circle and another political battle over rare earths may ignite in Washington in the second half of the year. That’s because America’s only functioning rare earth mine looks set to end up in Chinese hands, a move that would further bolster China’s control of global supply.
The Mountain Pass mine in California has proven reserves of 39,000 tonnes of rare earth – not huge when you consider the earlier export cap China imposed was set at 30,000 tonnes annually. The mine’s size was an issue, leading its operator Molycorp to file for bankruptcy in 2015. The Wall Street Journal reports that a Delaware court has auctioned the mine off for $20.5 million.
The winning bid was from Shenghe Resources, a firm founded in 1998 with a large smelting operation in southwestern China. According to Jiemian, it has 775,000 tonnes of rare earth reserves in China and can smelt 13,400 tonnes annually. The Delaware court says that as part of the deal it will need to inject $50 million into the Californian mine’s operations.
However, a rival bidder – Virginia entrepreneur Tom Clarke – has challenged the auction results on the grounds of “national security”. He is not alone in this view. Fox News has reported that President Trump wants to encourage domestic mining of rare earth so as to lessen America’s dependence on China for a commodity with both military and economic significance.
Trump fears that should the US and China have a major falling out, rare earth exports will be a point of leverage for his counterpart Xi Jinping. Indeed, such a rupture is looking more likely, warns the Financial Times, as the “honeymoon” period between Xi and Trump – inaugurated at their Mar-a-Lago summit in April – recedes.
Xi warned Trump on the phone this week that he was irked by “negative factors” souring the Sino-US relationship. These included the US navy’s decision to sail a destroyer close to a disputed island in the South China Sea; America’s $1.4 billion arms sale to Taiwan; and sanctions Washington has imposed on a Chinese bank for dealing with North Korea.
In this context – and in spite of the relatively modest size of the Mountain Pass deal – Jiemian reckons Shenghe’s bid will face a review by CFIUS, the US Foreign Investment Committee. Indeed, even though the mine’s output is too insignificant to have an effect on rare earth supplies or prices, it’s a safe bet there will be politicians on Capitol Hill who will loudly claim a threat to national security if it falls into the hands of a Chinese miner.
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.