Talking Point

Rare opportunity

Is a ban on rare earth exports really a bargaining chip in the trade war?

Rare-Earth-w

These innocuous looking rare earth substances are vital to the global tech industry’s supply chain

The Sino-US trade conflict was predicted in 2011 by a somewhat unlikely source: Michael Scott of Dunder Mifflin. The protagonist of the American version of The Office begins an episode titled ‘China’ by picking up objects and declaring “Everything here was made in China… They used to make stuff in America. But we’re falling behind.”

Played in the TV series by Steve Carell, Scott adds: “My whole life I believed that America was number one. That was the saying. Not ‘America’s number two’… England is number two. China should be like eight.”

Warming to his theme of America’s decline, Scott then asks his staff to come up with a “big idea” to “stop it” – an idea as big as “blue jeans or the Grand Canyon”.

Viewers may have laughed but Scott seems to have hit on the same line of thinking as a certain Donald John Trump – and he did so a full seven years before the US president had his own big idea of slapping tariffs on Chinese goods.

Trump has deepened the trade war in recent weeks with a ban on US companies supplying Huawei (see WiC453). The move has been seen as an effort to hobble a tech giant that poses an increasing threat to America’s position as ‘number one’ in technology, particularly given the risks to national security that Trump and his advisors see in Huawei’s strengths in 5G networks.

Since then the Chinese have retaliated with measures of their own (see this week’s “China and the World” for more on Beijing’s new blacklist of US firms). Still on hold – for now, at least – is another response that could wreck America’s ability to make electric cars, fighter jets and much else: a ban on exports to the US of rare earths and the components like magnets and sensors that Chinese firms process them into.

Don’t say we didn’t warn you…

President Xi Jinping has refrained from public comment on the trade and tech row with the US. But he was sending an unspoken message to Washington with an inspection tour to Jiangxi province last month.

Xi made a stop in Ganzhou and laid a basket of flowers at a monument marking the starting point of the Red Army’s Long March in 1934. In comments intended to signal that his administration is prepared for a prolonged battle over a trade deal, Xi warned of a “complicated international situation” and called for the Chinese people to get prepared for a “new Long March” and “start all over again”.

Xi then dropped a big hint about how Beijing might fire back at Washington in the next round of the trade war by visiting a rare earths components factory in the same city. The Global Times picked up dutifully on the signal and warned in an editorial that the “US will rue forcing China’s hand on rare earths”. The minerals are “an ace in Beijing’s hand,” it added.

Other state-run media outlets turned up the propaganda volume, with the starkest warnings emerging from the People’s Daily a week after Xi’s inspection tour. “Will rare earths become China’s counterweapon against the unprovoked suppression by the US?” it asked. “The answer is not mysterious… We advise the US to not underestimate China’s ability to safeguard its own rights and interests, and don’t say we didn’t warn you.”

The phrase “Don’t say we didn’t warn you” has been deployed by the People’s Daily on several occasions before China went to war, CNN noted, including ahead of the 1962 border conflict with India and before the 1979 clash with Vietnam (the Global Times added the Korean War in 1950 to the list, as well as China’s border contretemps with the Soviet Union in 1969).

How rare are rare earths?

More likely than a military confrontation is a blockade of goods seen as essential to the US economy, which is why Xi picked out the rare earths factory in his recent tour. A restriction on exports would also mirror some of China’s experience under the Wassenaar Agreement (see WiC454 for more on how the US-led grouping has contained the growth of China’s semiconductor industry). According to a report by the Chinese Academy of International Trade and Economic Cooperation (a think tank under the Ministry of Commerce), more than 2,000 commodities or products made in the US are still blocked from export to China as they are deemed too militarily sensitive. The same think tank is now calling for China to draw up its own export control system for strategically important products such as rare earths.

Commentators disagree on whether the Chinese can exert a stranglehold over future supply, however. Rare earth exports consist of a group of 17 elements such as neodymium and scandium. Besides usage in the manufacturing of semiconductor chips, the metals are essential to a range of industrial products ranging from iPhones to combat aircraft (a single F-35 stealth fighter contains 920 pounds of rare earths, according to the US Congressional Research Service).

But rare earths are not actually that rare, at least not compared to precious metals like gold or silver.

Relatively abundant in various parts of the world, they typically occur in lower concentrations, which means the cost to extract them is higher, especially when the environmental impact is taken into account. These costs have generally prevented more developed countries from exploiting their own reserves, which paved the way for the Chinese to dominate global supply for much of the last 40 years. So much so that in perhaps the most quoted remark about the metals, Deng Xiaoping celebrated in 1992 that while “the Middle East has oil, China has rare earths”.

Deng was referring to the strategic value of rare earth supply (Arab countries have used restrictions on crude exports as a political weapon numerous times) and his son-in-law Wu Jianchang seemed to get the message, taking a position as head of a state-owned rare earth miner.

Wu died last year but companies that he ran bought one of the key producers of the material needed for rare earth magnets from General Motors in 2004. The purchase of Magnequench and the subsequent closure of its US manufacturing plant was part of the bid to fulfill Deng’s aim of dominating the market for the minerals, Bloomberg says.

To what extent is the US relying on Chinese rare earths today?

A range of surveys on the global rare earth industry have come to similar findings: that China owns about a third of global reserves but that it accounts for more than 70% of international supply.

More importantly, China is home to about 90% of the world’s capacity for processing rare earths into materials with industrial value, such as sensors and magnets.

According to the United States Geological Survey, American consumption of the elements reached about 10,000 tonnes of rare earth compounds and metals, amounting to a modest $160 million in sales last year, with 80% of the total coming from China.

However, the Chinese media is saying that the cost of the imports would surge if the calculations also include parts that were processed from rare earths in China. Moreover, other countries supplying similar goods to the US including Estonia (6% of global sales) and Japan (3%) derive their material concentrates from the Chinese.

The Pentagon has repeatedly flagged its concerns about American reliance on Chinese exports and it has lobbied for federal funds to bolster domestic production of the metals. In a report filed by the Defence Department to the White House – and shared with Congress – last week, it was revealed that the US imported 80% of its rare earth compounds and metals from China between 2004 and 2017.

It was joined in its warnings this week by America’s Commerce Department which pointed out the economy’s vulnerability to a Chinese rare earth ban – especially for the tech and electric vehicle sectors. “If China and Russia were to stop exports to the US for a prolonged period – similar to China’s rare earth embargo in 2010 – it could cause significant shocks throughout US and foreign critical mineral supply chains,” the department said on Wednesday.

Will rare earths be an effective weapon against Trump?

Prior to the Opium War in the mid-19th century, the imperial Qing government was never able to make its ban on the opium trade effective – especially in port cities such as Guangzhou and Hong Kong. Much more recently, the government has struggled to police bans on rare earth exports too. Back in 2010, Beijing blocked sales to Japan as part of a spat over disputed territories in the East China Sea (see WiC81). Despite the directive, the action was not as effective as Beijing hoped, in part because some Chinese mines smuggled their rare earths offshore for illicit profit.

The Japanese also responded by investing in a new supply chain outside China, contributing to a drop in the Chinese share of rare earth production from 95% of the global total in 2010 to about 70% in 2018.

Caixin reports that the government launched another crackdown on smuggling and illegal production last October in another bid to get a firmer grip on global prices. But earlier efforts to get control of the market simply weren’t successful. “Rare earths are said to be worth as much as gold for industrial manufacturers but many Chinese firms have been selling them as potatoes,” Securities Daily complained in an article back in 2015, pointing out that prices had fallen below 2010 levels. “In a way they are actually subsidising Western countries.”

Beijing may hope to have more control this time round after forcing through a consolidation in the industry since 2015 that has resulted in six state-owned groups dominating Chinese supply.

But even were China to go ahead and succeed in curtailing its rare earths exports to the US, international customers may respond by increasing their own production. The Financial Times reports that there was a flood of new mining projects launched during the row with the Japanese in 2010, because of the sudden pick-up in prices.

Reports this week suggest that most new mines take about two years to get into commercial production – though some projects are already ramping up.

Australian rare earth miner Lynas announced last month that it would be expanding into the US market by setting up a processing plant through a joint venture with Blue Line Corporation, a Texan company. It said the new facility will be the only large-scale producer of separated medium and heavy rare earths outside China.

Currently only the Mountain Pass mine in California is operational in the US, although it then ships 50,000 tonnes of minerals to China for processing and separation. That will start to change next year, when processing facilities at Mountain Pass are completed.

In the short term these new investments likely won’t suffice to cope with curtailed Chinese supply which is why some now ask why the US did not build a strategic reserve of rare earths. That was a lesson Japan drew from the 2010 embargo and it is said to have stockpiled enough of the elements to be self-sufficient in rare earths for a long period.

Some say restricting the supply of rare earth fabricated products – such as sensors – could be the most disruptive route for the Chinese to take, given the US has limited manufacturing capacity where these vital components are concerned. The bulk of these factory lines are inside China, with the goods then sold into international markets. But it’s hard to see how broad-based restrictions could be enforced without wreaking damage to the sales of those domestic producers too.

Another possibility is a more surgical attack. Analysts have suggested that that the US automotive sector would be a prime candidate.

“A more effective threat would be to restrict exports of rare earth magnets, a much larger industry that China dominates with a market share of more than 80%,” the Financial Times has suggested. “That would hamper the transition to electric cars. JL Mag, the Chinese company that Xi visited last month, is a major exporter of rare earth magnets.”

While it isn’t clear how the Chinese would maximise the impact of export controls, a decision on a ban moved a step closer this week when the National Development and Reform Commission hosted a forum on how to strengthen supervision of the sector. Afterwards the NDRC said that it would be reviewing the findings to help it wipe out illicit production and smuggling.

Investors have also become convinced that a number of the minerals could go onto export blacklists, prompting a sudden surge of buying in the spot market.

Prices of dysprosium – used in magnets, high-powered lamps and nuclear control rods – are up almost 15% since Xi’s factory tour last month. Neodymium metal, critical to the production of some magnets used in motors and turbines, is up about 30% in the same period. Prices of gadolinium oxide – used in medical imaging devices and fuel cells – are also at five-year highs, Reuters reports.


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