China to restrict exports of rare earths to U.S. if needed in trade war

by Ike Obudulu Last updated on June 5th, 2019,

Beijing will firmly defend its national interest, and can’t accept its own rare earths supply being used “to crack down on China’s development,” commerce ministry spokesman Gao Feng said at a briefing on Thursday, adding that the nation is willing to meet “the legitimate needs” of the rest of the world.

Beijing has readied a plan to restrict exports of rare earths to the U.S. if needed, as both sides in the trade war dig in for a protracted dispute.

The government has reportedly prepared the steps it will take to use its stranglehold on the critical minerals in a targeted way to hurt the U.S. economy, the people said. The measures would likely focus on heavy rare earths, a sub-group of the materials where the U.S. is particularly reliant on China. The plan can be implemented as soon as the government decides to go ahead, they said, without giving further details.

The development follows a flurry of threats this week from state media and officials, highlighting the potential use of the strategic minerals as a trade weapon. China produces about 80% of the world’s rare earths, and an even higher proportion of the elements in their processed forms.

The National Development & Reform Commission, China’s top economic planner, didn’t immediately respond to requests for comment on the plan.

Shares in rare earths companies rallied on Friday, with mainland-listed China Northern Rare Earth Group High-Tech Co. rising as much as 5.9% to the highest level in a year, while China Minmetals Rare Earth Co.’s stock gained as much as 4.4%. In Sydney, stock in Lynas Corp. took gains this month to 51%.

Heavy rare earths include dysprosium, used in magnets commonplace in almost all cars and many consumer goods. The group also has yttrium, used in lighting and flat screens, as well as ytterbium, which has applications in cancer treatments and earthquake monitoring.

Any action on rare earths would deepen a confrontation that’s roiling markets and damaging global growth. The effect of any restrictions would be significant, and clearly signal that trade tensions are escalating, according to a research note from Goldman Sachs Group Inc.

The elements are also in weaponry, amid a host of applications key to U.S. supply chains. Rare earths are divided into two main categories, heavy and light, corresponding to atomic weight. Heavy rare earths are less common, and important for lasers, sonar and strengthening steel, among other uses.

For heavy rare earths, “China definitely dominates supplies, and if China abandons those exports, I don’t think the U.S. can find alternatives,” SMM’s Hu said. Dysprosium may be one of the more critical elements because of its use in permanent magnets, he said.

It isn’t clear what conditions would need to be met to trigger the restrictions, nor precisely how the curbs would be imposed, according to the people familiar with the plan. Separately, the government is taking account of how the U.S. might object to the measures at the World Trade Organization, they said.

A blockade on the supply of rare earth magnets could have a devastating impact across swathes of the U.S. economy, according to Technology Metals Research LLC. China produces 95% of the world’s output.

All the talk of China’s grip on rare earth minerals is starting to resemble 2010: Beijing’s threats to weaponize its stronghold on these 17 metals, the global panic over a potential shortage, even the soul searching about how we got here in the first place.

Beijing’s target back then wasn’t the U.S. but Japan. Caught in a political tussle over disputed islands in the East China Sea, China cut off rare earth exports in retaliation, sending prices soaring. Japan vowed to become more independent, offering developmental loans to Australian mining giant Lynas Corporation as it built out its supply chains outside of China.

That cooperation shaved 10% off of China’s global market share.

But their American counterparts have done little to move the needle, with 80% of the country’s rare earth supply imported from China, according to USGS figures.

U.S. Government involvement

In December 2017, President Trump signed an executive order to begin the process of reducing U.S. reliance on China for critical materials, directing agencies to find new sources of output and streamline the leasing and permitting process.

In a sign of mounting concerns about China’s grip on the sector, a Pentagon spokesman said this week, the Defense Department had submitted a rare earth mineral report to Congress, seeking federal funds to boost onshore production.

The 17 metals are crucial for use in everything from jets to satellites.

Air Force Lieutenant Colonel Mike Andrews said the request was included in a Defense Production Act III rare earths minerals report, as part of a program that gives the president “broad authority to ensure the timely availability of essential domestic industrial resources to support national defense and homeland security requirements through the use of highly tailored economic incentives.”

Africa holds promise of rare earth riches

Vital for so many modern technologies, rare earths remain among the most sought-after minerals on the planet. It was recently suggested at the American Association for the Advancement of Science that the sea beds should be mined for them.

Currently, global demand is met largely by China. However, the fact that Rainbow Rare Earths, which owns a project in Burundi, successfully listed on the London Stock Exchange has prompted speculation that China’s dominance may finally be challenged. Such talk may be premature but it does suggest that now is a good time to assess the current state of play in the market.

China clearly continues to dominate global production. The latest available statistics (for 2015, from the US Geological Survey) give its annual production as slightly more than 100,000 tons. Australia, second in the list, trails with 10,000 tons. Only three other countries produce more that 1,000 tons a year (the US, Russia and Thailand with 4,100 tons, 2,500 tons and 1,100 tons, respectively). Africa currently figures nowhere.

Despite China’s dominance of production, the same is not true of deposits. It is estimated that China has no more than 30 per cent of global deposits. The problem lies in the cost of bringing new deposits into production and the ability of one country with such a dominant position to flood the market and bring down prices, hitting the viability of new projects.

As well as price challenges, new projects face environmental hurdles. Projects in China have resulted in contaminated groundwater, radioactive tailings and other environmental issues.

In the 1990s, the US supplied its domestic demand for rare earths from its own production. But that ceased when low-cost minerals from China entered the market. It is speculated that China continues to stockpile rare earths, maintaining to some extent its ability to control global prices.

Mounting a challenge to Chinese dominance has been talked of for years. Several current macro trends are now likely to accelerate such a challenge. Demand for rare earths is set to increase significantly.

Historically, their major use has been in components for the telecoms, computer and other electronics industries (they are particularly important in making high-performance magnets). A growing need for enhanced battery technologies will boost demand. A rise in protectionism suggests new strategic imperatives for countries such as the US and Russia to recommence or increase domestic production.

It is widely acknowledged that, outside North America and Australia, southern and eastern Africa offer the greatest potential for rare earth production, especially in South Africa, Tanzania, Malawi and Mozambique. Kenya, Burundi, Zambia and Namibia are also mentioned.

Rainbow Rare Earths’ IPO is premised on its Gakara project in Burundi. The project is not yet producing and further exploration will be needed. The risks described in the IPO prospectus are a reminder of the difficulties of developing such projects, including pricing and environmental challenges and the need to produce ore at the required levels of concentration.

Rainbow raised ₤8m at its IPO, at the top end of its target range. It has clearly generated interest in the rare earth industry. However, by itself the project is unlikely to make a large dent in the overall global supply position. That will require bringing many more projects into production in the near to medium term. With the Lynas project in Australia being the only significant producer outside China there is a long way to go before Chinese domination is diluted. Clearly, though, African projects can make a significant contribution to correcting the imbalance.

Image: Bayan Obo mine in China containing rare earth minerals

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