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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Rare Earth Metals: China’s ‘Nuclear Option’ In The Trade War

China US

A simple visit to an obscure factory by Chinese President Xi on Monday is all it took to raise the specter that China could be contemplating cutting off supply of critical materials to the U.S. and potentially crippling large swathes of its industries. Also, fueled by political innuendo in Xi’s recent call for a new “Long March” in reference to a key founding tenet of the Chinese Communist Party, speculators are growing increasingly wary of Chinese export restrictions to the U.S., including rare earth minerals.

As the world’s largest producer, the Middle Kingdom has a vice-like grip on rare earths supply.

Rare earth minerals, also known as the “vitamins of chemistry”, are a group of elements used in the manufacture of a wide range of equipment in small doses to produce powerful salutary effects. These minerals are extensively used in smartphones, batteries, turbines, lasers, electromagnetic guns, missiles, advanced weapon sensors, stealth technology and jamming technology. For instance, lanthanum is used in lighting equipment and camera lenses; neodymium in hybrid vehicles; praseodymium in aircraft engines; europium in nuclear reactors and gadolinium in MRIs and X-rays. Oil refiners also use rare earth catalysts to process crude oil into gasoline and jet fuel.

China produced more than 90 percent of the world’s supply of these critical elements over the past decade, though its share was lower at 71.42 percent last year.

In 2018, the U.S. Geological Survey identified 35 minerals critical to the country’s economy and national security. America is heavily dependent on imports of these minerals, producing less than a tenth of the world’s supplies and importing half of what it consumes. It clearly highlights the U.S.’ soft underbelly.

Not surprisingly, rare earth minerals are some of the few products that escaped Trump’s latest tariffs.

(Click to enlarge)

Source: TRT World

What’s the big deal?

President Trump’s executive order that last week banned Huawei, China’s largest tech company, from doing business with U.S. companies might be the final straw that forces the Asian nation into sterner action (though Huawei did get a stay of execution for 90 days).

Related: China Set To Defy U.S. Sanctions On Iran Once again, Beijing has been dealt a strong geopolitical hand and it’s probably going to weigh the weapons in its arsenal that it can use to hit back—and rare earths are some of the most powerful. As usual, Beijing has maintained a deafening silence on the matter, letting its animated states media do most of the talking:

It is normal that the top leader investigates relevant industrial policies. I hope everyone can interpret it correctly.”

Meanwhile, the Global Times has gloated, “U.S.’ need of rare earths is an ace on Beijing’s hand”.

At this point it’s still merely speculation, but supposing the worst actually happened and Beijing went for the so-called “nuclear option”?

In the short-term, things would get pretty murky for hordes of U.S. industries.

As cited by Reuters, Ryan Castilloux, founding director of strategic metals consultancy at Adamas Intelligence, says that autos, renewable energy, defense, and technology would all suffer. There are no hard figures available yet for the extent of economic damage, but the consensus seems to be that if China turns off the tap of critical materials it would directly affect large chunks of the U.S. economy.

It would essentially be like dialing the tech industry a few decades back.

It’s only natural to wonder why the United States has left itself exposed this way.

Related: OPEC Is Facing An Existential Crisis

Actually, the country was the biggest producer of rare earths from the 1960s to the 1980s at its Mountain Pass mine in California. The processing plant was shut down on environmental concerns in 1998 and the entire site was mothballed in 2002 to keep in toxic wastewater. In short, the country’s position has been: rare earths mining is a costly, messy, and dangerous affair; why not let someone else do it?

To make matters even worse, the U.S. mine still relies heavily on Chinese firms for processing--again due to environmental concerns.

(Click to enlarge)


Source: The Verge

An ace in Beijing’s hand?

Not everybody is on the same page, though, with some experts unconvinced that the chilling scenario described here would necessarily unfold that way.

Tim Worstall, a former rare earths trader, told the Verge that a China embargo would only lead to temporary pain for the United States, which it would be able to solve before too long. Critical operations like military and defense likely have more than enough stockpiles to outlast such a ban.

It turns out that not all rare earths are that rare, with USGS (United States Geological Survey) classifying 17 of those elements as “moderately abundant” with significant deposits in the United States, Canada, Brazil, India, and Australia. The major problem for the U.S. would not be lack of those resources per se, but how quickly it can ramp up production at its existing facility—and possibly scale up.

Eugene Gholz, an associate professor the University of Notre Dame and a rare earth expert, also told the Verge that a similar spat between China and Japan offers valuable lessons. In 2010, China cut off exports of rare earths to Japan, yet the island nation was none the worse for wear. That’s because prices skyrocketed, thus encouraging Chinese smugglers to devise schemes to deliver the goods off the books. Meanwhile, production in other regions rapidly ramped up while Japanese manufacturers worked out ways and means of using less of the materials.

That might have been nearly a decade ago, yet the U.S. would probably fare even better given the even larger scale of economic integration across the globe.

By Alex Kimani for Oilprice.com

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  • Mamdouh Salameh on May 26 2019 said:
    President Trump and his advisers are well advised to study and also heed the mantras of Deng Xiaoping, the inspirational architect of contemporary China and is thus among the towering figures of the twentieth century. His mantras about the peaceful rise of China are:

    “China should “observe developments soberly, maintain our position, meet challenges calmly, hide our capabilities and bide our time, remain free of ambition, never claim leadership. China should not attempt to be a hegemon, it should never practice power politics and it should never pose a threat to its neighbours or to world peace”.

    By deciphering the meaning of Deng Xiaoping’s mantras, President Trump and his advisers may learn not to overestimate the United States power vis-à-vis China. They may also learn that China will never kowtow to the United States, that it is biding its time and sharpening its claws and that Washington’s current unipolar order will soon be a thing of the past.

    If President Trump derives any lessons for Deng’s mantra, he should then stop his trade war against China and try to reach an accommodation for the benefit of the global economy and also the economies of the United States and China.

    If, however, he continues escalating the trade war and tries to push China into a corner, he will find that China has very powerful weapons in its arsenal capable of inflicting real harm on the US economy and the dollar.

    Some of these weapons have been described as China's nuclear options. The first is for China to retaliate by offloading its holdings of US Treasury bills estimated at $1.3 trillion. That will immediately cause a steep devaluation of the dollar thus leading to a serious exacerbation of both the US budget and US outstanding debts.

    The other weapon is for China to impose an embargo on the supply of rare earth minerals to the United States. That could potentially cripple large swathes of US industry from smartphones, turbines, lasers, missiles, advanced weapon sensors, stealth technology and jamming technology to name but a few. By the time the United States finds alternative supplies, the damage would have been done.

    China gave two hints that if the trade war escalates further, it will resort to the nuclear options. The first hint is when Chinese President Xi visited on Monday an obscure factory of rare earth minerals.

    The other is when he likened China’s determination to face down the United States in the trade war to the Red Army’s Long March which ended in the victory of the communists in China. What President Xi was telling President Trump is that China will never capitulate no matter how long the trade war takes.

    Eventually President Trump will have to back down and end the trade war with China because the war is already costing the US economy far more than China’s. China’s economy is 28% bigger and far more integrated in the global trade system than the United States thus being able to withstand the strains of the war far more than the United States’.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Jeff Lawrence on May 26 2019 said:
    The USGS estimates are very, very conservative. Most "rare" earth minerals (REMs) are incredibly abundant around the world. The principal reason why so much rare earth processing is performed in China is that environmental regulations make it costly to process REMs in other nations. A temporary regulatory waiver and/or moving the processing to another nation with "lax" regulations, would overcome any China embargo. It would initially be costly to ramp up production. However, that is very different to saying the world would have no rare earth mineral supply. This is not like LNG where your greatest challenge is locating sufficiently large reserves (large relative to the cost of commercialization). Long way of saying that China withholding global REM supply would be relatively painless for customers after a transition period and it would harm both China's short term and long term interests in REMs but also exports more generally. China wants leverage in a trade war but not at any cost.
  • Will Smith on May 27 2019 said:
    This article points out a factor that is very relevant to the US-China brewing trade war. Marketplaces typically can address issues like this from other suppliers. It is simplest to see in the oil market when other providers, sometimes at higher costs, step in to fulfill the demand. The US has large untapped rare earth deposits which have not been exploited because of the higher costs due to US environmental regulations. So when evaluating trade sanctions keep in mind that the marketplace will typically do its best to meet demand even if the production and end product ends up being a bit more expensive.

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