Rare earths are a group of 17 chemical elements found in the Earth’s crust and listed in the periodic table you may recall seeing in a science class from your school days.
These elements are all metals and have a variety of uses. They are used in multiple devices and products across the defence, energy, technology and automobile sectors. Demand for them, as you might imagine, has increased dramatically. For example, rare earths are used in electric vehicle batteries and batteries in mobile phones.
Ironically, rare earths, despite their name, are not that rare. The real problem is they are found in low concentration pockets. This makes them unprofitable to mine except in a limited number of cases.
The world’s largest producer of rare earths is China. They dominate global supply with six centrally controlled mining companies producing output in line with annual quotas. According to Bloomberg, China plans to cap domestic output below 140,000 tons by 2020, slightly higher than the 120,000-ton quota applied in 2018. However, with demand for rare earths rising this adds pressure on pricing with China simultaneously cutting back on smelting and separation capacity by a third.
Why does any of this matter? Well for a start the US relies on China for an estimated 80% of its rare earth materials. Given the recent trade spat between the US and China the Chinese authorities could restrict foreign access to rare earths. But will they?
Rare earths, like any commodity, are subject to the laws of supply and demand. Growth in demand rose dramatically in the 1990’s and 2000’s which made rare earth consumers very aware of the vulnerability of supply. Back then it stimulated increased exploration by mining companies outside China. It also made manufacturers reassess their use of rare earths and to look at innovation to avoid using rare earths. However, this did not stop prices from rising, dramatically.
Beijing will have to consider the strategic and long-term merits of using rare earths as a weapon to retaliate against increased tariffs. If the supply of the commodities becomes restricted this will push up prices in the short-term hurting innovation and in areas where, technologically, China wants demand to increase.
An increase in price would allow production to be revived in places outside China where the costs of production had started to outweigh sale proceeds. This would bring supply levels back and offer the US access and destroy the monopolistic position China has built over 30 years. This is not fantasy as demonstrated by shale oil rapidly changing the dynamics of global oil markets in a relatively short period of time due to enhanced recovery techniques.
A second issue that could arise is the fact that China is a commodity importer itself. If rare earths become a political weapon then billions of dollars of crude oil, gas, iron ore, soya beans and other commodities that China imports could highlight some of its own commodity related vulnerabilities.
Tensions between the US and China have become increasingly heated. Donald Trump complained about China even before he took office in 2016 and addressing the issues is a hallmark of his presidency.
At the heart of the issues, Trump felt that the size of the trade deficit (the value by which imports exceeds exports) the US had been running against China was too large, and that other trade practises had been unfair such as forced technology transfer and intellectual property theft. Trump had signalled a willingness to take action through a series of tweets as below:
Source: Twitter, April 2018
As regards the trade war, the US increased its tariff rate to 25% on Chinese imports. This applies to $250bn of products exported by China to the US. China retaliated by taxing US products, but for a lower value of $110bn of imports from the US. China is close to full capacity on the tariffs it can impose which according to Trump gives the US the upper hand. However, China may look at alternative ways to apply pressure hence the threat to restrict access to rare earths. We will advise what happens next after the G20 meeting of world leaders at the end of this month when trade and other issues will be discussed.
Source: United States Census Bureau, March 2019