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Rare earths: Beijing threatens a new front in the trade war

The Financial Times logo The Financial Times 04/06/2019 Lucy Hornby in Beijing and Henry Sanderson in London
In this photo taken on May 27, 2019, a Huawei logo is displayed at a retail store in Beijing. - China is digging in for a tough period of deteriorating ties with the United States, fanning the flames of patriotism with Korean War films, a viral song on the trade war, and editorials lambasting Washington. (Photo by FRED DUFOUR / AFP)        (Photo credit should read FRED DUFOUR/AFP/Getty Images) © Catalyst Images In this photo taken on May 27, 2019, a Huawei logo is displayed at a retail store in Beijing. - China is digging in for a tough period of deteriorating ties with the United States, fanning the flames of patriotism with Korean War films, a viral song on the trade war, and editorials lambasting Washington. (Photo by FRED DUFOUR / AFP) (Photo credit should read FRED DUFOUR/AFP/Getty Images)

Nine years ago, Ian Higgins’ company in the north-west of England was jolted by bad news from Volkswagen. Prices for rare earths were rising, so Europe’s largest carmaker warned it was planning to discontinue use of all rare earth alloys in its magnets.

Mr Higgins braced for other clients to take a similar step, threatening his metal alloy maker Less Common Metals if the car industry moved away from the technology. Instead, to his relief, the scare died down.

Until this month. Rare earths — a group of 17 obscure minerals that are embedded in our digital lives — have been thrust into the centre of the US-China trade war following warnings by Beijing that it could cut off supply. Just as in 2010, when the price rise accompanied a dispute between China and Japan, Mr Higgins is again facing disruption to the supply of raw materials.

During the past month, the trade tensions between the US and China have been raised to a new level. The US decision to in effect ban Chinese telecoms company Huawei from the US market is not just a short-term blow to China’s exports but could also hamper its long-term efforts to boost innovation. Beijing is looking for ways to retaliate in kind and believes that rare earths could be an important strategic weapon.

A boy looks at models of cars at a museum in Beijing on June 1, 2019. - China's manufacturing activity contracted more than expected in May, official data showed on May 31, amid a bruising trade war with the United States and slowing domestic demand. (Photo by WANG ZHAO / AFP)        (Photo credit should read WANG ZHAO/AFP/Getty Images) © Catalyst Images A boy looks at models of cars at a museum in Beijing on June 1, 2019. - China's manufacturing activity contracted more than expected in May, official data showed on May 31, amid a bruising trade war with the United States and slowing domestic demand. (Photo by WANG ZHAO / AFP) (Photo credit should read WANG ZHAO/AFP/Getty Images)

On May 21, Xi Jinping visited a rare earths magnet-maker in Ganzhou, southeastern Jiangxi province, rattling global markets. The president’s talk of self-sufficiency reopened a furious debate about China’s dominance over a supply chain crucial to the military and high-tech industries.

“If you do get prices spiking again for a second time the fundamental question is how much damage it could do to the rare earth magnet industry,” says Mr Higgins. The magnets used in electric vehicles are almost all reliant on rare earths mined in China. Prices for neodymium and praseodymium, the two main rare earths used in magnets, have risen from about $32 per kilogramme in early May to about $42/kg, according to UBS. In 2011, prices rose to over $160/kg.

Rare earths — the 15 lanthanide elements on the periodic table, plus two other related elements, scandium and yttrium — are an integral part of modern life. Used in smartphones, lasers, instrument panels, wind turbines and MRI machines, they are incorporated so far up the manufacturing chain that most consumers are not aware of them. They will become even more important as new technologies take root. Over 90 per cent of hybrid and electric cars use rare earth-based magnets in their motors.

China accounts for almost 80 per cent of the global mined supply of rare earths, thanks to especially rich deposits and a high tolerance for the toxic and sometimes even radioactive process of mining and extracting. It enjoys an even higher share of the manufacturing of powerful rare earth magnets.

Mr Xi’s visit, which came five days after the Huawei announcement, was an unmistakable reminder that if the rest of the world threatens China, China can punch back.

A few days later, China’s powerful state planning body threatened to use rare earth exports as leverage in the trade war with the US. “Will rare earths become China’s counter-weapon against the US’s unwarranted suppression?” the National Development and Reform Commission wrote.

WASHINGTON, DC - MAY 23: U.S. President Donald Trump delivers remarks in support of farmers and ranchers in the Roosevelt Room at the White House May 23, 2019 in Washington, DC. As the U.S.-China trade war continues to hurt American farmers with tariffs on everything from peanut butter to soybeans and orange juice, the federal government announced Thursday it will give an additional $16 billion bailout to those most affected. (Photo by Chip Somodevilla/Getty Images) © Catalyst Images WASHINGTON, DC - MAY 23: U.S. President Donald Trump delivers remarks in support of farmers and ranchers in the Roosevelt Room at the White House May 23, 2019 in Washington, DC. As the U.S.-China trade war continues to hurt American farmers with tariffs on everything from peanut butter to soybeans and orange juice, the federal government announced Thursday it will give an additional $16 billion bailout to those most affected. (Photo by Chip Somodevilla/Getty Images)

Rare metals and their uses

ELECTRIC CARS

Powerful rare earths such as neodymium, terbium and dysprosium are used as magnets in electric vehicle motors. Hybrid car batteries also use the rare earth lanthanum.

MRI SCANNERS

Magnetic resonance imaging scanners use rare earth gadolinium in contrast agents to improve image quality. If supply were interrupted that would disrupt the medical industry.

IPHONES

Apple’s iPhones contain rare earth elements in the speaker, taptic engine and camera. Apple says recycled supply of rare earths is not “widely available”.

NIGHT VISION GOGGLES

Lanthanum is used in night-vision devices used by the US military

Sources: Toyota, Apple, Bank of America Merrill Lynch

The People’s Daily weighed in with a phrase that presaged the India-China war of 1962 and a short war with Vietnam in 1979. “Don’t say you were not warned,” it wrote.

“I think this is an attempt by China to cause second thoughts in Washington in hopes of moderating what has become a very aggressive US position towards China on all fronts,” says John Seaman, research fellow at the Institut Français des Relations Internationales in Paris.

MIAMI, FLORIDA - MAY 28: (L-R) Hengshan Hao and Dengyumei Du, originally from China, visit the Little Havana neighborhood on May 28, 2019 in Miami, Florida. The National Travel and Tourism Office reported that travel from China to the U.S. fell 5.7% in 2018 to 2.9 million visitors. It was the first time since 2003 that Chinese travel to the U.S. went down from the prior year. The trade war between the two countries is being pointed to as one of the possible reasons for the slowdown in tourism. (Photo by Joe Raedle/Getty Images) © Catalyst Images MIAMI, FLORIDA - MAY 28: (L-R) Hengshan Hao and Dengyumei Du, originally from China, visit the Little Havana neighborhood on May 28, 2019 in Miami, Florida. The National Travel and Tourism Office reported that travel from China to the U.S. fell 5.7% in 2018 to 2.9 million visitors. It was the first time since 2003 that Chinese travel to the U.S. went down from the prior year. The trade war between the two countries is being pointed to as one of the possible reasons for the slowdown in tourism. (Photo by Joe Raedle/Getty Images)

Long before rare earths became a cottage industry for security strategists, former Chinese leader Deng Xiaoping saw them as a way to earn export dollars. “The Middle East has oil, China has rare earths,” he noted during a 1987 tour of Baotou, Inner Mongolia, site of one of the country’s two large deposits.

During the following decade China overtook the US as the largest producer of rare earths, although at a heavy environmental cost. It was a “race to the bottom”, according to Julie Michelle Klinger, assistant professor of international relations at Boston University, with low environmental oversight allowing China to export at the cheapest prices. A toxic lake grew in Baotou, while the cost of cleaning the soil and water in Ganzhou runs to billions of dollars.

Cheap and dirty, rare earths were not on the radar of anyone outside the industry until a provocative 2006 proposal published in China suggested restricting exports of rare earths to Japan on national security grounds. The author touted the environmental benefits of curbs on mining, as well as the idea of luring processing technology to the country to take advantage of China’s lower costs. Soon after, Beijing imposed annual quotas on rare earth exports.

A few years later the global financial crisis caused demand for rare earths to plummet. Seeing that 2009 export quotas had not been fully used, state planners cut quotas for the second half of 2010. When demand started to recover after the crisis, exporters with full order books were unable to secure quotas. Prices rose, just as sparring between China and Japan over the East China Sea came to a head in September 2010. International media reported that China had cut off supply to Japan. 

People walk past Huawei advertising at Shenzhen-Bao'an international airport in Shenzhen, China's Guangdong province on May 30, 2019. - China on May 30 accused the United States of repeatedly lying about the effects of the trade war on its economy as Beijing prepares to hike tariffs on American goods ranging from wine to pianos and condoms. (Photo by HECTOR RETAMAL / AFP)        (Photo credit should read HECTOR RETAMAL/AFP/Getty Images) © Catalyst Images People walk past Huawei advertising at Shenzhen-Bao'an international airport in Shenzhen, China's Guangdong province on May 30, 2019. - China on May 30 accused the United States of repeatedly lying about the effects of the trade war on its economy as Beijing prepares to hike tariffs on American goods ranging from wine to pianos and condoms. (Photo by HECTOR RETAMAL / AFP) (Photo credit should read HECTOR RETAMAL/AFP/Getty Images) The customs data from both Beijing and Tokyo provided little evidence that there was any actual restriction on the supply of rare earths to Japan. But the mere suggestion of an interruption, combined with the price rise, had a profound impact on the way government and industry thought about rare earths. Countries suddenly became aware that China had the ability to use its market dominance as a bargaining chip.

Mindful of its vulnerability, Japan poured money into finding substitutes. Last year Toyota announced new magnet technologies that would “significantly reduce” the proportion of neodymium, a rare earth used in magnets for electric and hybrid vehicles, needed to make its electric motors.

Although companies like Mr Higgins’ in Cheshire were saved once the crisis subsided, the US defence department also took notice. Rare earths are used in lasers, radar, sonar, night vision systems, missile guidance, jet engines and alloys for armoured vehicles. Last September, a Pentagon report claimed that China had “strategically flooded the global market with rare earths at subsidised prices”.

“China’s domination of the rare earth element market illustrates the potentially dangerous interaction between Chinese economic aggression guided by its strategic industrial policies and vulnerabilities and gaps in America’s manufacturing and defence industrial base,” it added.

A man pushes his shopping cart past bread for sale at a Walmart Supercenter store in Rosemead, California on May 23, 2019. - Walmart has said it will raise prices as a result of the Trump administration's tariffs on Chinese-made goods as the trade war is about to take a bite into the retail sector affecting consumers shopping at stores like Walmart, Target and Macy's. (Photo by Frederic J. BROWN / AFP)        (Photo credit should read FREDERIC J. BROWN/AFP/Getty Images) © Catalyst Images A man pushes his shopping cart past bread for sale at a Walmart Supercenter store in Rosemead, California on May 23, 2019. - Walmart has said it will raise prices as a result of the Trump administration's tariffs on Chinese-made goods as the trade war is about to take a bite into the retail sector affecting consumers shopping at stores like Walmart, Target and Macy's. (Photo by Frederic J. BROWN / AFP) (Photo credit should read FREDERIC J. BROWN/AFP/Getty Images)

The tussle over rare earths is more complicated in 2019 than it was in 2010, but just as emotional. Back then, it revolved around minerals and oxides supply to Japan. This time, tensions with the US play out over longer and much more complex supply chains.

“It would be difficult to make it hit just the US,” Yujia He, of Hong Kong University of Science and Technology’s Institute for Emerging Market Studies, says of any eventual Chinese restrictions on exports.

To begin with, the US imports very little rare earths directly from China: the total value was about $160m in 2018, mostly for the oil and gas industry. Export restrictions would directly impact Japan and other Asian countries, which Beijing is not trying to antagonise.

China will meet “the legitimate needs” of other countries, commerce ministry spokesman Gao Feng said last week. It just would not countenance its own rare earths supply being used “to crack down on China’s development”.

David Abraham, a senior fellow at the New America think-tank in Washington and author of a book on rare earths, believes that Beijing is trying to ensure “that no rare earth material should end up in the US military supply line”.

In his view, “some kind of complicated vague requirement” to ensure that their products do not end up in US military equipment “would be impossible to certify and [would] introduce uncertainty in supply lines”.

Such a mechanism would be difficult to operate. The amount of rare earths used in metal alloys is too small to be easily tracked. Exports of lanthanum oxides and carbonates are destined for a wide range of products, including medicine to treat kidney disease, which makes it hard to filter out exports that end up in military applications.

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 per cent. That would hamper the transition to electric cars. US and possibly European carmakers would be forced to buy from Japan, which would rapidly push up prices. Analysts note that JLMag, the Chinese company that Mr Xi visited last month, is a major exporter of rare earth magnets.

“If these bans do move further downstream that would impact the US electric vehicle manufacturing industry or act as a barrier to that industry forming in the US,” says David Merriman, an EV analyst at Roskill in London.

Related: US-China trade war - a timeline [Photo Services]

Disruptions in Chinese rare earth supply would, however, stoke concerns in Europe and Japan that the country is not a reliable supplier. That would hasten moves already under way to reduce reliance on Chinese supply — just as it did last time.

Already, rare earths mining is diversifying. Last year China became a net importer of rare earths, as it looked to other countries to provide raw materials, while it prioritised emerging high-tech industries such as rare earth magnets and electric motors.

“Do they really want to weaponise it?” asks Will Smith, founder of Westbeck Capital Management in London, which invests in the raw materials needed by the electric car industry. “If there was a bigger and more secure supply of these things then the use of permanent magnets would be higher. The last time China limited supply it was to their detriment, the demand evaporated.”

During the 2010 scare, prices for rare earths rocketed as much as tenfold, prompting a global flood of new mining projects. At one point there were over 100 listed rare earth companies, each claiming to be the answer to Chinese dominance, says Mr Smith. “I didn’t expect that only one would survive.”

But one did: Australian-listed Lynas, which owns the Mount Weld mine in Western Australia as well as a processing facility in Malaysia. Its shares have risen by more than 90 per cent this year as a result of the trade tensions, and it made a profit for the first time last year. Its survival has been contingent on support from magnet makers in Japan.

Related: Europe 'suffering most' in US-China trade war [Sky News]

UP NEXT
UP NEXT

“The US never looked at it in that same strategic way that the Japanese did and were reluctant to get involved in a single company,” says Mr Merriman.

China’s threats may finally push the US to revive its own rare earth industry. Last month Lynas announced it would build a rare earths processing plant in Texas, with Blue Line Corporation. The US’s only rare earths mine, the Mountain Pass mine, expects to start a processing facility next year.

Mr Xi must balance the need to present the US with credible consequences for the trade war against the need to maintain the trust of the magnets and motors market.

“If rare earths were completely cut off it would definitely damage the Chinese market as well,” Mr Merriman says. “But don’t rule out China slightly damaging itself to push the bigger national strategic picture. They can use this bargaining chip to impact decisions on a more macro scale.”

Additional reporting by Archie Zhang in Beijing

Mountain Pass: new mine owner targets ‘transformation’ in supply

High up in the mountains of California on the border with Nevada, the US’s only rare earth mine encapsulates the twin histories of the US and China over the past 70 years.

Discovered in 1949 amid a hunt for uranium to supply the American nuclear arsenal, the Mountain Pass mine produced the bulk of the world’s rare earths after 1960. But Chinese material hit the market in the 1980s.

Edward Nixon, president Richard Nixon’s brother, sold rare earth magnet technology to China. So did Archibald Cox, then chief executive of rare earth magnet maker Magnequench, who went on to become chairman of Barclays Americas in 2008.

In 1998, regulators found that radioactive wastewater had spilled into the desert from the mine. Facing fines for environmental violations and price pressure from China, Mountain Pass halted processing operations in 2002, Julie Michelle Klinger wrote in her book Rare Earth Frontiers .

Chevron sold the mine to Molycorp in 2008. After an initial public offering in 2010 at the height of the hype over rare earths, Molycorp reached a market capitalisation of more than $5bn in 2011. By June 2015, it was bankrupt. Hedge funds JHL Capital and QVT Capital teamed up with Shanghai-listed Shenghe Resources to buy the mine for $20.5m in 2017. It restarted last year. “We’re in the beginning of a decade-long transformation. We’re going to see a lot of the supply chain come back to the US,” says James Litinsky, co-chairman of mine operator MP Materials. Plans are afoot to restart processing capacity next year.

For the moment, though, a reopened Mountain Pass has not provided any independence of supply. Without processing capacity of its own, it must export its rare earth concentrate to China.

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