Rare earths are no weapon in a trade war

May 24, 2019 11:10
Neodymium mined in Baotou, China. The country dominates global production of rare earths. Photo: Bloomberg

Rare earth reserves are not a trade war game-changer. Here's why:

1. There are abundant reserves. The US has several years of its annual consumption in domestic reserves and can also use alternative sources.

2. Most of the companies involved in rare earth mining are either generating no returns, or returns well below the cost of capital or are loss-making.

China would suffer in unemployment and corporate financial challenges if it stops selling to the US. Like many other mining industries, many rare earth miners work on a “running to stand still” strategy, where they need to increase sales and production or attract funding in order to recover working capital losses or fund exploration. Banning exports would be extremely negative. Even if prices rise, who do they sell to? And how will the firms fund themselves?

3. China would be perceived as an unreliable partner in various sectors, and the development of alternative sources would accelerate.

Like OPEC’s threats and production, where cuts have accelerated technology substitution and alternatives like shale, as well as increased efficiency. Threatening customers when you are a commodity provider is a very bad idea.

4. Many producers of rare earth materials are Chinese but mines are not based in China.

In order to survive, many will look at an alternative way to export in order to generate cash.

The last thing a commodity producer should do is to look at its biggest supplier and try to hurt it. It always backfires. The history of copper, aluminum, oil, coal, and so many other commodities is filled with such misguided actions, and they always backfired.

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PhD Economist and Fund Manager