Can rare earths really be China's weapon as trade war worsens?

Mark O'Neill June 13, 2019 09:00

As the economic war with the United States intensifies, policy makers in Beijing are looking at what weapons in their arsenal they can use.

In most sectors of high technology, Washington holds the trump cards. But there is one commodity where Beijing could hurt US industry badly – rare earth products. The materials are widely used in manufacturing and industrial applications ranging from satellites and missiles to electric cars, nuclear plants, flat-screen televisions, camera lenses and smartphones.

China has 37 percent of total global deposits of rare metals – a group of metallic chemical elements – and more than 90 percent of global production. This dominance is a result of years of industrial policy, including export quotas and investment incentives that enticed the processing industry to move to China from its original base in Japan.

Other countries stopped mining rare earths because of the toxic waste and severe environmental degradation necessary to produce them. In 2015, Mountain Pass mine in California, then the sole miner in the US stopped production after an environmental disaster.

China accounts for 80 percent of US imports of these products, many used by the defense industry.

"China could shut down nearly every automobile, computer, smartphone and aircraft assembly line outside of China if they chose to embargo these materials," James Kennedy, president of ThREE Consulting, wrote in May in National Defense, a US industry publication.

In January 2018, Mountain Pass resumed mining, after a buyout by a company called MP Materials. It employs 175 people directly and ships 50,000 tons of rare earth concentrate each year to China. “We are it,” its co-chairman James Litinsky told CNBC late last month. “If we cannot be economic, there is no hope for the US industry. There’s no refining capacity in the world outside of China.”

MP Materials said that, because of the trade war, it would resume processing the metals in 2020. “Our self-sufficiency will serve as a foundation for an American-based rare earths industry,” Litinsky said.

“We’ve had a number of discussions with people in government and we believe they are certainly receptive to us. There’s a strong bipartisan view that creating an American rare earths industry is of utmost importance.”

An editorial in the China Daily on May 30 threatened a ban on exports of rare earth products.

“Some may brush aside China’s warning as having no substance as there are plenty of other sources of rare earth minerals. But the production processing is heavily polluting and setting up the requisite metallurgical capabilities would take time. Chinese officials have a ‘tool box’ large enough to fix any problem that may arise as trade tensions escalate and are ready to fight back at any cost. A fierce battle has already been imposed on China. Any countermeasures that China can take to safeguard its national interests are necessary and justified,” it said.

But China must use its weapon carefully. The US is busy looking for new suppliers at home and abroad.

In 2108, the United States Geological Survey estimated that there were 120 million ton of deposits worldwide, including 44 million in China and 22 million in both Brazil and Vietnam.

As of September 2016, the Defense Logistics Agency of the US Defense Department held stocks of many critical minerals worth US$1.15 billion. “We are looking for any source of supply outside China. We want diversity. We do not want a single-source producer,” said Jason Nie at engineer with the Agency. It has held talks with suppliers in Malawi and Burundi and offered to introduce financial institutions to potential producers at home.

There is the Round Top deposit in the west of Texas and Rare Element Resources in Wyoming – but they will take several years to start processing the metals, in part because of the strict environmental regulations in place in the US

Another complication is that Europe and Japan are also major buyers of Chinese rare earth products.

Beijing has tried restrictions before. In 2009, it imposed export quotas on rare earths. In 2012, the US challenged these at the World Trade Organization and was later joined by the EU, Japan and other governments. Beijing quietly dropped the quotas at the end of 2014.

The risk of an export ban to the US this time is that Washington and other governments around the world would see China as an unreliable supplier. They would invest the money necessary to increase mining and processing at home and in other countries, to prevent China getting its current dominant position ever again.

So it would be smarter for Beijing to leave things as they are and maintain its comparative advantage.

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Mark O'Neill

A Hong Kong-based writer, teacher and speaker.