Trade war will hasten bull market for rare earths

When the Canadian prime minister or US president visits an auto plant, people are reassured that the government understands the importance of the auto sector for jobs and exports. When the Chinese president recently toured a rare earth company on home soil, it invoked fear among China’s trading partners, so critical are these metals for the supply chains of North American high-technology firms.

The presidential visit sent a very clear signal that rare earths could soon become bargaining chips in the trade war that is heating up between the US and China.

Consider that the United States relies on China, the dominant global supplier, for about 80% of its rare earth elements.

Rare earth metals, alloys and magnets needed by US defense contractors come either directly or indirectly from mostly China - it either mines or processes about 90% of all rare earth oxides.

A Chinese embargo on rare earths would be equally devastating to US industry, especially considering their use in permanent magnets - necessary for electric vehicles and wind turbines - two of the most important technologies to wean Americans off of fossil fuels.

Among the US companies that would be most badly hurt either from export restrictions on rare earths or outright bans, are Apple, Tesla, General Electric, Western Digital, Seagate and Cree, Inc.

In this article we take a look at what Chinese restrictions on rare earth elements could mean for the rare earths market.

Three steps to (trade) war

Last Friday, citing security risks to the US due to the danger of Huawei’s 5G network being used for espionage, President Trump signed an order that restricts Huawei and its competitor, ZTE Corp., from selling equipment in the US. American chipmakers like Intel Corp and Qualcomm Inc have confirmed they won’t supply software and components to Huawei until further notice.

Then on Sunday, Reuters reported that Google’s parent company Alphabet has suspended all business with Huawei that requires transfer of hardware, software and technical services except those available publicly via open source licensing. That’s a big deal. It means that the tech giant will no longer have access to updates to Google’s Android operating system, thus hobbling its business outside of China, where Huawei does about half of its smart phone sales. Most of Google’s products are banned in China. Alphabet’s suspension could delay Huawei’s rollout of 5G (the latest cellular network) services throughout the world, and even kill its ambition to become the world’s leading smart phone brand.

 

 

Just hours after the Trump administration added Huawei to a blacklist that makes it very difficult for the Chinese telecom company to do business with American firms, China’s president Xi Jinping went to a rare earth’s facility in Jiangxi province.

So with China and the United States now into a full-blown trade war, and two of China’s star companies under fire, a likely target is rare earths, the 17 elements in the Periodic Table that are used in dozens of military and industrial applications including electric vehicle motors, wind turbines and missile guidance systems.

Xi’s visit to JL MAG Rare-Earth Co Ltd had an immediate effect on the Chinese rare earths market. Reuters reports the MVIS Global Rare Earth/Strategic Minerals Index, which tracks the shares of 20 producers from 10 countries, including China, Australia and Canada, jumped 6.4% in its biggest one-day gain since October 2011, last Tuesday.

Among the top gainers were JL MAG Rare-Earth Co which soared 10%, Innuvo Technology Co which increased 10%, and Hong Kong-based China Rare Earth Holdings which vaulted 80%.

Beijing said on Monday it would raise tariffs on U.S. rare earth metal ores from 10 percent to 25 percent from June 1, making it less economical to process the material in China. That’s clearly a red herring.

The only US producer of rare earths, currently, is the consortium that purchased the Mountain Pass rare earths mine in California. And their total production, in the scheme of the overall global REE concentrate market, is small. There is an interesting twist here though - one of the three companies in the consortium is Chinese, and that’s where Mountain Pass rare earths concentrate gets shipped, so that it can be further processed into oxides, then transported back to the US for sale to end-users.

Because Beijing as a one-party state has the power to impose an industry-wide quota on rare earth production - something that would never get around anti-trust legislation in a Western country - and the fact that China has a global monopoly on rare-earth production and refining, China can easily spike rare earth prices.

On March 15 the Chinese government attempted to do just that, by restricting the domestic rare earths production quota. Reuters reported the mining output limit for the first half of 2019 was set at 60,000 tonnes, down 18.4% from the first six months of 2018. The smelting and separation quota was set at 57,500 tonnes, 17.9% lower than H1 2018.

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