Trade Hardball: China Threatens to Cut Off US Supply of Rare Earth Elements

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China produces 80% of the world's rare earth elements. They are used in weapons, cell phones, hybrid cars, and magnets.

China does not have the means to match the US in the total number or amount of tariffs. But China can strike back in other ways. One critical way would be to cut off the US supply of rare earth elements.

Rare earths are 17 minerals used to make cell phones, hybrid cars, weapons, flat-screen TVs, magnets, mercury-vapor lights, and camera lenses.

Xi Visits Rare Earth Plant

Bloomberg reports Xi’s Trip to Rare-Earths Plant Stokes Talk of Trade Retaliation

Shares in JL MAG Rare-Earth Co. surged by their daily limit Monday after state news agency Xinhua said the Chinese president had stopped by the company in Jiangxi. Official news outlets give regular updates on the whereabouts of top leaders, sometimes leading to share spikes on the belief that companies have been handed official backing.

The U.S. relies on China, the dominant global supplier, for about 80% of its rare earths imports. Xi was accompanied on the trip to JL MAG by Liu He, the vice premier who has led the Chinese side in the trade negotiations.

The visit “sends a warning signal to the U.S. that China may use rare earths as a retaliation measure as the trade war heats up,” Yang Kunhe, analyst at Pacific Securities Co., said by phone from Beijing. That could include curbs on rare earth exports to the U.S., he said.

U.S. Rare Earths Revival Planned Amid Trade Conflict

The Wall Street Journal reports U.S. Rare Earths Revival Planned Amid Trade Conflict

The Trump administration worries a lack of domestic rare-earth supplies undermines a competitive modern economy and strong military. Last year, the U.S. Geological Survey designated 35 minerals as critical to the economy and national defense. The U.S. is nearly reliant on imports for more than half of them.

Rare earths are among the most extreme examples of such critical minerals, with China accounting for more than 90% of the world supply over the past decade, according to U.S. government figures.

China’s control of the global rare-earths market has long been a concern of manufacturers, particularly after Chinese export quotas led to a price surge that in 2011 made some of the elements more valuable than gold.

Building a Plant is Not So Easy

The WSJ article notes that Blue Line Corporation, a US company, and Lynas Corp., an Australian miner propose to build the first rare-earths separation plant in the U.S. in years.

But that would take time. And there are huge environmental issues.

I have covered this before. So I am not at all surprised by any of this.

The lead image is from my August 2, 2018 article Not Only are We Stupid, We are Hypocrites. Take a look at what I said at the time:

Three Ways China Can Retaliate

1: Let the Yuan slide 25% negating the tariffs.

2: Further limit US firms ability to do deals in China

3: Halt Rare Earth Exports. Rare earths are 17 minerals used to make cell phones, hybrid cars, weapons, flat-screen TVs, magnets, mercury-vapor lights, and camera lenses.

Option one has capital flight risks for China of course. But US tariffs pose numerous risks to the US and global economy as well. Option two is a given. Option three is rarely discussed, but China has at least 80% of the global market.

​Not So Rare

Rare earths are not that rare actually. That fact prompted the Verge view: China can’t control the market in rare earth elements because they aren’t all that rare.

However, there's a good set of reasons nearly all rare earths are produced in China.

  1. The whole process is “expensive, difficult, and dangerous,” says former rare earth trader and freelance journalist Tim Worstall. He tells The Verge that, because of this, the West has been more or less happy to cede production of rare earths to China. From the 1960s to the ‘80s, the US did actually supply the world with these elements; all extracted from a single mine in California named Mountain Pass. But in the ‘90s, China entered the market and drove down prices, making Mountain Pass unprofitable and leading to its closure in 2002.
  2. There’s also the fact that rare earth production in China is often a byproduct of other mining operations. “The biggest plant there is actually an iron ore mine which extracts rare earths on the side,” says Worstall. This means that, unlike the Mountain Pass mine, producers aren’t reliant on a single product. “If you are trying to only produce rare earths, then you’re subject to the swings and roundabouts of the market.”
  3. As the academic David S. Abraham explains in his book The Elements of Power, this makes for a grueling extraction process. To create rare earths from the ore that contains them, this material has to be dissolved in solutions of acids, over and over again, then filtered, and dissolved once more. “The goal is not so much to remove rare earths from the mix as to remove everything else,” writes Abraham.
  4. Rare earth ore goes through these steps hundreds and hundreds of times, and for each new mining location, the concentration of the acids used has to be recalculated in order to target the specific impurities in the soil. To top it off, the whole process produces any number of nasty chemical byproducts and is radioactive.

Rare Earth Response

The notion that there will be a plant any time soon in the US seems like fantaslyland material.

On September 17, 2018, I penned Trump Unwisely Escalates Trade War: Expect a "Rare Earth" Response From China

It did not happen because Trump backed down following an escalating series of belligerent trade Tweets.

In December, Trump gave China until March, then April, then May, then June.

To quote Yogi Berra, It's Deja Vu All Over Again.

Trump's Track Record

Cooler head may prevail. Or not.

Trump's track record is one in which he continually acts like a playground bully only to eventually back down.

Who Will Win the Trade War?

I discussed the current setup in Who Will Win the Trade War? Some Say China, Others Say Trump.

The correct answer is nobody, put please read the takes. Notably, Steve Bannon, former White House chief strategist, thinks both sides will eventually win.

I propose "eventually" does not work because Trump has an election to win, and Trump is unlikely to win the election if he triggers a recession.

Besides, nobody wins trade wars. If you disagree, please provide some pertinent examples.

Mike "Mish" Shedlock

Comments (27)
No. 1-18
we_will_be_Ok
we_will_be_Ok

'Hot' war at a 3-4 year horizon... who would've thought that trade does not promote peace and causes war? But it makes sense: issues and grievances accumulate some do better, others fall behind, and countries, like people, grow resentful and bitter... welcome to the 'resentful and bitter' part.

Eighthman
Eighthman

China should demand payment in gold for rare earth metals. It would send a message.

Augustthegreat
Augustthegreat

Actually Trump is winning the war, in his pipe dream

offintherough
offintherough

Invested in Lynas as it was trying to get permitting and went on for a decade in a country somewhat lax on EPA issues, so it is probably a decade late to think there will be alternative supplies if the Chinese really want to shut most of our tech industry down.

tz3
tz3

Trade war? Japan in the 1970's-80's that wrote "A Japan that could say no", except they engaged in inflation. We were damaged, they won. (at least that round, but France and Russia 'won" ww1, but there was ww2. - if you define "win" there will probably be an example, and Vox Day debated Bob Murphy on Tom Woods' podcast and won. I think he would debate you).

On "rare earths", apparently the free market is totally broken here too. If the price goes up, then they will be recycled, e.g. instead of throwing earbuds and hard drives into the trash, the Neodymium will be recycled.

There are plenty of US resources for (not really) Rare Earths - they are like Gold. China doesn't care if their workers die and if they dump toxic sludge into their rivers, so they have a cost advantage. Also rare earths aren't "required" for much, they are merely the cheapest (blood mineral) alternative.

You belive that magically we will have self-driving everything replacing drivers in two years. But you don't believe that the same spirit of innovation could start production of rare earths when there are more and specific incentives to do so in the USA?

A big problem is that although Lithium is NOT a "rare earth", it isn't (economically feasible to) recycle, but we are also supposed to go all electric, and Tesla is a part of your "auto pilot" prediction. That is worse as it is even more limited and will run out, so will cell phones cease to exist in a few years of have big AAA battery bumps? I don't think you would predict that.

Menaquinone
Menaquinone

Rare earth elements are not rare. USA has abundant deposits of rare earth elements. The tree huggers have regulated the USA rare earth element industry out of the market. Deregulation is a job for a Superman President Donald Trump.

WildBull
WildBull

We have let ourselves become dependent on foreign sources of materials that are critical to the economy and national security. Somehow that isn't an issue. Why is it not an issue? Neither is building an internet infrastructure that may be compromised by foreign powers. The world is a dangerous place. I'm not a big fan of government, but our government first and foremost should be protecting us from other governments that I like one hell of a lot less. If the Trump administration brings us closer independence from potential threats, Trump has done us a favor in the long run.

Menaquinone
Menaquinone

Mish, The abolition of the slave trade in 1807 is a trade war that was won by USA and Great Britain. Africans had only slaves to trade for cotton cloth, sugar, rice, indigo, tobacco, steel, and manufactured goods. Africans were eager to trade slaves. They lost.

Greggg
Greggg

This was a national; security problem from way back. Obama refused to talk to the press about it several times during his administration.

CautiousObserver
CautiousObserver

"The notion that there will be a plant any time soon in the US seems like fantaslyland material."

Since rare earths are typically a small component in any product in which they are used, it is possible a much more expensive source in the US could be built for US needs. It will not happen quickly, but it is amazing how bureaucrats will magically wave regulations for their own pet projects. For example, we have all kinds of dumpster enclosure regulations for commercial properties in my area which make building the surrounding for a trash container into a $10,000+ ordeal. However, when the City wanted to place recycling containers everywhere (identical to 6 yard dumpsters except they are painted green), they just placed them in a couple empty parking spaces in everyone's parking lots. I kid you not.

Sechel
Sechel

This is a huge threat. Military suffers but the effects would not be immediate.

logline
logline

These are the ingredients for WAR.

Menaquinone
Menaquinone

Mish, Let me explain it for you. China would like to trade slave labor for American jobs, American know how, American technology, American investment, and American capital.

BoneIdle
BoneIdle

Rare earths are named because of the atomic composition, not because they are actually rare - or scarce around the planet. Mish is correct though - relatively dirty processing.

just making it clear.

Realist
Realist

The US is currently reducing the amount of oil in the strategic petroleum reserve from 700 million barrels stored to 400 million in 2027.

Carl_R
Carl_R

Beside the rare earths issue, China has one other thing that works in their favor in a "trade war". The US, as a Democracy, can not tolerate pain well. Yes, if, say, Pearl Harbor gets bombed, the US can have tremendous focus, and can tolerate pain for awhile, but such situations are rare. So long as China doesn't do anything outrageous, US voters will not be willing to accept short term pain. Will farmers, who have been injured in the cross fire, vote again for Trump? I don't know. If the price rises 25% on Chinese goods, and we see a huge jump in inflation , and a decline in the standard of living from the trade war, will main street vote for him? I don't know.

Meanwhile, in China, where protests are not tolerated, and the government has total power, they can tolerate quite a bit of pain, if necessary.

Curiosity kills
Curiosity kills

The last time China tried to restrict rare earth export, US tog with Japan and EU took China to the WTO and won. I'd be surprised if China will use rare earth as a weapon in this round of US-China trade war.

Also Apple and many US-based firms now manufacture their goods in China. Trump's tariffs actually hurt US corporations. How much and how long will Wall Street tolerate Trump's interference into the market will be interesting to watch...