Truth or Consequences: Trump Has Exaggerated the Threat of China’s Monopoly on Rare Earths

Originally published on WorldPoliticsReview.com, the story below characterizes the “Trump China Rare Earth Threat” as something inconvenient in contrast to a full supply interruption (tantamount to a national security fiasco). The Editor of GlobalREEsVenture.com disagrees with the contention of the story. The argument in the narrative below is that China export reductions would lead to production increases in Japan. There is one problem with the Japan processing alternative. It simply does not exist. To our knowledge, there is no rare earth processing in the country of Japan. If any reader has a different understanding, we would be grateful for the facts. In the meantime, take a look at the story below. The USA-China trade war is a real dilemma with tantalizing possibilities, none of which look promising for America. Benjamin Spiegel, Senior Associate at Redwood Capital is concerned about the intermediate-term supply chain disruption that might occur if China reduces or stops exports.

According to Spiegel, “Redwood Capital is deploying capital in the rare earth sector. We are particularly interested in NdPr. All one has to do is look at the EV production plan for major automotive companies over the next few years. There is not enough NdPr available in the supply chain to support global EV production that has been announced. If the USA antagonizes China and global NdPr supplies get tight, permanent magnets will be in short supply and that means EV’s will not get motors….the supply chain vulnerability is very real. If Lynas can sort out the uranium and radium challenges, we like the Company as an alternative to China. In fact, Lynas is the de facto production for Japan given the Company origins and effective control levied by Sojitz and Japan Oil, Gas and Metals National Corporation (Lynas lenders).

We understand that Spiegel is also bullish on Neo Performance Materials, a company that has rare earth processing facilities in Estonia.

https://www.worldpoliticsreview.com/trend-lines/28014/trump-has-exaggerated-the-threat-of-china-s-monopoly-on-rare-earths

The Editors Monday, July 8, 2019

As its trade war with the United States goes on, China in recent months has raised the possibility of weaponizing its control over 80 percent of the world’s supply of rare earths, minerals that are used in a wide array of important industrial and consumer products. In response, Washington wants to partner with other countries to help develop their mineral reserves to diversify the global supply chain, and even boost its own domestic supplies. But while that may sound sensible on paper, it is based on an unrealistic portrayal of the threat posed by China’s near-monopoly supply of rare earths, says Eugene Gholz, an associate professor at the University of Notre Dame with expertise in industrial supply chains. WPR recently spoke with him about the reality of the global market for rare earths, and why the Trump administration may have other reasons for exaggerating the threat posed by China. The following transcript has been lightly edited for length and clarity.

WPR: How is it that China came to control such a large share of the world’s supply of rare earths? Was it geological good fortune, or were there other factors at play?

Gholz: Definitely not purely geological. The observation that rare earths aren’t actually that rare—they’re about as common as copper or lead in the earth’s crust—is very commonplace now. But it’s actually not that helpful, because in most places, rare earths don’t appear in concentrated form. They’re very diffuse. But there are still commercial concentrations in a lot of countries besides China; Australia and the United States are the major ones that are currently commercially producing rare earths.

China wound up as the near-monopoly supplier 10 years ago. It has much less of a monopoly today than it did then, but it ended up that way due to a number of issues, the most important of which is that rare earths are often found with other materials when you mine them. So, the largest rare earth mine in the world, in China, is really an iron ore mine that produces iron ore in large quantities and has rare earths as byproducts. Most of the fixed costs are absorbed by the iron ore operation, which makes it a quite low-cost place to produce rare earths on the side.

It’s not a hard mining operation. The challenge is the purification chemistry—the next step in the supply chain—with a lot of protected intellectual property and trade secrets. Having the exact chemistry for a particular deposit, to get very high-purity rare earths out of it, takes a lot of effort. That leads to a few countries being good at this, and that has to match up with a good supply of the material. Lately, that’s been in China, but there’s lots of expertise in processing elsewhere.

WPR: So, what would actually happen if China followed through on its threats of export controls? What kinds of disruptions might we see? 

Gholz: I think we’d see an annoyance more than anything else. In part, it would depend on the details of what China did. If it tried to do something very narrow and targeted, like cut off rare earths exports to the U.S., it would have very minor effects. The biggest use of rare earths materials that are directly imported to the U.S. is actually in oil refining. It’s just used to make the refining process a little more efficient. In the past, when the price of rare earths has gone up, oil refiners have said, “We’re just not going to use this particular refining additive until the price goes back down.”

If the Chinese government wanted to squeeze the most high-profile rare earth products, it would presumably try to restrict, say, rare earths magnet exports to the U.S., because the magnets are what goes next into the supply chain for electric vehicles, wind turbines, aircraft and missile actuators, radar emitters—a whole series of things. The challenge to China is if it is trying to focus its export disruption on the U.S., other countries, notably Japan, make rare earths magnets and could expand their production. So, if China stopped exporting rare earths magnets to the U.S., rare earth elements would find their way to Japan and Japanese companies would turn those rare earths into magnets and sell them to American companies. So, it’s difficult for China to make a concentrated disruption.

WPR: Based on what you’re saying, are U.S. efforts to boost domestic production of rare earths and diversify its suppliers based on an exaggerated sense of the threat that China poses in this regard?

Gholz: I certainly think it is based on an exaggerated sense of the threat. I think there’s a lot of alarmism and a lack of confidence in markets, businesses and entrepreneurs to deal with any move by China. It’s based on the idea that government understands things better than individual people seeking profit opportunities, and it comes from a protectionist mindset. There’s talk about the government investing meaningful subsidies in various stages of the supply chain for rare earths in the U.S. and talk about regulatory changes. There are a number of other initiatives, like relaxing permitting requirements or changing rules for mining rare earths on public land—those are very much in the conversation. 

A lot of this is based on the belief that the constraint is on the material coming out of the ground. I think that’s generally a misreading of the industry. There’s been a mineral glut in past years, and the reason there aren’t more mines is that opening more mines wouldn’t have been profitable. If China disrupts exports in some way, and suddenly there’s unmet demand and prices go up, other mines would be profitable. There are other mines that are already permitted and ready to go, or existing non-Chinese mines could expand their production. But there are political interests who are committed to reducing regulations, and they see an opportunity linked to fears about rare earths. Even if it’s not actually going to solve the rare earths issue, it’s part of a broader campaign to deregulate.

WPR: Are there other things going on here that bear mentioning?

Gholz: There’s also an initiative within the Trump administration to use Title III of the Defense Production Act to subsidize capacity expansion for producing [rare earth] magnets. It’s a law on the books in the U.S. that allows the government to invest in creating or expanding production capacity for national security reasons. The companies that are actively producing in the industry have tended to be very cautious about this kind of government investment, because they’re sensitive to the possibility of creating a glut and going out of business if too much production capacity is created. They’re afraid the government is going to put them out of business—that by thinking that it is expanding capacity, the government is actually going to destroy existing capacity.

This fits a pattern in which the Trump administration seems inclined to use government action in trade, whether it’s tariffs or subsidies. To do that without passing new legislation, they need to trigger language in existing law that refers to national security. So, the more that the administration can create a situation where there’s at least a fig leaf—if not public agreement—that there’s a national security issue, the more leeway they have to use existing laws to implement protectionist policies. If you scratch the surface one level deeper, there’s a reason why the administration talks about rare earths as a potential national security vulnerability. Independent of whether it actually is a vulnerability, it’s part of creating the idea that, for national security reasons, the government should take some action through subsidies.

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