Rare Earth Quotas: Political Posturing or Cause for Concern?

As the war of words between the US and China rages on, another commodity has been swept up in the trade dispute between the two powerhouse nations.

Rare earths, which are seldom heard of but are used in abundance to manufacture electronics and technological goods, could be the latest resource added to the tariff tit-for-tat.

In a retaliatory move against US President Donald Trump’s growing list of tariffs and the US government’s ban on technology sharing with Huawei (SZSE:002502), Chinese President Xi Jinping alluded last week to the idea that his country may limit supply of rare earths to America.

The speculation was enough to drive the sector into a fury of conjecture. But how much of the tariff talk is mere political posturing and how much is cause for concern?

China’s rare earths market dominance

China is by far the largest producer of rare earths, with output in 2018 topping 120,000 metric tons (MT). Meanwhile, the US is heavily reliant on imports to supplement the 15,000 MT it produced last year.

What’s more, the vast majority of rare earths refinement, which is crucial in producing oxides and concentrates for technological uses, is done in China.

Luisa Moreno, managing director of Tahuti Global, told the Investing News Network (INN) that China accounts for more than 80 percent of the world production of refined rare earths.

Malaysia, home to Australian rare earths company Lynas (ASX:LYC,OTC Pink:LYSDY), makes up about 15 percent of refined rare earths production, although the country does not mine rare earths domestically, importing the raw material from Australia.

“China is refining a good percentage of the rare earths that are mined in other parts of Asia and some small amounts coming from Africa. Also, China refines heavy rare earths concentrates from refineries outside China,” explained Moreno. “For example, Malaysia exports heavy rare earth concentrates to China because they do not have the capability to refine those individual elements.”

The majority of the 18,000 tonnes of imported rare earths to the US in 2018 were light rare earths like lanthanum, cerium and neodymium.

“In fact, over 50 percent is lanthanum, a very common rare earth element (REE) that is found in most rare earths deposits in the world,” said Moreno. “However, the less common rare earths, often referred to as heavy rare earths, like dysprosium, lutetium, yttrium, scandium and others, are only imported to the US in small amounts, but are nearly impossible to source outside China.”

She explained that, while the US only uses a small amount of these heavier REEs, the critical applications that they are used for would be severely affected if imports were to be cut.

“Many of the heavy rare earths are used in the medical field, in missile systems, in advanced optical devices, et cetera,” Moreno said.

Although China hasn’t yet implemented quotas or exemptions on America-bound exports, tensions escalated Tuesday morning (May 28) when Hu Xijin, the editor in chief of Chinese tabloid Global Times, tweeted, “Based on what I know, China is seriously considering restricting rare earth exports to the US. China may also take other countermeasures in the future.”

Based on what I know, China is seriously considering restricting rare earth exports to the US. China may also take other countermeasures in the future.

— Hu Xijin 胡锡进 (@HuXijin_GT) May 28, 2019

Past tariff tensions a sign of what’s to come?

This isn’t the first time the critical metals have been used as a political pawn and likely won’t be the last.

In 2010, China cut REE exports by approximately 40 percent at a time when it provided roughly 97 percent of global supply. The country said the intention was to crack down on illegal rare earths and to introduce environmental protocols. However, it was largely viewed as a move against Japan as part of a longstanding feud over island rights.

The drastic reduction in global supply prompted the World Trade Organization to force China to lift all export limits in 2015. The decrease also drove rare earths prices much higher, which worked against China’s illegal rare earths crackdown.

As David Merriman, manager of battery and electric vehicle materials at Roskill, pointed out, the 2010 limits also spurred on exploration and production outside of China, which ultimately weakened Chinese dominance in the sector.

“As a result of the 2010 situation, Japan invested in Lynas as their REE supplier and have stuck with them to ensure their success,” Merriman told INN. “With Chinese supply into the USA becoming more questionable and production from Lynas being hoovered up by Japan, the USA could turn to Russia (unlikely because of political reasons) or India (unlikely because of technical reasons) to supply their material.”

“Alternatively, the USA could look to nurture a REE company like Japan did to ensure a sustainable source of materials, though they will have to be willing to support it through a potentially volatile pricing period.”

Despite that diversification and continued work by China to halt illegal and environmentally unfriendly rare earths production, the nation remains the dominant player in the rare earths industry — when it capped its REE exports last October until the new calendar year, prices rose for in-demand rare earths.

For Simon Moores, managing director of Benchmark Mineral Intelligence, the 2010 REE quotas were a precursor and foreshadowing of today’s struggles.

“Until the rare earths crisis of 2010, governments were unaware of the supply imbalances that can exist in niche minerals and metals that are key to the most crucial defense and technology applications,” he said. “It was the coming of age for a wide variety of niche minerals that are used in 21st century technology. If you consider the iPhone was launched in 2007, it was quite an early warning sign for the world.”

A wakeup call for the US — and the world

As part of an effort to shore up its own supply, the US government pledged US$40 million for increased REE exploration and production in 2017. Last year, Trump added rare earth magnets to the John S. McCain National Defense Authorization Act, essentially banning the import of the Chinese rare earth magnets in the name of national security.

Less than a month later, the US administration changed its mind, and strategically left rare earths and the electric vehicle sector — which uses rare earth magnets — off a 194 page tariff list released in September 2018.

The turnaround was likely because the country is unable to meet its own needs through domestic production and does not have the capacity to refine its own rare earths.

“The US will not be able to produce refined REEs at home in the short term. Surely not to replace the imported volumes from China, (which were) about 13,000 tonnes in 2018,” said Moreno. “Can it source the REEs from somewhere else? Yes, but again, considering the volumes, not immediately. Unless it gets it indirectly via Japan and Europe.”

With only one domestic mine, the Mountain Pass rare earths mine in California, which was offline between 2015 and 2018, it would be a challenge for the US to meet its own demand if Chinese supply were to come off the table.

“Theoretically, there is sufficient REE production outside of China to meet the USA’s consumption, though this would cause the USA to compete with the EU and Japan, which have established REE supply contracts with producers, mainly Lynas,” Merriman explained. “Overall, the USA would be in a difficult position to replace its imported REEs from China without causing massive market disruption.”

The road from exploration to production is long, often taking a decade from discovery to output, meaning China’s supremacy in the rare earths sector is likely to go unchallenged in the near future.

“The fear that gripped the US and other countries that are heavily reliant on Chinese rare earth supply, such as Japan and Korea, is now being played upon again. In many ways, China has every right to do what it wants with its own natural resources,” said Moores. “The rest of the world has had nearly 10 years to correct this huge supply imbalance and has failed to do so.”

He believes this is the wakeup call the global mining sector at large needs to move away from outdated resources to the metals and minerals of the future.

“This is a warning shot to electric vehicles and energy storage raw materials of lithium, graphite, cobalt and nickel — the oil pipelines of tomorrow,” he added.

This sentiment was echoed by Moreno, even though she believes a rare earths embargo by China is unlikely and would not be a good decision given the potential price and market implications.

“I think that this incident will continue to remind the west that they are heavily dependent on China when it comes to rare earths. There is need for more REE production and refining outside Asia.

“But it is not just rare earths — China is the largest refiner of tungsten, cobalt, vanadium, graphite, antimony, and many other minor metals,” she said.

Whether the country will limit exports to the US or implement an outright ban, it is too early to tell. However, as Moreno stated, “It would be a poor strategy.”

Don’t forget to follow us @INN_Resource for real-time updates!

Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.