Stormcrow Capital: Rare Earths Not a Trade Weapon

Rare earths came to the fore last summer as the trade war raged and the US targeted Chinese imports, with market watchers concerned about the blowback that could come Washington’s way if Beijing were to retaliate imaginatively.

There is precedent for that idea — the Chinese have previously used rare earths as a trade weapon, tightening the screws on exports to Japan in 2010 after a brief fisheries dispute. The move triggered a rush on the sector as end users wondered about their own supply chains.

But according to Jon Hykawy, who is president of Stormcrow Capital, rare earths are unlikely to be used as a weapon in current trade disputes, and it’s “a waste of effort” for governments around the world to scramble to seek alternatives.

Hykawy’s firm recently released a report on rare earths, and his reasoning is based on the damage that the Chinese government did to itself back in 2010 by teaching the world how to operate without rare earths — an unacceptable self-inflicted economic wound for little political gain, in his opinion.

“Rare earth prices rocketed higher (in 2010), partly because the quota system was very badly designed,” Hykawy said in an email interview with the Investing News Network. “Those higher prices then crushed demand and prices collapsed. This was an object lesson that rare earths are generally neither ‘essential’ or ‘irreplaceable’ or any other dumb term that people want to assign to them. 

“Why would the Chinese want to do this to themselves again?”

He also took aim at the politics and rhetoric in the west in today’s world, questioning officials’ knowledge of the sector and saying they could sidestep all the angst that Washington has been engaging in.

“It’s my belief that most of the people in government who are showing concern over rare earths couldn’t name two of them and couldn’t point directly to where rare earths are used, or explain why. I believe it’s a politically acceptable overreaction, and a complete waste of effort. There are much better materials for China to use as a weapon in a trade war, a topic we covered in another report many months ago.”

Recent developments on the trade front between the US and China regarding the importation of scandium and yttrium are also not much to shake a stick at, according to Hykawy.

“If you read that agreement, you will see that rare earths are one of many things named in a long list of products that China might or might not buy,” said Hykawy.

He noted that given the Californian Mountain Pass mine — which is one of two major sources of rare earths outside of China — is increasing output, “I don’t doubt China will buy more in the normal course of business, because otherwise there is no place right now for the California mine to get its concentrates upgraded to a marketable product, but this doesn’t mean China has suddenly become dependent on the US for rare earths.”

In the Stormcrow report on rare earths, Hykawy and his colleague Tom Chudnovsky state that while the situation is not pretty for rare earths currently, “they will get better.” They added that rare earths companies that are profitable in 2020 should be even more profitable due to increases in demand from end users, though the report notes that electric vehicles could forge ahead without rare earths.

“The use of rare earth-based magnets in any new energy vehicle, even a battery-electric vehicle, is not required. The early Tesla (NASDAQ:TSLA) models got by using old-fashioned induction motors and did a perfectly serviceable job,” reads the report, which looks back on the scenario in 2010 and analyzes the current supply chain for end users.

“(Stormcrow) doesn’t see a world where rare earths suddenly become unavailable because China decides to try to make 2020 look like 2010 by imposing a new rare earth embargo,” concludes the report.

“If you are part of a company hoping for that, then (Stormcrow) doesn’t have any hope to give you,” Hykawy and Chudnovsky said, adding that those hoping for a rare earths bubble will have to hope for one sans Chinese trade war action.

You can read the full report from Stormcrow here.

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Securities Disclosure: I, Scott Tibballs, 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.