China Gears Up to Weaponize Rare Earths Dominance in Trade War
Bloomberg
May
29, 2019
China
Gears Up to Weaponize Rare Earths Dominance in Trade War
Beijing
is gearing up to use its dominance of rare earths to hit back in its deepening
trade war with Washington.
A
flurry of Chinese media reports on Wednesday, including an editorial in the
flagship newspaper of the Communist Party, raised the prospect of Beijing
cutting exports of the commodities that are critical in defense, energy,
electronics and automobile sectors. The world’s biggest producer, China
supplies about 80% of U.S. imports of rare earths, which are used in a host of
applications from smartphones to electric vehicles and wind turbines.
The
threat to weaponize strategic materials ratchets up the tension between the
world’s two biggest economies before an expected meeting between Presidents Xi
Jinping and Donald Trump at the G-20 meeting next month. It shows how China is
weighing its options after the U.S. blacklisted Huawei Technologies Co.,
cutting off the supply of American components it needs to make its smartphones
and networking gear.
“China,
as the dominant producer of rare earths, has shown in the past that it can use
rare earths as a bargaining chip when it comes to multilateral negotiations,” said
George Bauk, Chief Executive Officer of Northern Minerals Ltd., which is
producing rare earth carbonate from a pilot-scale project in Western Australia.
About
80% of U.S. rare earths supplies come from China.
The
U.S. shouldn’t underestimate China’s ability to fight the trade war, the
People’s Daily said in an editorial Wednesday that used some historically
significant language on the weight of China’s intent.
The
newspaper’s commentary included a rare Chinese phrase that means “don’t say I
didn’t warn you.” The specific wording was used by the paper in 1962 before
China went to war with India, and “those familiar with Chinese diplomatic
language know the weight of this phrase,” the Global Times, a newspaper affiliated
with the Communist Party, said in an article last April. It was also used
before conflict broke out between China and Vietnam in 1979.
On
rare earths specifically, the People’s Daily said it isn’t hard to answer the
question whether China will use the elements as retaliation in the trade war.
China
is “seriously” considering restricting rare earth exports to the U.S. and may
also implement other countermeasures, the editor-in-chief of the Global Times,
said in a tweet. An official at the National Development & Reform
Commission told CCTV that people in the country won’t be happy to see products
made with exported rare earths being used to suppress China’s development.
Editorials
in the Global Times and Shanghai Securities News took similar tacks in their
Wednesday editions.
What
our analysts are saying:
The
U.S. will continue to rely on importing rare-earth minerals from China, the
materials used in key components for a wide variety of products including
electronics, hybrid vehicles and energy-storage systems. Importing from China
is cheaper than producing domestically in the U.S.
The
nation’s producers have rallied hard in recent weeks on the view that rare
earths could be an ace in the trade war. President Xi Jinping visited a plant
earlier this month, accompanied by his chief trade negotiator with the U.S.,
fueling speculation that the strategic materials could be weaponized in China’s
tit-for-tat with the U.S.
Rare
earths have already featured in the trade dispute. The Asian country raised
tariffs to 25% from 10% on imports from America’s sole producer, while the U.S.
excluded the elements from its own list of prospective tariffs on roughly $300
billion worth of Chinese goods to be targeted in its next wave of measures.
Rare
earths aren’t particularly rare. Cerium, the most abundant, is more common in
the Earth’s crust than copper. All other rare-earth elements, besides
promethium, can be found more widely than silver, gold, or platinum, according
to the U.S. Geological Survey. However, concentrated and economic deposits are
scarce, and production is dominated by a handful of countries. China is the
biggest by far, accounting for almost 70% of global production and 40% of the
world’s reserves, USGS data show.
Rare
But Everywhere
Rare-earth
elements have widespread uses in defense, energy and technology
China’s
rare earth market is dominated by a handful of producers including China
Northern Rare Earth Group, Minmetals Rare Earth Co., Xiamen Tungsten Co. and
Chinalco Rare Earth & Metals Co. The nation has form in using the elements
to make a political point. It blocked exports to Japan after a maritime dispute
in 2010, although the consequent spike in prices saw a flurry of activity to
secure supplies elsewhere, which would be the risk again if Beijing follows through
with its threat of retaliation.
China
Northern rose as much as 9.3% in Shanghai, while Lynas Corp., the biggest
producer of rare earth products outside China, added as much as 16% in Sydney.
Hong Kong-listed China Rare Earth Holdings Ltd. spiked as much as 41% and has
doubled in value in May.
Loosening
Grip
China
dominates rare earths mining, but new projects are being assessed globally
Note:
Exploration projects are being evaluated to determine if they are economic to
develop
China’s
stranglehold is so strong that the U.S. joined with other nations earlier this
decade in a World Trade Organization case to force the nation to export more
amid a global shortage. The WTO ruled in favor of America, while prices
eventually slumped as manufacturers turned to alternatives.
In
December 2017, U.S. President Donald Trump signed an executive order to reduce
the country’s dependence on external sources of critical minerals, including
rare earths, which was aimed at reducing U.S. vulnerability to supply
disruptions.
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