Why rare earths are a key Chinese advantage

Ole Hansen

Head of Commodity Strategy

Summary:  The US may exert an enormous amount of control over China's crucial exports sector, but Beijing's dominance in rare earth minerals means that it holds a powerful 'nuclear option' in the ongoing trade war.


Earlier this week, Chinese president Xi Jinping made a much-publicised visit to a major rare earth minerals company in Jiangxi province. The visit was widely regarded as a signal that China is very aware of its overwhelming dominance in the rare earths sector, and may be prepared to use it as leverage in its ongoing trade battle with the US.

The geopolitical and economic importance of rare earth minerals is vastly inflated by China’s overwhelming near-monopoly on the mining of these elements. Used for a variety of products including smartphones, batteries, magnets, and a host of other crucial industrial purposes, these materials’ importance to the technology, consumer and defense sectors has lent them the status of a ‘nuclear option’ in the escalating China-US trade war.

According to Mining.com, the US would be unable to manufacture military hardware without rare earths mined and processed in China.

“Rare earths are great multipliers,” says Mining.com’s Rick Mills, adding that “they are used in making everything from computer monitors and permanent magnets to lasers, guidance control systems and jet engines.”
While the US’ domestic market holds enormous sway over the success of China’s key exports sector, increasing tensions may lead Beijing to consider deploying a devastating, rare earths-based response to US tariffs.

Cold War error, trade war threat

It wasn’t always this way. At one point, the US was the largest global producer of rare earths, but a regulatory misstep made the mining and refining of these elements economically unviable. When Washington decided in 1980 to class rare earth mining under the same restrictions that applied to mining thorium, a byproduct of processing many key rare earths, the US industry started its protracted, two-decade collapse. 

During the US’ withdrawal from the sector, China began moving into the rare earths space, acquiring US technology, filing patents, and embarking on a massive mining programme. 

The result is Beijing’s near-total dominance of a space that has only grown more important with the widespread consumer adoption of high-tech devices. According to Reuters, China “supplied 80% of the rare earths imported by the US from 2014 to 2017”. 

Data from the US Geological Survey show China accounting for 81% of global rare earth production in 2017.

Military dependence

While US-bound consumer products containing rare earths represent a significant Chinese weapon in the escalating trade war, US military dependence on these minerals is perhaps Washington’s largest vulnerability.

Chinese-supplied rare earths are used in the most leading-edge weapons from the US’ major military contractors, with Lockheed Martin, Raytheon and BAE Systems all employing these minerals in long-range missiles key to US air superiority, and even, by extension, to US hegemony.

These elements are also used in a vast array of more mundane systems such as jet engines, night vision devices, lasers, satellites, and anti-aircraft systems.

China’s control of the rare earths sector could prove more than equal to the US’ hold over China’s massive export market if Beijing chooses to deploy its ‘nuclear option’.

Signs of a US response

“Rare earths” is something of a misnomer; these elements can be found in deposits around the world. The only thing that is truly ‘rare’ is the ability to reliably extract and process these elements from the surrounding strata. 

Although China is home to 81% of global rare earth production, it only hosts 37% of the world’s reserves. Following Beijing’s 2010 decision to ban all rare earth exports to Japan, causing a price spike and impacting US consumers indirectly via Japanese exports, Washington decided to take certain measures to decrease its vulnerability in this area.
In 2012, the US re-opened its rare earths mine in Mountain pass, California; last week, Australia-based Lynas Corp. – the world’s only rare earths processor outside of China, and the subject of a May 22 Saxo Trade View – signed a memo of understanding with Texas-based Blue Line Corp. to open a new rare earths facility in the US.

Efforts are afoot to extract rare earths from recycled materials, such as fluorescent lightbulbs, and the US Senate recently introduced legislation to encourage development of domestic supplies.

The outlook from here

While the US is aware of the threat posed by Chinese dominance of the rare earths space, its present efforts can only be classified as early, tentative steps into what promises to be a protracted effort to decrease Beijing’s sway over rare earths production.

As such, US-based think tank Stratfor cautions that “with few immediately viable alternatives, the global rare earth supply chain will remain vulnerable in the near term”. Stratfor analysts also note, however, that as “China is more intimately tied into the rare earth elements supply chain through its own imports and as a manufacturer of value-added products, it is less likely to risk the economic ramifications of employing a ban for political purposes”.

Rare earths are an interesting component of the complex economic relationship between China and the US, and the current, tense renegotiation of this association has the potential to place these elements and their producers at the forefront of the trade war.

Major companies and ETFs with rare earths exposure

At present, however, prices remain relatively stable, and while both Beijing and Washington are indulging in harsher and harsher rhetoric, neither seems willing to deploy anything approaching a ‘nuclear option’ at this time.

The following table highlights the largest companies involved in the mining and processing of rare earths. The last week has seen a dramatic jump in the share price of several Chinese, Australian and Canadian companies, but year-on-year performance has not been that impressive. As noted above, Australia's Lynas Corp was a notable exception to this trend.

Access through ETFs also remains limited with the only freely available being the VanEck Vectors Rare Earth/Strategic Metals ETF, currently up 4% for May but down 44% over the last year. 

For more on how to trade the China-US trade war, read the latest analyses from Saxo Head of Equity Strategy Peter Garnry:

• Are you ready for a Cold War in tech?
• How to prepare for an all-out trade war
• Semiconductors are the trade war epicenter
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