Rare earths: A catalyst to geopolitical realignments.

The current rare earths crisis is not a stand-alone event. In 2010, the elements captured both international headlines and the attention of policymakers and industry globally when a geopolitical incident between China and Japan revealed how the world had grown almost exclusively dependent on China for rare earth mining, processing, production, and export. Prices skyrocketed, international tensions ensued, industrial nations scrambled for alternatives and ways to innovate out of dependence. They talked big talk, took China to the WTO but never effectively followed up on addressing the vulnerability they had discovered. Governments largely dropped the ball and even rare earth dependent industries abandoned the few alternative mines outside China when the market corrected itself, choosing the cheapest supplier to fit their bottom line.

China put the world on notice when it discovered the strategic importance of these elements that are vital for high tech, renewables, and the defense industry. Faith in globalization, the blind belief in the narrative of economic interdependence, lack of foresight and the presumption that government is “obliged” to step in and fix things has led to extensive complacency and risk aversion for private sector investment in rare earth exploration, mining and processing. It’s no wonder given the long lead times from discovery to mining, while processing can be very toxic and handling of tailings particularly costly.  

We are no longer in 2010. Today the gloves are off and it appears that we have entered what was once unthinkable: a veritable trade war that is having spill-over effects not only on the global economy but also on geopolitical realignments. China’s use of its strategic advantage should not come as a shock, as it seeks to counteract US attempts to thwart its aspirations for leadership in the digital age. Yet, reports of China’s possible decision to curb rare earth exports to the US have been met with a mixture of alarm, anger, and even dismissal.  Some say, it’s another blip. Others that they have stockpiled enough materials that it won’t affect them immediately. Some media outlets inform readers that rare earths aren’t rare and they can be found in so many locales. However, mining materials need to be economically viable for the materials to be extracted. There are those who express outrage that China dares to use economic statecraft to respond to the US decisions about tariffs. 

In order to understand the complexity and importance of the issue, given the new trade war between the US and China, in the summer of 2018 in the list of products from China that would be subject to tariffs, the White House had included “rare earths” but then took them off. Note that the United States did not mine ANY rare earths domestically in 2017 and instead imports 78% of its rare-earth compounds from China (also note that the rest of the compounds that came from elsewhere were mainly derived from Chinese rare earths).

How disruptive could the current trade dispute between China and the United States be for the rare earths market,  journalists keep asking.

Is that the right question? I wonder.

Of course, it’s the immediate question that comes to mind. The markets want an answer. So, the reports are focused on that.

But let’s look at the issue a bit less narrowly.

The ongoing trade war is impacting both the global economy and is acting as a catalyst to geopolitical realignments.

In my opinion, this is the most critical development.

In the short term, companies appear to have enough of stock to go around. Don’t forget that rare earths are enablers and they are used in extremely small quantities.

That fact will surely make everyone complacent yet again.

The crisis won’t last long enough to make it economically feasible for new projects to come online and as we know the most significant producer is Lynas in Australia that is facing a number of issues at the moment and has only stayed afloat because the Japanese invested in them directly to ensure an alternative supply.

This has not been the case with the US nor the Europeans. They did not put their money where their mouth was.

China has also demonstrated that it will invest in mining projects across the world and if and when any other significant sources make it to the market, they may be interested in acquisition. I would also like to point out that for years large quantities of the elements were being smuggled out of China which is the reason why the PRC government wanted and succeeded in consolidating the industry regaining a level of control.

The newer development worth mentioning, however, is that China became an importer of the elements (this year) because it has increasingly turned to high tech production that requires more rare earth inputs for its own economy. That has been a goal of the PRC government — to add value to its economy rather than merely extracting and exporting the elements.

The Chinese are consolidating the supply chain and aim to produce the end products domestically.

Still, the most significant aspect of this crisis is that the trade war launched by the US coincides with the belt and road project already underway, allowing China to call in its chips. There are many countries that owe a great deal to China and I don’t mean money.

The Chinese have built institutional connections with the developing world and they have the ear of governments in significant resource producing countries.

They have provided a significant alternative source of financing that comes without the usual conditionalities that the US and Europe attach to funding.

Moreover, the US, contrary to popular opinion, has effectively withdrawn from much of the world and their importance rests on “past reputation.” This could change quickly and significantly if China is put on the spot.

I just came back from East Africa. The US is nowhere to be found. The competition there will be between the EU and China. Let’s see if Europe can regroup in order to protect its influence there. I am currently finishing a manuscript on just this issue.

I would also like to say that the belief that increased recycling and the fact that rare earths are not as rare as they sound offer a quick fix is both over-exaggerated and wishful thinking.

I had already pointed that out in my book as it concerned the rare earths crisis of 2010.

Very little has changed in the intervening decade. As soon as the crisis was over, various actors – government and industry – went back to business as usual.

Only Japan showed some true foresight but they too are highly dependent on China for the elements. They play down their dependence with statistics that could be somewhat misleading but it’s important for them to seem less dependent as they are extremely resource poor but hold the most patents for the use of the elements.

Both recycling and mining require high prices over a long stretch of time for it to make financial sense to finance new mines and processing plants. Mines need over a decade to come online and processing is both toxic and very expensive. The crises have never lasted long enough to make these possible alternatives truly viable. Molycorp in the US went bankrupt and Lynas is facing extreme pressures with their Malaysia processing plant and the high level of thorium in their rare earths.

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