Your Inside Track To Rare Earths

By China Water Risk 18 June, 2019

Do China's threats to weaponise rare earths in the trade war have any teeth? Find out & get the edge below

Trade war tensions between China and the US are flaring up. Tariffs, Huawei and now possibly rare earths.

Since late May, China has sent smoke signals of weaponising rare earths as a weapon in the trade war, from an expert symposium on rare earths held by the NDRC to President Xi visiting a rare earth processing plant in Jiangxi. Then there was the strongest gesture yet: the State Council’s White Paper on “China’s Position on the China-US Economic and Trade Consultations”. Essentially China doesn’t want a war; but it will fight if push comes to shove.

The question on everybody’s lip is – will China actually make good on its threats and limit rare earth exports? And does the threat have teeth?

We have been warning about the reliance of global smart tech/clean tech on rare earths in various reports as early as 2015. The truth is: China is a significant producer of rare earths and other critical raw materials (CRMs), which means it controls the interactive core of our high-tech future.

We wrote a report for CLSA in 2017 about this – “Toxic phones: China controls the core”. While it is proprietary to CLSA clients, below are five key takeaways from the report and you can read the highlights here.

1. The interactivity from our phones and devices comes from CRMs including many rare earths

2. China controls these CRMs with no/few substitute materials

3. China is running out and needs more for itself

4. China imports are going up but so is reliance on China exports

5. Plus pollution economics makes no sense for China

These trends, plus the fact that China has acquired stakes in mines outside of China, means that a trade war is unwise. China’s in a stronger position now than it was in the last rare earth scare.

If there is to be a fight, what’s at stake? A trillion-dollar house of cards

We cautioned in the report that much is at stake if China decides to limit CRM supply. Without the interactivity that CRMs enable, the whole house of cards from Apple and Samsung to Uber & WeChat could all come crashing down. That’s trillions of dollars from the electronics industry built on a rare earth market we estimated to be valued at just a billion at the time of writing the report.

“Would Facebook, WhatsApp, Instagram, Google Maps be so popular without a smartphone? Imagine playing Pokemon Go or using Tinder without swiping right?” asks the report.

Beyond smartphones – missiles!

And it’s not just our devices. Rare earths and CRMs are also integral to a wide range of other applications, including MRI machines, robotics and even missile guidance systems and wind turbines.

Rare earths & CRMs are integral to a wide range of applications…

…including MRI machines, robotics & even missile guidance systems & wind turbines

China is stocked – 13FYP said “go out and buy” while US says its 15 years behind

China released its first ever 13^th Five Year Plan (13FYP) in 2016 on rare earths specifically, highlighting China’s strategic and long-term thinking over rare earths. After all, as we estimated, China’s own demand will exceed its supply by 2020.

From overseas exploration efforts in Greenland to a 90% equity stake in Vietnam Rare Earth Company…

…China has been sweeping up sources of rare earths

As such, in the plan, enterprises were encouraged to “go abroad” in pursuit of more rare earth resources and this is exactly what has happened in the past few years. Since 2016, from overseas exploration efforts in Greenland and offtake deals in Australia to a 90% equity stake in Vietnam Rare Earth Company, China has been sweeping up sources of rare earths far beyond its own borders through state-influenced enterprises.

Plus the low prices meant it was difficult for overseas production to be competitive. So simply “buying outside of China” may not be an easy option. Where does this leave the US?

Even if the US took its only rare earth mine back, the ore mined is exported to China for processing

The US Government Accountability Office has admitted in a 2016 report that it still needs 15 years to build a fully domestic rare earth supply chain; compare this to China where scientists recently found a cleaner and faster way to extract rare earths, which may shorten extracting time from days to 20 minutes.

Worse still, China bought a stake in the only rare earth mine (Mountain Pass) in the US; and even if the US took this back, the mined ore is reportedly sent back to China for processing.

Even without the trade war China is cleaning up

Mining and processing rare earths is toxic. Even without the trade war, China does not want to carry the cost of rare earth pollution any more.

Just look at Baotou, China’s “Capital of Rare Earth”. It is home to one of the largest tailings dam in the world – only 10km away from the Yellow River, it is a ticking time bomb.

How about Ganzhou – China’s “Rare Earth Kingdom”? China’s Ministry of Industry and Information Technology (MIIT) has estimated clean-up and soil remediation costs there at USD5.6bn – why would China spend so much to dig up toxic rare earths for the rest of the world when they can spend USD1 billion to control global tech? Ganzhou city is located in Jiangxi, which is part of the Yangtze River Economic Belt (YREB) where green development has been repeatedly stressed by President Xi. It is important that China protects its upper watersheds – the Dongjiang River, which provides water to major cities like Shenzhen, Guangzhou and Hong Kong, starts in Jiangxi.

With China’s ongoing War on Pollution plus an “ecological civilization” enshrined into the constitution, why would China want to keep supplying the rest of the world at the expense of its own environment?

Of course this risk is not new. We even managed to get the UNPRI to recognize this back in 2016 – they tabled rare earths as an emerging ESG issue off the back of our 2016 report “Rare Earths: Shades Of Grey – Can China continue to fuel our clean and smart future?”.

The fact is trade war or not, transitional risks are abound for various industries and electronic brands

The fact is trade war or not, transitional risks are abound for various industries and electronic brands which rely on rare earths, as the CLSA report warned. What the trade war has done is to turn the spot light back on these risks. However, many electronic brands are still following no-sense strategies such as low recycling rates, built-in obsolescence and poor reparability.

What we need: responsible sourcing platform for electronics

In an ideal scenario, there would be no trade war. China would keep supplying rare earths and other CRMs. There would be no illegal smuggling or black market and rare earth production can be cleaned up.

It may be the best practical scenario but with emotions running high, practical gets thrown out of the window

Instead of continuing with a trade war that would set tech industries and countries back years leading to Mutually-Assured Destruction, why not work together to clean the electronics supply chain? Let’s pool our resources to set up a responsible sourcing platform for electronics to encourage clean production – wouldn’t that be nice?

Even better, why not pool resources and innovations to fight to only battle worth fighting – our battle against climate change. It may be the best practical scenario but with emotions running high, practical gets thrown out of the window.

If you missed our previous updates and reports then catch up in the further reading below.

Further Reading

At-a-glance infographics:
 

Our interactive core and supply risks:

On rare earth pollution and black market:

On brands’ no-sense strategies: