China ‘huffs and puffs’ on rare earths, but history suggests more sound than fury

By William Clarke
Published: Thursday, 30 May 2019

The government in Beijing appears to be preparing for restrictions in the supply of rare earths, but market sources said that previous similar attempts only served to support production of such materials outside China.

By William Clarke and Cristina Belda

Recent hints that emerged from Beijing about possible restrictions on exports of rare earths appeared to be good news for non-Chinese producers, but any limitations would only harm China’s dominance of the rare earth market, informed sources have told Fastmarkets.

There is widespread skepticism about whether China would be able to reduce the global supply of rare earths, even if it were willing to do so.

"Throwing your weight around can have adverse effects," said Christopher Ecclestone, mining strategist at New York-based investment bank Hallgarten & Co. Even the suggestion of restrictions has boosted interest in rare earth companies, he added.

"The dogs of the rare earth industry have woken from their slumber, and have started yapping," he said.

There has been no official threat of a rare earth export ban, but several heavy-handed hints have been dropped by the Beijing government. On May 21, Chinese President Xi Jinping visited a company that makes rare earth magnets shortly after the United States blacklisted Chinese technology firm Huawei.

The East Asian country’s National Development & Reform Commission recently warned that "if anyone wants to use products made from rare earth to curb the development of China, then the people of the revolutionary soviet base and the whole Chinese people will not be happy."

And the editor of state-owned, English-language newspaper Global Times has been vocal on social media about the prospect of restrictions on rare earth exports.

There have been signs that traders at least are paying some attention to these threats.

One rare earth trader warned Fastmarkets that "history has shown us that China can use rare earths supply as a weapon if it feels threatened."

The threat of a rare earth export embargo is not new. In 2010, China attempted to cut off rare earth exports to Japan after a dispute over the ownership of a group of islands in the East China Sea, which sent prices briefly surging upward.

There is also evidence that some traders are trying to build up stocks, in anticipation of a rising market.

"Chinese companies recently approached us to buy rare earths, and this is quite extraordinary since China is not really a buyer," a European rare earths and minor metals trader said. "This situation [with Chinese producers trying to purchase material] has only happened once or twice in the past several years."

The motivations for this move were not yet clear and, according to the trader, it could be "for strategic reasons."

But traders were holding on to stocks and forecasting an escalation in international trade tensions.

"We are not selling rare earths at the moment… we will hold our stocks," the European trader said. "We are taking a wait-and-see approach."

Vulnerable monopoly

The lesson to be taken from the 2010 export restrictions is that Chinese dominance of the rare earth market is vulnerable. The 2010 restrictions caused a massive increase in rare earth prices, but triggered a similarly rapid increase in the production of rare earths outside China.

The increase in prices allowed Australian producer Lynas, with some Japanese backing, to set up a major rare earth separation plant outside China, and briefly breathed new life into US domestic rare earth production in the state of Nevada.

And history is already showing signs of repeating. Lynas was quick to capitalize this year, announcing plans to build a heavy rare earth separation plant in the US shortly after the materials returned to the political agenda.

The fact is that China has no monopoly on the mining of rare earths. There are a number of rare earth mining projects in production worldwide at the moment, and a larger number of mothballed or junior projects which could quickly return to production in the right circumstances.

The bottleneck is not in production but in refining capacity, where mixed rare earth oxides are separated into different elements. In particular, there is a stark shortage of refining capacity for the heavier rare earth elements, which includes the rarest and most valuable types.

Rare earths are not created equal. The various elements in the rare earth group vary widely in value, rarity and ease of substitution. Most of China’s exports to the US are of cerium and lanthanum - "throwaway rare earths," as Hallgarten’s Ecclestone puts it.

These materials are both relatively abundant, and available from sources other than China.

The most rapid increase in rare earth demand has been for the magnet minerals. Rare earth permanent magnets are used in electric motors and windmill turbines. Of these magnet minerals, the light rare earths neodymium and praseodymium are the most commonly used, and can be sourced from Lynas’ separation facility in Malaysia.

But supplies of the heavy rare earth minerals dysprosium and terbium are less easy to source. These minerals are included in neodymium/praseodymium magnets to increase their high-temperature performance.

Production of these minerals is heavily concentrated in China. Australian miner Northern Minerals produces rare earth carbonate with a high proportion of dysprosium and terbium, but it currently ships its production to China to be separated.

This combination of rising demand and limited supply makes dysprosium unusually vulnerable to politically motivated export constraints.

In the longer term, the vulnerability of electric-vehicle (EV) manufacturers to constraints on dysprosium supply could be tackled by reducing its use in magnets. Japanese carmaker Toyota has already unveiled plans to eliminate the use of dysprosium and terbium.

It is also possible to build electric vehicles that use electromagnets instead of permanent magnets. But this increases the overall power consumption of the engine, which in turn means that larger batteries are needed, and more lithium and cobalt are consumed.

The technical barriers to substituting electric magnets in EVs are so difficult that no manufacturer currently tries to do so. Even sector pioneer Tesla uses rare earth magnets in its latest product line, after years of resisting their inclusion.

And although Lynas is proposing the creation of a new heavy rare earth separation plant in the US, there would be a lag before any new capacity comes online.

'Huffing and puffing’

A more significant question is whether China actually has the ability to close off supplies to the US.

First, the US does not have a large domestic EV industry, and no domestic rare earth magnet capacity. As Ecclestone points out, it would be very hard for China to prevent domestically produced magnets which were exported to Japan or Europe being re-exported into the US.

And the prevention of smuggling would be extremely difficult because of the high values and small volumes of rare earths exported from China.

One European minerals distributor told Fastmarkets that "even if there is an export embargo… they can sell it illegally through Shenzhen [the southeast Chinese city adjacent to the trading outlet of Hong Kong]."

The distributor also noted a recent appearance on US television by a Chinese journalist as evidence that China’s interests lie in cooling the trade war, rather than inflaming it.

On May 29, Liu Xin, a journalist for the state-run China Global Television Network, appeared in an English-language interview on the US television channel Fox News, a favorite of US President Donald Trump. Liu rebutted some of the interviewer’s comments on trade relations between the US and China, but struck a noticeably conciliatory tone, agreeing that low tariffs would be best for both countries.

The European distributor said that this interview showed that the Chinese had been forced to "try and change the thinking within America," and that any threats on rare earth export restrictions were hollow.

"If it was a real threat, why would you have Liu Xin going on TV [and speaking] in English?" he said. "It wasn’t aimed at the Chinese audience. The Chinese are at their wits end about negotiating with Trump. Everything he’s asking is impossible for them. They haven’t got anything to bargain with. It’s all huff and puff."

Ecclestone agrees that any increase in rare earth prices would be short-lived. "We could see tightness, disruption, higher prices," he said, adding that any increase would be most noticeable in dysprosium, neodymium and praseodymium.

But he says that any price rally would not match the feverish levels seen in 2010. "I think people have a better idea now," he said.

And in the long term, he added, China had the most to lose. "The worst nightmare for the Chinese is a non-Chinese rare earth supply chain," he said. "That would mean 'game over’."


More like this