Monday 10th December 2018

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Senkaku II

How might a U.S.-China trade war affect rare earths?

 

At first glance, the rare earths aspect of the U.S.-China tariffs tussle looks like small change—a proposed 10% duty on American RE imports that might cause a smallish markup on some manufactured goods and wouldn’t necessarily apply to defence uses. But all that’s part of a much bigger battle that will probably target $250 billion of Chinese exports to the U.S. China used an incomparably smaller incident in 2010 to rationalize a ruthless sequence of rare earths trade machinations. Could something like that happen again, this time with different results?

How might a U.S.-China trade war affect rare earths?

Hostilities began earlier this month as the U.S. imposed a 25% tariff on approximately $34 billion worth of Chinese imports, with levies on another $16 billion likely to come. China retaliated with tariffs on equal amounts of American imports.

The U.S. re-retaliated with a threatened 10% on an additional $200 billion of Chinese imports in a process that would follow public consultation. The additional list includes rare earth metals along with yttrium and scandium, which are often considered REs but rate distinct categories in this case.

Last year the U.S. imported $150 million worth of 15 RE metals and compounds, up from $118 million the previous year, according to the U.S. Geological Survey. Some 78% came directly from China, with much of the rest derived from Chinese-produced concentrates. Yttrium shows a similar story, with 71% coming directly from China and nearly all the rest from Chinese concentrates. Although lacking hard numbers for scandium, the USGS states that too comes mostly from China.

Globally, China produced over 80% of world RE supply last year, but with less than 37% of the planet’s reserves.

Rare earths plus scandium comprise two of 35 mineral categories pronounced critical to the American economy and defence by Washington last May, after Donald Trump called for a “federal strategy to ensure secure and reliable supplies of critical minerals.” Now the same administration wants to slap those commodities with a 10% price hike.

And at risk of provoking powerful Chinese retaliation.

Rare earths watchers will remember the 2010 confrontation around the disputed South China Sea islands of Senkaku. The Japanese navy arrested a Chinese fishing crew captain who had twice rammed his boat against the military vessel. Within days, China banned all rare earths exports to Japan, crippling its globally important but RE-dependent manufacturers. China also imposed heavy cutbacks and duties on exports to other countries.

While some Western manufacturers relocated to China, Western resource companies strove to develop alternative supplies. Lynas Corp’s Mount Veld project in Western Australia and Molycorp’s Mountain Pass project in California both reached production in 2013. The following year the U.S. claimed victory as the World Trade Organization ordered China to drop its export restrictions on rare earths, as well as tungsten and molybdenum.

China complied with a vengeance, flooding the world with cheap RE supply. America’s WTO victory proved Pyrrhic as a burgeoning non-Chinese supply chain failed to compete. The most salient casualty was Mountain Pass, which went on care and maintenance in 2015.

So does China have more rare earths machinations in mind, this time responding not to a minor territorial dispute but tariffs affecting $250 billion of Chinese exports?

Maybe, but different circumstances might bring a different outcome. Since the Senkaku-induced RE crisis, advanced-stage projects have developed potential mines outside China. Work has progressed on non-Chinese supply chains, working to eliminate that country’s near-monopoly on processing expertise. Most recently, the U.S. has begun an official critical minerals policy to encourage development of supplies and supply chains in domestic and allied sources.

Of course any future scenario remains speculative. But this time the West might be better prepared for China’s tactics. Any new export restrictions might spur development of the deposits that now exist outside China. Any Chinese attempts to dump cheap supply could face further, far more punishing tariffs. While some other industries might suffer in the shorter term, Western resource companies might welcome Senkaku II.


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