Rare earths have emerged as an issue in the US-China trade war, potentially increasing costs for companies who rely on these materials.
At the last flare-up, metal prices rose significantly but most companies managed to absorb those higher costs into manufacturing costs - however this time may prove more challenging.
Transitioning to a cleaner energy economy depends on 17 elements used across industries from electric cars and flat screens to satellites, lasers and fighter jet engines - including electric vehicles, rare earth metals (REM). According to analysts, disruption could set back technological advancement by an estimated 10 years; China is the primary producer and exporter of these elements; Chinese president Xi Jinping visited Jiangxi province's biggest rare-earths company last week as an indication that Beijing might use these resources in a trade war against Washington.
Last time, US and China clashed over rare-earth minerals was in 2010, when Beijing blocked rare-earths exports to Japan as punishment for Tokyo protesting over two islands' sale by Beijing, forcing Tokyo to seek alternatives, prompting World Trade Organization members to rule that China's restrictions were unlawful according to Bank of America analysts.
China could use its dominance over rare-earth minerals as leverage against the US in trade negotiations, but such an approach would be high-risk. Already flooded with cheap products from Chinese sources, they may drive away competitors and discourage new entrants into this industry. Furthermore, this may encourage other countries to increase production to fill any resulting production shortfall - although such an endeavor would likely prove complex given processing rare-earths is expensive and alternative sources such as California's Mountain Pass mine are yet to fully operate at full capacity.
Rare earths, an essential suite of 17 elements used in numerous technological applications, from electric car motors and flat screens to catalytic converters and wind turbines, are key to everyday technological life. Their presence is also integral to military jet engines, satellites and lasers; yet rising tensions between China and America have raised concerns that Beijing may exploit this sector's dominance for political gain in their trade war with Washington. China supplies 80% of global rare earth processing capacity while their President made a highly public visit to a mine in Jiangxi province before publishing an editorial suggesting it may limit exports further.
Though some news reports might try to create alarm, a rare-earths ban would likely have minimal repercussions for American companies. Nearly all imports come from China for processing; even the country's one mine for rare earths sends its ore over. While a ban would raise prices, most companies can easily absorb any increase; metal prices fluctuate quickly anyway and increased rare earth prices in recent years have encouraged companies to find alternatives or reduce usage altogether, such as cutting the quantity used to produce fluorescent lamps.
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Standard practice in Europe and the US involves recycling from 15-70% of high-use metals; however, only about 1-2% of rare earths are recycled due to difficulty dismantling old products to retrieve rare earths - this process typically uses excessive energy consumption and toxic chemicals; Noveon from California developed a semiautomated process but it's difficult to scale up.
Companies often rely on substituting rare earths with other metals in order to cut production costs and environmental impact; this practice allows for cost savings as well as reduction in environmental harm; however, such substitutions don't always perform equally as effectively as their original materials.
Last week, China's state media suggested that Beijing might exacerbate its trade war by restricting US access to rare earth minerals - something which would greatly harm sectors of the economy like technology, automotive and renewable energy production. Unfortunately for Beijing though, this may not work; for one thing the United States maintains large stocks of rare earths while Beijing continues its crackdown on extraction practices that violate environmental standards; furthermore a ban on China exports could prompt other nations to ramp up production and expand their supplies as a response.
China may dominate in mining and refining rare earth elements, yet its global market power could be significantly diminished by export restrictions. A renewed scare over availability could undermine China's status as a reliable supplier and prompt other nations, like the US, to pursue plans of their own for mining rare earth elements outside China; parallel supply chains might even emerge that challenge Chinese dominance and limit market power over time.
China has shown its might before; restricting rare earth exports to Japan in 2010 during a territorial dispute is just one example. Now China has threatened again for 2019, and state media outlets have played up this possibility.
As an example, President Xi Jinping's visit to Ganzhou mine was seen as an indication that Beijing might place restrictions on rare earth exports; one nationalist tabloid even ran with headlines proclaiming, "China Prepares to Utilize Rare Earth Advantage".
However, restricting REE exports to America would undermine China's efforts at building its domestic industry and decreasing reliance on foreign supplies. Furthermore, restricting REE exports would thwart China's efforts at closing illegal mines and cleaning up local rivers - two major plans being pursued simultaneously by Beijing. At one of the small factories producing rare earths in Ganzhou, one manager showed off tiny disc magnets made out of REEs that were just wider than thumb sized and made up of about 30% REEs each.