Rare earths are a critical element in global supply chains, and their delicate balance is being put under immense strain.
China has become a major player in the sector and is exerting its influence more assertively. This has triggered a rush among Western countries, notably America, to gain their independence on strategic minerals.
This ongoing story highlights the complex interplay between trade, technology and national security.
China’s implementation of a strict licensing process for exports of rare earths, and products related to them on April 4 sent shockwaves throughout the international market.
Exports immediately plummeted. Beijing initially presented this procedure as standard, citing that permanent magnets, which heavily depend on rare-earths, are used for civilian and military purposes. However, it soon became apparent the implications of the strategy.
In a recent report, Volkmar Baur said:
In particular, the negotiations with the US made it clear that licensing was likely to be a more strategic approach in the US trade dispute.
Although Chinese exports rebounded in June, businesses continue to struggle with bottlenecks, resulting in delays and a lingering effect of China’s increased grip.
China’s dominance is unmatched and has implications
China has a near-monopoly on the rare earths markets. This gives it unmatched leverage.
This nation controls 90% of the global production capacity for rare earths, and produces about 90% of them.
The Chinese government can use its position to overturn supply chains by imposing deliberate export restrictions. This could lead to widespread production stops in the manufacturing sector.
Such disruptions have far-reaching consequences. The permanent magnets are manufactured in China almost exclusively and they’re used in many electronic products, from mobile phones to vacuum cleaners. They can even be found in cutting edge electric cars.
Rare earths are difficult to replace, even though the quantity required is often very small. Baur said that even though rare earths can be used in small amounts, their importance cannot be overstated.
US Counter-Strategy: Investing in Domestic Resilience
The US Government has launched an ambitious plan to boost its rare earth capability at home. Recognizing the vulnerability resulting from the dependence on China.
The Department of Defense made a major move by acquiring a stake of a US-based company in July. It secured an option to purchase up to 15 percent of the shares of the firm, making it potentially the biggest shareholder.
The company is the only entity in the US to have both a mine for rare earths, Mountain Pass Mine, in California, as well as a permanent magnet production facility.
US Government’s Commitment goes beyond Equity Investment It has also guaranteed to purchase all neodymium-praseodymium (NdPr) oxide produced by the company over the next decade at a price of $110 per kilogram.
The price is around 50% higher than the current price at the Shanghai Metal Exchange, and over 80% more expensive than the average NdPr price this year.
Baur explains:
In the past 15 years, the price of NdPr has exceeded the guarantee only 8% of the time.
The premium paid for domestic supplies was also illustrated.
This guaranteed price is based on the production volume of 2020 from Mountain Pass Mine. It translates to an annual subsidy estimated at $1.4 billion.
The US aggressively pursues a strategy of building a supply chain from “mine to permanent magnet”, despite the costs that are debatable. This is to achieve self-sufficiency by 2027 in permanent magnet manufacturing. It will also serve the US’s manufacturing and defense needs. This is a crucial move, given China’s alleged intention to limit critical minerals to Western defence companies.
Europe’s lagged response and its persistent vulnerability
Europe’s continued reliance on China to supply rare earths is in stark contrast with the US.
The implementation of diversification strategies is woefully behind schedule despite the plans.
This inertia exposes the European industry to significant risks of sudden supply limitations at any time. It is a vulnerability which will persist on a medium-to-long term basis. This continued dependency is expected to increase prices at least.
This precarious position is brought home by the case of Germanium.
China will introduce mandatory export licensing for this crucial mineral by summer 2023.
Exports of Chinese goods have fallen by 70% since the license was granted.
In direct response, germanium prices in Germany are currently around 30% more expensive than germanium prices within China.
Baur, commented
This is illustrated by the example of germanium.
He also emphasized the economic impact that China’s leverage has on Europe. Europe’s industrial base is at the mercy geopolitical changes in the market for rare earths without decisive action.
As new information becomes available, this post China’s dominance in rare earths sparks Western scramble for Independence may change.
