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China's rare earth export restrictions could backfire as 'peak production' hits

Experts say reports that China may extend its retaliatory action against U.S. tariffs to include restrictions on rare earth exports could backfire on the Asian giant, which they say is on the verge of becoming a net importer due to its significant manufacturing plans.

London financial advisory Hallgarten & Co. said in a June report that it expects China to mine less than half the world's rare earths by the mid-2020s, by which point it could be a net importer, and "we are now in the territory of post-peak Chinese production of rare earths."

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Hallgarten & Co. Principal
Christopher Ecclestone
Source: Hallgarten & Co.

"We are probably already at the point with some of the rare earths where China is dangerously close to becoming a net importer, because its main sources were so over-exploited in the past," Principal Christopher Ecclestone told S&P Global Market Intelligence.

The report, which cites specialist rare earths consultancy Adamas Intelligence's data and analysis, noted the production volume of neodymium-iron-boron permanent magnets in China rose by 5% in 2018 while consumption rose by about 6%.

Hallgarten said illegal rare earth production in China has dropped 50% since it started combating the practice in September 2018, and the consequent market gap is filled by other countries.

The firm noted that much of China's concentrate imports from Myanmar come from illegal artisanal mining, but have become an important source of the dysprosium, terbium and gadolinium for China's magnet and alloy manufacturing industries.

"To plug gaps in its rare earth 'range,' the Chinese mining investors have been mining ionic adsorption ores in Myanmar and Vietnam and exporting the ores to China for refining," Hallgarten said.

However, in November 2018, Myanmar banned the rare earth mining activities of Chinese enterprises due to China doing the downstream value-adding back home.

Publicly available data suggests that global rare earth element production amounted to about 130,000 tonnes in 2017, of which China constituted 82%.

S&P Global Market Intelligence Senior Commodities Analyst Max Court said in an interview that more than half of these quantities supply the catalyst market — which is increasingly necessary given a drive to improve global air quality — while almost 20% are estimated to be involved in glass making which is important for a host of consumer electrical appliances.

In what Hallgarten called a "telling development," China's rare earth oxide imports more than doubled year on year in 2018 to reach about 41,400 tonnes, while domestic production shrank as China combated illegal rare earth production. Thus, as the Chinese data displayed below shows, exports have shrunk.

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With few alternatives economically available, Court said these supply chains are stretched and have particular supply and demand options.

Geopolitical pressures

A trade war is "difficult" for suppliers to contend with because substitution is not technically possible in the short-run, and any extra cost to rare earths trade must then lead to an increase in price to be borne by the end consumer, Court said.

"The trade war is evolving to be less about trade and more to do with intellectual property and market access — weaponizing tariffs may now have led to weaponizing rare earths," he said. "A strategically engineered global shortage of Chinese rare earths production may create pressure on American diplomats who will need to add this dimension to an already multi-faceted negotiation."

On May 28, Chinese publication Global Times reported China's state planning agency as saying "if any country wants to use products made of China's rare earth exports to contain China's development, the Chinese people would not be happy with that," which was seen as a veiled threat.

Then June 5, Reuters reported that the U.S. Department of Defense had held talks with Malawi-focused Mkango Resources Ltd. and other non-Chinese miners to secure minerals listed as strategic minerals to cut its dependence on the Asian giant's rare earths exports.

Hallgarten said with few developers that have mines ready to build, there is no threat of oversupply, but as Japanese rare earth end users start pulling their plants out of China to friendlier Asian jurisdictions, China will start moving to buy rare earth mines in other countries.

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Chinese companies have already accumulated substantial investments in Australian producer Northern Minerals Ltd. and hopeful Arafura Resources Ltd..

"However, by China itself having declared rare earths to be a sort of 'national treasure' it has alerted other governments to the sensitivity of Chinese ownership of such assets in their jurisdictions," Hallgarten said.

China wants new energy vehicle annual production to reach six million units by 2023, which would need 30,000 tonnes of rare earth elements.

Thus China will end up being a large minority shareholder in rare earth projects in Australia and elsewhere but any attempt to take over such companies will likely be blocked.

UBS resources analyst Daniel Morgan, whose firm is acting for Wesfarmers Ltd. in its bid for rare earths producer Lynas Corp. Ltd., said China has an "overwhelming desire" to become the world's "center of excellence for high end manufacturing" through its Made in China 2025 initiative.

"Rare earths is a small but critical component" in the needs of that initiative, Morgan said, and China has an advantage given it's widely known that it accounts for some 80% of production — though Hallgarten said that doesn't necessarily mean China actually mined 80% of the metals.