Beijing Threatens Damaging Rare-Earth Export Ban As Trade Fight Intensifies

Once dismissed as a "nuclear option" that would only be invoked by Beijing as a last resort in the burgeoning trade war with the US, it's looking increasingly likely that the Communist Party might impose an export ban on rare-earth metals, creating serious supply-chain issues for American producers of everything from microchips, to batteries, to night-vision goggles.

Xi

After Global Times editor and Trump Twitter foil Hu Xijin warned on Tuesday that a ban was being 'seriously considered' (which followed a visit by President Xi and Vice Premier Liu He to a rare-earth mine that was widely seen as a threatening gesture), China's powerful state-planning body threatened to use rare earths as "China's counter-weapon against the US's unwarranted suppression"...while a host of state-controlled media organizations used rare threatening language intended to convey that Beijing isn't playing around.

As BBG explained, an editorial published in the People's Daily on Wednesday used the phrase "don't say I didn't warn you", which is loaded with historical significance. That specific wording was used by the paper in the early 1960s before China fought a brief war with India; it was also used before conflict broke out between China and Vietnam.

The newspaper’s commentary included a rare Chinese phrase that means "don’t say I didn’t warn you." The specific wording was used by the paper in 1962 before China went to war with India, and “those familiar with Chinese diplomatic language know the weight of this phrase,” the Global Times, a newspaper affiliated with the Communist Party, said in an article last April. It was also used before conflict broke out between China and Vietnam in 1979.

On rare earths specifically, the People’s Daily said it isn’t hard to answer the question whether China will use the elements as retaliation in the trade war.

The Global Times added that while China is aware that it's economy might suffer some blowback from a rare-earth metals ban, "the US would suffer greater losses."

China is fully aware of the fact that the global supply chain is exercising its influence over industries of almost every country in the world. If China decides to ban rare earths export to the US, it would produce complex effects, including incurring certain losses on China itself. However, China also clearly knows that the US would suffer greater losses in that situation. Recently, some US media suggested that China's export ban on rare earths would not serve its interests in trade tensions and could even "hurt the country's economy." Those remarks show that the US is deeply worried about China using export bans on rare earth as one of its tactics, which puts pressure on the US.

The tensions spurred a rally in shares of rare-earth miners - not just in China, but around the world. Hong Kong-listed shares of China Rare Earth Holdings Ltd soared by more than 30% in morning trading, while JL MAG Rare-Earth Co Ltd, rose by the daily 10% limit to a record high. China Northern rose by 8.68% as of close on Wednesday. Australian miner Lynas Corp., the biggest producer of rare earth products outside China, climbed 16% in Sydney.

Rare

On Tuesday evening, China's National Development and Reform Commission published a Q&A warning that China wouldn't tolerate its own exports being used by adversaries in the furtherance of "unwanted suppression," per the FT.

"Will rare earths become China’s counter-weapon against the US's unwarranted suppression? What I can tell you is 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," the notice read.

When the US started imposing tariffs on Chinese imports, Washington made sure to exclude rare earths from the list (though rare earths from China typically travel through a long supply chain before they arrive in the US). A few years ago, China imposed quotas on rare-earth exports, but swiftly dropped them after the US and others brought a case to the WTO. 

As rare-earths become increasingly central to the trade spat, it's worth remembering that the name 'rare earths' is a bit of a misnomer: Most of the 17 rare earths critical to high-tech devices are more abundant than precious metals like gold and titanium. The issue is finding deposits with high enough concentrations to make mining economically feasible. Also, the mining and refining process of rare earths is so economically damaging, which has made many companies reluctant to open mines.

China

As it stands, China controls 80% of the rare-earth supply.

BBG

But efforts to expand production outside of China were already underway before the latest round of trade-war escalation. Earlier this month, WSJ reported that American chemicals company and Australia's Lynas Corp. are planning to build a rare-earth minerals separation plant in the US, one of the first such projects in years.

Meanwhile, other new projects are being explored around the world.

BBG

Still, if China were to severely limit the export of rare earth metals, they would throw the global supply chain for dozens of high-tech products into chaos. While there would certainly be collateral damage, the advantage is clear: New mines couldn't be brought online fast enough, leaving Washington extremely vulnerable, at least in the short term. Given the desperate need for these products, we wouldn't be surprised to see rare-earth export curbs change the nature of the trade spat from 'cold' to 'hot':