October 25, 2018 / 4:53 AM / 25 days ago

Breakingviews - China aims rare earth bazooka at trade rivals

Rare earths dug up and processed into concentrate at Mount Weld in Western Australia, are pictured after being shipped to the Lynas plant in Gebeng, Malaysia, July 3, 2014. REUTERS/Sonali Paul

HONG KONG (Reuters Breakingviews) - Beijing is limiting its output of rare earths, according to Adamas Intelligence. That tackles lingering oversupply of the tough-to-mine minerals, but could easily also starve foreign buyers of key ingredients like cerium and neodymium, used in catalysts, electronics and weapons - a drastic trade war escalation that would punish profit margins. An overdue rush to develop new supply outside China, though, will come too late.

The dominance of the rare earths’ market by the People’s Republic encapsulates a lot of what trading partners worry about. The elements, common throughout the earth’s crust but tricky to extract, were perceived as strategic two decades ago by leader Deng Xiaoping, who compared it to the Middle East’s oil bounty. He instructed Chinese state-owned companies to dig deep, and they did - assisted by a horde of smaller private miners that drilled in haste, polluted liberally, and drove prices so low it became uneconomical for many foreign rivals to stay in business.

U.S. Geological Survey data shows China holds around a third of global reserves, and accounted for 80 percent of output last year. The United States imported $150 million worth from the People’s Republic in 2017. This is a worry for security hawks: in 2010 Beijing used its near-monopoly in a trade fight with Japan, halting exports. The application in modern weaponry has the Pentagon fretting too.

Now China could be turning back to its old playbook, with plans to slash production to 45,000 tonnes in the second half of 2018, according to Adamas. Some of that might offset previous excesses, but Adamas argues it won’t leave much for foreign buyers. Meanwhile, the cuts will send prices higher: gravy for Australia’s Lynas, one of the world’s few significant alternative producers, but tough on consuming manufacturers.

Beijing could reward some countries with exports in exchange for concessions. Japanese Prime Minister Shinzo Abe is in China today, and firms like Panasonic and Toyota are both exposed to rising costs. For U.S. companies it could be more painful. Even with the required economic incentives, it would take years to open new mines elsewhere. Beijing can make its point.

Breakingviews

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