Does the rare earth media frenzy around the US-China trade war miss the mark?
Like a slow-boiling frog, consumers have either ignored or merely croaked about China’s increasing dominance of the rare earths market, when they should have been hopping to develop alternative supplies. The media frenzy being played out under the guise of the US-China trade tariff dispute is misplaced. As China advances its economic and environmental agendas, its technological and trade advantages grow, threatening the security of other nations. China is often portrayed as the villain in this story, but the rest of the world must accept responsibility for helping to create this situation and move fast to change it.
Rare earths: why should we care?
Rare earths are 17 elements referred to as the ‘vitamins of industry’, due to the minute amounts required for a range of advanced technologies on which developed nations depend.
China first realized the importance of rare earths some 40 years ago when Deng Xiaoping said ‘The Middle East has oil, but China has rare earths’. China proceeded to quietly invest hundreds of billions of dollars in domestic rare earth resources, research and industry – a strategy spelt out in the Made in China 2025 policy – creating a value-added supply chain for rare earth products comprising 90% of global output. The rest of the world largely stood by and watched.
Call it foresight or luck but rare earths are critical to today’s clean and green economy, where zero carbon emissions targets are the new normal. The clean energy and clean transport megatrends are major drivers of the US$3-5 billion rare earths market. China turns rare earths into finished products in high demand, including smart devices, wind turbines, electric motors, vehicles and hybrids, reaping massive returns.
China’s cleaning up. What’s wrong with that?
Get our daily investorintel update
China’s objective is to become a sustainable, developed country of equal standing to other G20 nations. China’s transformation is the sum of many moving parts, not least of which is the race for 400 million Chinese baby boomers to become rich before they grow old, while another is the imperative to create an environmentally sustainable, circular economy.
Waging ‘war on pollution’, China is committed to reducing its reliance on coal, the source of 70% of China’s energy and much of its air pollution. The crackdown on water and soil polluters will be even more severe, with thousands of chemical factories facing the risk of closure at a moment’s notice, plus massive remediation costs.
Water scarcity in northern China has reached crisis as people, agriculture, energy and industry compete for this precious resource. Cheap Chinese exports consume vast quantities of water, but this is changing fast. China’s Three Red Lines policies balance economic growth against limited water resources and environmental sustainability. China is especially targeting polluting industries with low GDP contributions and high water and energy consumption. The textile industry and paper industries have already been hit, and the chemicals industry is next.
As China tightens environmental standards, supply chains for thousands of products are now vulnerable to long-term supply disruptions.
Stand by for rare earth supply disruptions. Whose fault are they?
Decades of unrestrained growth created unsustainable Chinese supply chains for millions of products as rest-of-world companies closed down and we bought from China. Short-sighted companies and purchasing managers, motivated by short-term objectives and personal incentives, talked about supply security and sustainability but continued to buy the lowest priced commodities from polluting Chinese companies. They demanded that new, non-Chinese projects matched, or even undercut, Chinese prices, and were not prepared to invest in new projects themselves, for their own long-term supply security. Unfortunately, it will probably take supply disruptions to change this behaviour, and that means there will be a long lag before new projects replace Chinese supply.
Securing lithium supply for batteries is a recent exception to this behaviour pattern, but devices and vehicles requiring lithium batteries also need rare earths.)
A Chinese ban on rare earth exports happened briefly in 2010, resulting in rare earth prices jumping 300-1,600%. Japan’s response to the crisis was to create a US$1billion fund to finance non-Chinese rare earths projects to support Japanese industry. In the rush for development, most of this fund was wasted on bad projects, but Lynas emerged as a beacon of hope, and prospers today thanks to ongoing support from its Japanese partners.
In the next decade, at least three more projects of equivalent size to Lynas are needed to meet continued exponential demand growth for electric vehicles, with China leading demand. China could become a net importer of rare earths. What will other nations do then?
Australia has a new rare earths project. Who’s smart enough to hop on board?
Typically, the Chinese aren’t waiting for a crisis to occur. Private and state-owned Chinese companies are moving to control rare earth resources in Australia, Africa and elsewhere, before the rest of the world realises that we’re in hot water. The Chinese will buy cheap raw materials abroad and capture most of the value at home.
Cash-strapped small mining companies ultimately turn to China for financing and offtake agreements, and their countries consequently lose sovereignty over their resources as well as losing the greater processed value of their minerals.
It doesn’t have to be this way.
In central-west NSW, Alkane Resources Ltd.‘s (ASX: ALK | OTCQX: ANLKY) Dubbo Project can supply 6,500 tonnes of rare earth oxides annually (including approx. 1,400 tonnes of the key rare earths used in permanent magnets), for 75+ years. The most advanced project of its kind outside China, its strategic value is clearly high and increasing. To progress the Dubbo Project to construction, Alkane Resources seeks a blend of financing from export credit agencies, strategic partners and equity and debt markets. Information for investors is available here.
Alister is an expert in the zirconium/hafnium industry and its expanding global markets, with a deep understanding of the critical issues in rare earths/metals supply. ... <Read more about Alister MacDonald>