EDITOR: | May 27th, 2015 | 19 Comments

US-Chinese tensions build rising interest in rare earths

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Black Friday is one of the features of the US shopping year when budding purchasers camp outside their local Walmart with a view to getting first dibs on some ultracheap piece of electrical goods. These events frequently devolve into violence and even death when sharp elbows become sharp objects and bystanders fall prey to the uncivilized. In recent days the rising tensions in the South China Sea prompted by a Chinese “land-grab” (though more of a land-build & grab) have nearly bought the US and China to blows.

As the chart below shows the Chinese have a very inflated view of what they actually own in the South China Sea.Spratly-Islands

Indeed it is like China has cordoned off the entry to Walmart at a great distance from the building and told other shoppers that they should not dare cross the line. It’s all (supposed oil reserves and fishing rights being the “all”) for China and nothing for anyone else. The US, as friend/protector to the other countries around the South China Sea, has waded into this fray to calm persecuted shoppers and restore order before the doors open. And the Chinese aren’t having a bar of it.

There is very little that we can see that is “diplomatic” about the Chinese actions in recent weeks as regards the Spratly Islands. In some ways this is even worse than the fishing boat war around Japan’s Senkaku Islands (some uninhabited rocky islets in the East China Sea) several years back that sent more than a frisson through REE markets when the Chinese banned exports of Rare Earths to their neighbor.

Heavy-handed might be a better word for Chinese actions. That there is no chemical relation, or otherwise, between a fishing boat and those elusive objects of desire known as Rare Earths almost goes without saying.. or at least there was not until the Chinese decided to change the game plan in its struggle with Japan over the Senkaku Islands. At the risk of sounding apocalyptic the current tussle in air-space rather than in the water has the potential to escalate and all the theorizing that pundits like ourselves have done about the West’s China-dependency in specialty metals may finally be put to the test.

Agadir Parallels

While the Agadir Crisis was not the first use of gunboat diplomacy (that had originally surfaced in the 19th century largely as colonial muscle-flexing in Asia), the incident in question was one of the most portentous and essentially presaged the First World War (hence its de rigeur presence in all books on the theme).

The Agadir Crisis, also called the Second Moroccan Crisis, was the international tension sparked by the deployment of the German gunboat Panther (pictured below), to the Moroccan port of Agadir on July 1, 1911. This ship was sent to make a German presence felt at the time that the French were suppressing an uprising against their “client” the local Sultan. In a spiral of events the Spanish seized two ports and the British then threw its support behind France despite having not wanted the French to send troops to help the Sultan in the first place. The British feared the Germans seizing Agadir and making it an enclave port. Such is the potted version. It was a dry run for the haggling in the weeks that preceded the First World War three years later.

SMS_Panther_(1901)

For desisting the Germans were given Cameroon as a colony. So a gunboat on hand can be a useful thing! However Germany’s goal was really to scare France into turning to Germany, the main result was to increase British fear and hostility and to draw Britain closer to France. British backing for France during the crisis reinforced the Entente between the two countries (and with Russia as well) and added to Anglo-German estrangement, deepening the divisions that would culminate in World War I.

Some think that it was this incident that led Winston Churchill, then Britain’s Home Secretary (and shortly after made First Lord of the Admiralty), to the conclusion that the Royal Navy must convert its power source from coal to oil in order to preserve its supremacy. Commodity replacement as a strategy… sound familiar?

The Senkaku Event

The previous peak in tensions was in 2011 when a Chinese fishing boat “going about its business” was harassed by Japanese patrol boats. Some sort of altercation ensued and it “rammed” the Japanese ships and the Chinese captain ended up being arrested. The Chinese government demanded his freedom. When they didn’t get it the rhetoric was stepped up and then the Japanese claimed that REE shipments to Japan had been unofficially frozen, something which China denied, but which many traders corroborated. Much to the surprise of many, the Japanese did not tough it out (though in retrospect they probably wished they had) and instead, with rather unseemly swiftness, let the fisherman go. We had thought that they could have used intermediaries and transshipping to get REE from China through other means if they had decided to hang tough, but clearly they rushed to save their REE supply before thinking of saving face.

The Chinese, still not satisfied, demanded apologies and other reparations while the Japanese said they wanted China to pay for damage to their vessels by the fishing boat. The issue was allowed to fade away because the “hostage” was no longer in the middle but the real hostage was patently clear to the economic community. In various key metals the Chinese have the rest of the world over a barrel. Without stockpiles or alternative sources (or even recycling processes) the West is at the mercy of China’s mood swings and grandiose machinations.

The Spratlys

Obviously in the latest case we don’t have colonies or quasi-colonies (like Cameroon and Morocco) in contention but we do have oil (as the reefs and rocks create a zone of influence to claim suspected undersea oil reserves). All the countries around the South China Sea claim the Spratly (and Paracel) Islands to varying degrees. As the map shows the Spratly’s are much closer to the Philippines than they are to China. Never let distance stand in the way of a land-grab though. All of these claims were rather theoretical until recently but the Chinese decision to turn what was a shipping hazard into a military base by importing sand, rocks and cement and building some sort of a runway has made a technical claim into a reality under the old saw that “possession is nine-tenths of the law”. The Chinese have not only become squatters on this remote outpost but have also claimed the airspace and quite literally told the US Air Force to “buzz off”.

The Senkaku dispute got very close to becoming a shooting war and this was only narrowly avoided, the Spratlys may be the one to do it. If we dust off the history books, Agadir was merely a sideshow with the eventually trigger for WW1 being the assassination of Archduke Ferdinand of Austria in Sarajevo, three years later.

Conclusion

The old saying that those who do not remember history are destined to repeat it comes to mind. The Senkaku Islands events had the Chinese rankled at the Japanese and conjuring up the bogeyman of Japan’s actions in the 1930s and 1940s. Ironically one lesson from that time was that the Japanese push across the region was made in the name of the Greater East Asian Co-prosperity Sphere, which many in Asia now see being revived with the Chinese having purloined the notion and doing its best to make its own version.

A few rocks in the ocean don’t seem much, but provocations don’t need to come in large sizes (or of Archducal status). The Nazi’s invaded Poland on the pretext of a stooged raid by “Polish” troops on a German radio station in August 1939. Thus rocks and reefs can have their nationalist uses.

The West seemingly has not learnt the lessons of the fishing boat incident and things are escalating up the food chain with the US now involved in the sharp elbowing over the Spratlys. This is potentially a whole different order of magnitude. The West now has Lynas and Molycorp in production, which were not back then. The position of Heavy Rare Earths supply though is scarcely better while there has been nothing done to improve the non-Chinese production profile of a swathe of non-sexy, yet still important, technology metals which China has in its vice-like grip. At least a sound stop-gap would have been to build stockpiles, even if one wasn’t going to foster producers. But no.. paying lip service won out again over action.

They say that truth is the first casualty in war… well this time around it may be shorters in the Rare Earth space.


Christopher Ecclestone

Editor:

Christopher Ecclestone is the EU Editor for InvestorIntel and is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten ... <Read more about Christopher Ecclestone>


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Comments

  • Fred

    China’s preferred technique is to win at the game of “the straw that broke the camel’s back”. China’s hope is that the camel’s back just keeps getting stronger, and doesn’t break. So no war over the islands. But the US is the only country that has the potential to meaningfully stand up to the Chinese. And China realizes that it is unlikely, in the next few decades, to see a US President as weak on international affairs as Obama. So that straw is being thrown onto that camel’s back at a frantic pace. China hopes that it can de facto win the islands before the US’s next President can get his feet wet in international affairs.

    May 27, 2015 - 11:49 AM

  • Daniel

    You’re missing the point. A Military Alliance between Russia and China with nukes aimed directly at the United States if the US cant find a diplomatic solution.

    May 27, 2015 - 1:50 PM

  • Fred

    There is no real military alliance between Russia and China. They would slit each other’s throats as quickly as as they would anyone else’s. The only thing resembling an alliance is the fact that China and Russia will not complain when the other country steals territory, as long as it is not their own.

    China is stealing the territory because it thinks it can. Forceful diplomacy is only possible when there are likely concrete consequences. China knows that Obama won’t go to war over the islands. Obama could push through economic sanctions. Given the US’s lack of a functioning REE strategy, and Walmart selling mostly Chinese goods, this is inadvisable any time soon. And if the US did enact economic sanctions against China, it was a similar strategy that caused Japan to attack the US in World War II.

    So what diplomatic solution are you advocating? Why should China listen to Obama? Putin isn’t. The US is stuck with a President who would never be good at foreign relations if he lived to be 100. China is in hurry up mode building islands before the next President takes office.

    May 27, 2015 - 7:33 PM

  • merlion

    “As the map shows the Spratly’s are much closer to the Philippines than they are to China.”

    Substitute Falklands for Spratly’s, Argentina for Philippines, and Great Britain for China. Add an Iron Lady, a good Royal Navy and you maintain the status quo.

    Possession is 99% of the law.

    Empires usually lock military horns when the aspiring power takes on the existing – but the British let the US have it all when they ceded about 75 years ago. Not a shot was fired.

    [They remember Paul Revere’s legacy ;-)]

    ‘Stalemate’ is the late John Nash call. There are lots of ‘unsinkable battleships’ to be built as Chinese sand dredgers construct more airstrips. This maritime Silk Road will remain open.

    May 27, 2015 - 8:40 PM

  • Alex

    I guess Russia will not support USA sunctions against China.

    May 27, 2015 - 9:27 PM

  • asrms

    Any economic tension between the Chinese, Japanese and the West in general can only be a positive for Lynas and Molycorp.

    May 28, 2015 - 9:57 AM

  • Daniel

    Fred
    Neither Russia nor China can stand up to the US military separately. If the US start a conflict in the Spratley Russia will attack the US directly in North America.
    Whether China needs the US as a market is questionable.
    Its the Obama administration that is pivoting to Asia. The US refuses to use their own resources(American lives) but incent other countries to pay the price to strategically weaken their competitors. CNN was there as a pipe dream to form an Alliance against the Asian Infrastructure Investment Bank. Australia has taken the bate and will challenge China. Its to turn world opinion against a new financial world order the Silk Road.
    At present I have no solution without the aid of Leaders of Countries but I would advocate a shared resource structure and freedom of navigation excluding military vessels treaty. The problem is the US, they want a conflict. They have a limited time line before Russia and China catches up with military technology.

    May 28, 2015 - 12:31 PM

  • merlion

    Good guess, Alex!

    There’s a dress rehearsal and a template to contemplate.

    The dress rehearsal case was Scarborough Shoals (to the north of The Spratlys and 200km west of Subic Bay) where China grabbed the seafood booty and still has it. That crisis flared up 3 years ago. Current status? As you were, soldier.

    The template case is Crimea. Putin annexed that one in April 2014 and the motivation was military. Sevastopol’s naval infrastructure is the booty. Last time I checked, it’s still in Russian hands. As you were, soldier.

    The Spratlys is a template copy. Clearly, the motivation is military. The oil is a bonus.

    If the US slaps sanctions on China, again, history offers a precedent. Argentina copped trade sanctions in 1982. (Falklands crisis.) Trade between Europe and ARG got re-routed via Swiss trading addresses. The nimble gnomes made millions.

    If sanctioned, Chinese trade would find its way in and out. Russia and ‘green border’ neighbours would benefit directly. As for the RE supply chain, expect disruption and price volatility.

    George Soros warns we could be “on the threshold of a Third World War”. That’s here: http://www.gold-eagle.com/article/gold-capped-soros-warns-%E2%80%9Cthreshold-third-world-war%E2%80%9D
    Look at the ‘Power Projections’ graphic sourced from the Wall Street Journal.

    Game over!

    (Psst. Soros has money in the game!)

    May 28, 2015 - 8:54 PM

  • charles.1

    Soros is a reporting shareholder in Tasman.

    May 28, 2015 - 11:47 PM

  • Fred

    Daniel, it was only a few generations ago that Communist China and Communist USSR fought their own border war. Currently they’re trying to implement a cross border gas pipeline deal from Russia to China. But don’t think of this too much as a treaty. Russia similarly supplies Ukraine.

    After backing down on Syria’s WMD red line, and pulling the troops out of Iraq so quickly that ISIS could take over, militarily Obama is acting like the 98 pound weakling at muscle beach. It is true that he pulled a fly over of the Spratlies, but all of the other world leaders have been able to consistently thoroughly outmaneuver him. Does anyone think that Obama will order the US’s military in the Pacific to actually fire weapons at the Chinese? If Obama had a Pacific strategy worthy of the name “strategy”, there would already be a functioning contingency plan for REEs.

    May 28, 2015 - 11:47 PM

  • Alex

    I don’t think that US will use “hot” war against China or Russia. Yes USA stronger in military then each of those countries. But Putin conception is if Russia will lose in ordinary war , it will be nuclear answer. So, it have to be crasy to start War betweemn nuclear States. So, it will be only sanctions.
    But this is question does Russia ban export Rare-earth from Russia or not if Chinese make this ban for USA , Japan and Europe. Anycase Lynas, Molycorp-Shinyetsu have only 10-15 tones for light REE per year

    May 29, 2015 - 12:47 AM

  • Fred

    Russia says it will spend piles of money for all sorts of projects. Now all it needs is the money for them. REE production is one of these projects. Since Russia has reasonably good relations with China, I doubt that Russia feels particularly worried about REE supplies, and their REE goals will stay mostly unfunded until the price of oil goes up, giving them the money to fund REEs. Until that funding, Russia won’t have much influence on the REE market.

    May 29, 2015 - 1:13 AM

  • Alex

    When Russia consider themself as a part of Western this REE projects will be usefull. But now, after sanctions Russia can not consider West as partner for long term bussiness. So, Russia have to secure only their own rare-earth supply chain. Not concidering big projects which can supply ROW as a supply chain part. I don’t think Russia will invest money in big REE projects because there is no demand in Russia for big projects and there is no garantee of demand from West . If goverment will not ban REE export from Russia , may be it’ll be posible to supply in sport market REE from Russia

    May 29, 2015 - 2:14 AM

  • Fred
    May 29, 2015 - 4:08 AM

  • Alex

    This big projects will not get money. They probably think that they can sale it to Western countries. There is no demand in Russia for aditional products

    May 29, 2015 - 10:23 AM

  • merlion

    Back to The Spratlys … The 14th Asia Security Summit is being held this weekend in Singapore. There’s a fulsome website to google and well worth a look.

    There’s a brilliant digest by Alexander Neill here:
    http://www.iiss.org/en/shangri-la%20voices/blogsections/2015-84cc/the-growing-chinese-us-strategic-rift-1e65

    Two quotes deliver the nub of it …
    “Short of blockading Chinese vessels in the Spratlys – which would surely risk an escalation of hostility with China – there is very little the US can do.”
    “For China to have deployed such staggering resources at breakneck speed a thousand miles from its coast would have required a long-standing, intricate master plan and huge cash reserves. ”

    Fait accompli.

    May 29, 2015 - 8:09 PM

  • Fred

    While he didn’t market it this way, Obama is pushing the Trans Pacific Partnership to counteract China. Instead of American jobs going to cheap Chinese labor, they would go to other Asian TPP members. Obviously Obama couldn’t market the deal to the American public in these terms, but this is apparently how the Chinese are viewing it. Americans, wouldn’t you rather lose your jobs to TPP members than to the Chinese?

    “There is very little the US can do.” There is so much the US can do that it is mind boggling. The US, with the cooperation of China’s neighbors, can make China wish it had never heard of the Spratlies. Everyone on this website wishes that the US had a functioning REE policy. Add to this policies for the multitude of other items that China has taken control of. And coordinate this with other TPP members, the EU, etc, etc. We won’t be able to turn China into a North Korea, but we could sure make them feel like they’re a leper colony. What is lacking is the imagination and the political will to act upon it.

    May 30, 2015 - 1:37 AM

  • merlion

    #1: “There is very little the US can do.”
    #2: “What is lacking is the imagination and the political will to act upon it.”

    #2 begets #1

    Upstream from #2 there is body bag fatigue. The US electorate is tired of the decade of human loss. At 18 months prior to a Presidential Election, the democrats would be foolhardy to play with that public sentiment.

    Upstream from #2 is an emerging mindset of DoD sequestration.

    Upstream from #2 is the US diplomat’s exit door vis-a-vis Manila. The 1951 Treaty between the Philippines and the US covers landmass but not the South China Sea (ie. West Philippine Sea).

    May 31, 2015 - 1:46 AM

  • DANIEL

    A Solution:
    The Chinese have a goal, a Maritime Silk Road and multiple Silk Road connected by railroad lines. The Maritime Silk Road is the key to resolving the multiple disputed islands. A Code of Conduct for Freedom of Navigation is paramount to the success of the “Silk Road”. Instead of bi-lateral negotiations all nations have a stake in the development of Eurasia, Middle East and Africa trade routs. Use the concept “Fair and Just”(my coin phrase) endorsed by both China and Russia to include all stakeholders as equal partner. The concept of the Silk Road is an exchange of culture and ideas along a trade route that is open to all the world as equals. Make the man made reclamation islands open to all to safe guard the trade route. I would suggest making the reclamation islands a place of refuge for the Rohingya boat refugees and build an economy on those islands.

    June 1, 2015 - 5:13 PM

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