I am often asked to introduce technology metals based ventures to the sourcing/purchasing activities of the OEM automotive industry, based in Detroit, where I have lived for most of my 83 years, and for which I was a supplier of production parts and engineered materials for more than 30 years.

I find an almost complete lack of understanding of marketing and sales to the OEM automotive industry to be common among technology metals miners and refiners, who are of course the anchor companies of any and all production parts’ supply chains.

In the past this has been of little interest to the OEM automotive industry due to its standard operating procedures of choosing preferred vendors, known in the industry as Tier One Vendors, who then became responsible for choosing their own vendors of parts and services, subject to the acceptance of the Tier One product by the end-use customer’s internal Production Part Acceptance Protocol (PPAP), and even then, subject to on-time delivery, in the agreed quantities, to the customer’s specification at the agreed pricing. Failure in any one of these required categories could, at the discretion of the OEM, result in the “desourcing” of the (approved otherwise) vendor. To ensure security and continuity of supply, the end-user normally would have a primary Tier One vendor and at least two alternates, each of which would normally get a small percentage of the total “buy” to keep it in the game. The alternates would be required to have the capability and the capacity to supplement or even replace the primary in the event of partial, or even total, non-performance by the primary.

Such Tier One Vendors are of course operating companies with an existing output or capability to produce the parts in question. They will have positive cash flow and, typically, are public companies with a listing on a major exchange and a substantial market cap. The core competency of each and every company in the total supply for the part chain would be required and it is understood to be guaranteed to the OEM by the Tier One.

Nowhere is the decay of proven, verifiable, competence as the sine qua non “standard” more apparent than in the, most likely to be, disastrous exemption of the PPAP standard in the OEM automotive industry for lithium-ion battery manufacturing. Rare earth permanent magnet motor manufacturing may soon be compromised by the same decay of standards.

The pathetic and jejune industry “experts” who not only analyze but, even worse, advise the OEMs on the sourcing of production parts based on critical metals are unified by their almost complete lack of practical experience, education and knowledge of the origin, processing, fabricating and manufacturing engineering at commercial scale of the total supply chains for the critical metals enabled devices upon which the motive power, “engine” management, and supply of information for the drivers of EVs depend.

Last week we were told by this “expert” class of journalists and advisors that both germanium and gallium were “rare earths” and that they were used in batteries. Both “expert” statements were completely wrong and misleading.

Earlier this year we were told and continue to be told by an “expert” firm that the economy needs “only 300” more lithium mines to meet the needs of a zero-carbon economy. Apparently, these fools think that there is not only a standard size lithium mine, but also a standard predictable demand for lithium. Mining engineers and mining company CFOs will be delighted to find out about this development.

I’m going to try from now on to list the Erroneous Critical Minerals Supply and Demand statement of the Week each Friday.

Attention manufacturing executives and policy makers: You need to do a due diligence review of your “experts,” before you act on their advice.

Hint: Make sure that their jobs don’t depend on always agreeing with you.

A final comment: Germanium and gallium are critical to chip manufacturing, LEDs, and military optics. The “CHIPs” act and the “IRA” pledged more than $50 billion in subsidies for domestic chip manufacturing and battery manufacturing, but not ONE CENT for domestic gallium or germanium production.

Is this how policy experts in Washington think we can become independent of Chinese dominance in critical minerals production and processing?  

In recent months China has escalated tension over Taiwan. An example of this came last month when CNN reported: “Military exercises suggest China is getting ‘ready to launch a war against Taiwan,’ island’s foreign minister tells.” CNN quotes Taiwan’s Foreign Minister Joseph Wu stating, “They seem to be trying to get ready to launch a war against Taiwan. Look at the military exercises, and also their rhetoric, they seem to be trying to get ready to launch a war against Taiwan.”

Taiwan’s Foreign Minister would be better informed than most and he clearly feels a China invasion is a very real near-term threat.

It should also be noted that President Biden has said that the U.S. would defend Taiwan militarily if China were to attack.

Potential losers if China invades Taiwan

In the short term, most stocks globally would be hit if China invades Taiwan. The biggest loser would likely be Taiwan stocks and the Taiwan currency.

Taiwan’s leading stock Taiwan Semiconductor Manufacturing Company (“TSMC”) (TWSE: 2330 | NYSE: TSM) would be the largest concern for Western investors. If the business was forced to shut down, it could cause havoc globally with the semiconductor industry.

CNBC reported in 2022:

“If China were to invade Taiwan, the most-advanced chip factory in the world would be rendered “not operable”, TSMC Chair Mark Liu said. … Liu said that if Taiwan were invaded by China, the chipmaker’s plant would not be able to operate because it relies on global supply chains.”

TSMC produces approximately 60% of the world’s semiconductor foundry market, essentially the chips that are then used by companies in products such as smartphones, PCs, autos, and military hardware.

In 2022 the U.S. passed the Chips and Science Act, to provide billions of dollars in incentives to build semiconductor factories in the USA. The problem is that new USA semiconductor factories take time, expertise, and billions of dollars to establish.

This potentially means an invasion of Taiwan with TSMC inoperable, would lead to severe semiconductor shortages and massive global supply chain upheaval, especially across the electronics, telecommunications, auto, and defense & space sectors.

The good news is that the U.S-China trade war and then Covid-19 led to decisions to decouple supply chains and build up U.S. self-sufficiency, especially in semiconductors. Intel Corporation (NASDAQ: INTC), GlobalFoundries Inc. (NASDAQ: GFS), Samsung Electronics Co. (KOSE: A005930), Texas Instruments Incorporated (NASDAQ: TXN), and TSMC are all building new semiconductor factories in the USA.

TSMC is building a US$12 billion factory in Arizona, USA and Intel is outlaying US$40 billion on chip facilities in the USA. The CHIPS Act will pump an estimated US$52 billion into new US-based chip fabrication factories. By 2025 the USA will be in a much stronger position.

Companies that rely on semiconductors heavily in their products such as Apple Inc. (NASDAQ: AAPL) would also potentially be badly impacted.

FIGURE 1: The Nimitz Carrier Strike Group with aircraft carriers, like the one below, is operating in the vicinity of Taiwan in the Philippine Sea (April 2023)

Potential winners if China invades Taiwan

Cash should be the safest asset class, ideally in USD currency.

In terms of stocks, the non-Taiwan-based semiconductor foundries such as Samsung Electronics (13% global market share) and GlobalFoundries could benefit.

Military stocks could likely be the clear winners. Some examples would be Lockheed Martin Corporation (NYSE: LMT), Northrop Grumman Corporation (NYSE: NOC), General Dynamics Corporation (NYSE: GD), Raytheon Technologies Corporation (NYSE: RTX), and The Boeing Company (NYSE: BA).

Closing remarks

Generally speaking, a Taiwan-China war would be very negative for most technology stocks. Taiwan, Hong Kong, and China’s equity markets would be hit the hardest. U.S. stocks that rely on TSMC’s semiconductors would also likely take a hit as would those sectors that rely on semiconductors the most, such as aerospace, automotive, consumer electronics, defense, and telecommunications.

The few winners would likely be those semiconductor companies that can gain market share and achieve higher pricing due to chip shortages. The other obvious winner would be the military stocks. Cash and other safe-haven assets, such as gold and treasury bills, could also be expected to outperform.

We all hope that wars never happen, but it is wiser to be prepared just in case it does.

Lynas Rare Earths Ltd.‘s (ASX: LYC) August 3 announcement that it will invest an additional $500 million to rewrite its own already aggressive growth plan is risky, sure, but then, when it comes to rare earths, what isn’t? Managing Director Amanda Lacaze appears to be reading the demand-pull market for Lynas’ main products, neodymium (Nd) and praseodymium (Pr), as further accelerating, despite some hits to the “green” economy from the war in Ukraine. There are sound reasons supporting such a view, including the commitments by EU auto manufacturers to cease all gasoline production by 2025 and recent (surprising) political developments in the US, especially passage of the CHIPS Act (supporting redevelopment of a US-based semiconductor industry) and the current Inflation Reduction Act (also known as Build Back Better in disguise) likely to be approved this week by the House of Representatives and signed quickly by President Biden.

Lynas is particularly well-positioned to benefit from this latest legislation as it already has two agreements with the US Department of Defense for construction of two separation plants: a $30 million light rare earths plant (deal signed in January 2022) and also in June a $120 million deal for a heavy RE plant. This in addition to Japan’s ongoing demand, a not insignificant factor as Lynas self-identifies as controlling 80% of that market.

So, if all looks positive on the demand, where are the risks? Well, unvarnished success will require the split-second timing of a juggler. Expanding output at Mt. Weld should be a green light: the deposit and its characteristics are well known and should present few obstacles to an experienced team (with the usual caveats about the weather which these days can be a real Devil).

But, there is a problem with Malaysia. Despite winning an unprecedented two EcoVadis awards, political and public concerns about radioactive materials led the Malaysian government to refuse to extend Lynas’ cracking and leaching permits. (ESG Comment: this goes to show how history haunts even companies who had nothing to do with previous problems, and how hard it can be to gain and retain trust.)

Lynas announced in February of this year that it has received Ministerial approval for its Kalgoorlie rare earth processing facility, clearing the way for construction to begin. This new facility will strip and store the radioactive elements (uranium and thorium) and then ship the “clean” material to Malaysia for final processing. Thus the timing issue. If the processing plant can be constructed in record time with no unexpected issues, it could dovetail nicely with the increased output from the mine. Otherwise, lower through-put or possibly storage of mined materials could be necessary, providing a cost hit. And even if the timing is impeccable, there will be some increased product cost due to shipping to and processing at Kalgoorlie and then onwards to Malaysia.

Nonetheless, kudos to Lynas for a bold move, going for market share in a booming market with positive political signals and economic momentum. As Christopher Ecclestone said to InvestorIntel: “Lynas just goes to show that it is a doer when so many others are just talkers in the Rare Earth space.”