By Will Diem

As the trade war between the United States and China drags on, Bejing is considering ways to gain leverage beyond tariffs. Because China imports from the US far less than it exports to the United States, it cannot retaliate to US tariffs dollar-for-dollar. The Washington Examiner notes that “Beijing has to date placed tariffs of 5% to 25% on about $110 billion worth of U.S. goods, which is close to the total amount it imports annually. It has only an estimated $10 billion worth of U.S. imports left that it could place new tariffs on, according to Census Bureau data.” For perspective, the US has imposed tariffs of 25% on $250 billion of Chinese imports and has threatened to impose tariffs on an additional $325 billion of imports.

There are various non-tariff retaliations to US tariffs still open to Bejing. One of these options is placing restrictions on the export of rare earth elements, which has been referred to as China’s ace in the hole. According to Bloomberg, the Chinese government already has plans in place–that could be implemented immediately–to restrict the export of rare earth elements to the US. Racket Hu, of Shanghai Metals Market told Bloomberg TV that, “China definitely dominates supplies [of heavy rare earth elements], and if China abandons those exports, I don’t think the U.S. can find alternatives.”

Rare earth elements–the fifteen elements with atomic numbers from 57-71 as well as the elements Scandium and Yttrium, which have similar chemical properties–are crucial (though usually in small quantities) for the manufacture of many modern technologies from hard drives to batteries to LED screens and motors in electric vehicles. The vast majority of these rare earth elements are today sourced from China.

Contrary to the name, rare earth elements are not especially rare in the earth’s crust–most of them are about as abundant as copper, lead, or mercury and even the second-rarest (thulium) is far more abundant than gold. China only has about 30% of the total minable rare earth deposits in the world–there are also significant known deposits in Russia, India, Australia, and the United States.

But extracting pure rare earth elements from their ore (which often includes radioactive elements) is an involved chemical process that produces significant hazardous waste. The Verge reports that “the Chinese government estimated that [as of 2010] the industry was producing 22.05 million tons of toxic waste each year.” Although China controls only about 30% of the deposits, China produces about 80% of rare earth elements, largely because of its dominance in processing.

China did not always have such a dominant position in the rare earths market. It became a major supplier of rare earths in the mid-1980s, and in the mid-1990s it massively increased its output, driving down the price of rare earth elements and jeopardizing the economic viability of other sources.

According to the USGS, from the mid-1960s to the mid-90s global production of rare earth elements was dominated by the Mountain Pass mine and processing plant in California. The Mountain Pass processing plant was partially shut down in 1998 due, according to the Verge, to problems disposing of toxic water, while the mine itself was closed four years later, a casualty, according to the Verge, of the drop in prices following the massive growth in China’s output during the 1990s. (The Mountain Pass mine, it should be noted, was reopened in 2012 and again in 2018).

Widespread demand for stable sources of these essential ingredients of technology has recently given rise to plans to reopen old mines and processing facilities and to develop new ones. Scientific America reports that the new owner of the Mountain Pass mine in California, MP Materials, plans to reopen the processing facility next year (2020); according to Reuters, they currently ship the 50,000 tonnes of rare earth concentrate produced at the mine each year to China for processing. Australian company Lynas Corp. and the US-based Blue Line Corp. plan to open a processing plant for rare earth elements in Texas, though the facility won’t be operational until at least 2022. On the mining front, Texas Mineral Resources Corp. hopes to open both a mine and processing plant at Round Top (in western Texas) in 2022, according to Reuters.

Another source of these elements might be found in American homes: rare earth elements are present in many devices with short lifetimes, so recovering and recycling them may prove viable source as prices increase. Apple, which–according to CultOfMac–uses nine rare earth elements in its flagship iPhone, has begun trying to recycle materials, including rare earth elements, from old iPhones, though due to the small quantities used in each individual device, the project of salvaging them has proven difficult to make economical. “The science and engineering is not at the place to support Apple at that goal without having a $5,000 iPhone,” Eric Schelter of the University of Pennsylvania told Gizmodo.

As some companies are looking to find sources outside of China, other companies are finding ways to reduce their demand for these materials. BMW, for example, plans to remove all rare earth elements from its motor for next-generation electronic vehicles. Stefan Juraschek, BMW’s Vice President of Electric Drivetrain Development, told BMWBlog that “We are endeavouring to gradually lower the proportion of critical raw materials that are used . . . the electric motor in our fifth-generation electric powertrain is [an] illustration of this, as it is completely free of rare earths.”

These alternatives to relying on a single country as the source for critical materials will take time to come to fruition. In the meantime, experts note that companies have been stockpiling these elements to weather short-term disruptions in their supply chain. Citing standing inventory of rare earth elements, Eugene Gholz (professor at Notre Dame and former senior advisor to the Pentagon’s Deputy Assistant Secretary of Defense for Manufacturing and Industrial Base Policy) told Scientific America, “I don’t think there is an obvious supply gap or hole where someone will not be able to get a Prius or Tesla or whatever they’re looking at.”

 

This article was contributed to www.psgclarity.com, a division of Planning Solutions Group, a financial planning firm.  If you would like to discuss your financial goals with Brian Kuhn, CFP® the financial planner quoted in this article you may schedule a time using the online scheduler at this website, or calling 301-543-6035 or emailing him at BKuhn@psgplanning.com.

No portion of the content in this article may be construed as investment or tax advice.

Securities offered through Triad Advisors, Member FINRA / SIPC.  Advisory Services offered through Planning Solutions Group, LLC.  Planning Solutions Group, LLC is not affiliated with Triad Advisors. PSG Clarity is a division of Planning Solutions Group, LLC