Although presented as the evil machinations of an enemy state, a recent Financial Times article lays out the rare earths dilemma China faces.
Rare earths in the crosshairs
Rare earths industry executives made unofficial statements indicating Chinese government officials had asked them how badly companies in the US and Europe, including defense contractors, would be affected if China restricted rare earth exports during a bilateral dispute.
The conversations should be seen against the backdrop of moves last month by the Ministry of Industry and Information Technology.
The ministry proposed draft controls on the production and export of 17 rare earth minerals from China. Although China doesn’t control the world supply of mined ores, it does dominate the refining into useable salts and metals, controlling about 80% of global supply.
Nonetheless, the country itself remains at risk to unstable ore supplies from countries like Myanmar. That may help explain Beijing’s tacit support for the recent military coup there.
The US even sends its ores to China for refining. That’s not because it doesn’t have the technical knowhow; the US simply lacks the facilities. Furthermore, China is more willing to tolerate the environmental damage from the dreadfully polluting refining process.
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Rare earths supply dependence
This lack of refining capacity leaves the US and most of its Western allies horribly exposed.
Rare earths elements are used in smartphones and wind turbines. Furthermore, every F-35 jet requires some 417 kg to provide its advanced capabilities. Rare earths are key for precision guided weapons, drones and a host of civilian technologies. For example, electric cars rely on the unique properties small quantities of such metals can create.
The Pentagon in not blind to the perilous state of the supply chain. As the Financial Times reported, the Pentagon has become increasingly concerned about the US reliance on a supply source it views as coming from a foe rather than a partner.
Ellen Lord, the top defense official for acquisitions until last year, told Congress in October that the US needed to create stockpiles of certain rare earths and reestablish domestic processing, the Financial Times reported.
China’s rare earths security
But rumors that China is assessing the damage export controls — or worse, outright bans of certain rare earths — would have on the US defense industry should be seen as an expression of its own vulnerability.
“China’s own rare earth security isn’t guaranteed,” David Zhang, an analyst at Sublime China Information, is quote by the Financial Times as saying.
“China’s economic planners have failed to predict the surge in rare earth consumption,” another source is reported as saying.
Demand for rare earths in China is high. In fact, it has consistently exceeded domestic supply over the past five years. Beijing’s first priority will be to ensure it has sufficient secure supply for domestic consumption. Questions of the impact on US consumers have more to do with the geopolitical balancing act they will have to maintain if they are to satisfy rising demand, both domestically and for export.
China knows an outright export ban would provoke a severe backlash from the West.
More serious in the short term are specific company export bans or sanctions. The US has applied such sanctions to certain Chinese companies it sees as sponsors of state bad intent.
China would find it easier to justify selective sanctions. For example, last year China’s foreign ministry announced sanctions against Lockheed Martin, Boeing and Raytheon for selling arms to Taiwan, on which Beijing claims sovereignty.
Threats of export restrictions for political reasons may be overdone. However, the US and Western Europe remain very much at risk to a vulnerable supply chain. Furthermore, high concentration and long lead times are factors working against development of alternatives.
China will favor domestic demand over exports, particularly for technologies it has designated as strategic, like defense, renewables, electrification, etc.
Demand from renewable and electric vehicle markets will soar. The slow but steady tightening of the supply screw seems all but inevitable if the West doesn’t wake up and bite the investment bullet.
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