Commentary

It is hardly surprising that En+, owners of Russian aluminum producer Rusal, are pressuring the LME to force other aluminum producers to disclose their carbon footprint.

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Rusal finds itself in the fortunate position of all its smelting capacity being powered by renewable hydroelectric power. When by fair means or foul En+ came to acquire much of Russia’s primary aluminum assets in the years after the collapse of the Soviet Union, the fact the majority of its power came from hydro was of little consequence beyond the benefit it was a reliable power source and one not subject to fluctuating global energy prices in the way that coal, natural gas or oil can be.

But in those days, global warming and corporate environmental responsibility was in its infancy. Now, the producer’s carbon footprint is a very significant contributor to its brand strength — either a huge asset, if it is near zero, or a huge negative if the firm has a significant negative carbon footprint.

Rusal has made efforts in recent years to close its few aging coal-powered generating facilities and invested in its hydro plants, both for energy security and because it had the vision to see that a total reliance on near zero-emission hydropower was a potential major brand strength.

Firms are demanding their supply chain measure and report their carbon footprint and are becoming increasingly sensitive to the contribution this makes to the carbon footprint of their own products and services.

With the vast energy demands inherent in aluminum production, aluminum consumers are often more aware than other industries about these metrics. Some producers, like Rusal and Norsk Hydro, can supply material with a very low-carbon signature because of their primary smelters’ power sources, while Novelis’s scrap-based supply chain has a significantly lower carbon footprint than semi-finished manufacturers sourcing raw material from most conventional primary supply chains.

Others based on coal and using older technologies can produce up to 20 tons of carbon dioxide for every ton of aluminum, according to the Financial Times.

Nor is the aluminum industry alone.

Just last month, Forbes listed 101 corporations pledging to improve their environmental credentials, notably their carbon footprint (but also sustainability in various forms).

These firms and their shareholders are not, on the whole, spending hard-earned dollars to achieve such goals out of altruism; they are an example of the old idiom nothing gets done unless someone can make money out of it.

These firms see burnishing their image by such means as likely to boost sales. Whether they are part of the minority that denies we even have a climate change problem is not, from a business perspective, relevant. The vast majority of their customers do increasingly believe we have a problem and are willing to make purchases decisions on the basis of their supplier’s image as a sustainable and environmentally responsible company.

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So, En+ lobbying the LME is a move to maximize what they rightly see as an opportunity to position themselves as the lowest carbon content major supplier in the marketplace. To the extent that they are successful, it will translate directly to the bottom line in enhanced sales and security as a preferred supplier.

They are not alone in their exploitation of such opportunities, but you have to admire the way they are showing much of the rest of the industry the way.

GM workers this week went on a nationwide strike, the first since 2007 at the Big 3 automaker (pictured: the ACDelco and GM Genuine Parts processing center in Burton, Michigan, which opened in August 2019). Photo by Jeffrey Sauger for General Motors

Nothing entertains me more than receiving an oddball inbound phone call, email or, in this case, text message when something hits metals markets.

A great inbound came in yesterday regarding the nationwide strike at General Motors, which could have an impact on steel prices.

The question, “Do you think the GM strike will pull the market down further?” resulted in an immediate reply, “I don’t follow the stock market as closely as I do commodity markets.”

To which this large steel buyer replied, “I’m talking steel market, not stock market.”

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Now, that’s a very good question!

Let’s do a quick calculation to assess impact. I feel like I’m interviewing for a big consulting firm and they have given me my first case study — “how would you calculate the GM strike’s impact on steel demand?”

So, here goes:

  1. GM produced 8.4 million cars in 2018.
  2. According to the God of Google, 2,138 pounds of steel (on average) are in every car/truck produced by GM.
  3. So, 8.4 million cars annually multiplied by 2,138 pounds of steel — we converted the 2,138 to 1.069 short tons — equals 8.98 million short tons of steel.
  4. The average automotive OEM operates 365 days a year, less a mandatory two-week shutdown — so, 365 minus 14 equals 351 operating days.
  5. That means GM’s strike would hinder steel usage by 25,582.9 tons (on average) per day.

Given that the U.S. market consumes about 110 million tons annually, and GM’s share represents about 8% of domestic steel production, it would take a 39-day strike to lower demand by 1 million tons, or 1%.

Does that mean the GM strike could cause steel prices to plummet or fall further?

Not likely.

However, coming into annual contract negotiation season, buying organizations should certainly take heed of underlying steel price momentum.

Fundamentals do not drive metal prices, as we have long noted, but they may provide some leverage to other large buying organizations.

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Of course, if you disagree with this analysis, leave a comment!

Following a decade of hype, there remains huge debate about the viability of carbon capture as a solution to carbon emissions from coal-fired power stations.

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A recent article in the Financial Times lays out both sides of the argument. On the one hand, there is the one put forward by the coal lobby, broadly drawing on the work of coal miners in the form of Coal21, an industry body in Australia backed by 26 mining groups (including BHP, Anglo American and Glencore). On the other hand, there is a more disparate group of academics, research bodies and NGOs who rubbish the miners’ position as untenable.

Coal21, however, is pouring a considerable amount of money into research, lobbying and, most controversially, marketing in an effort to influence the debate in its favor.

The industry club has invested $4 million in advertising to promote the prospects for carbon capture and sequestration (CCS) as a solution to coal’s carbon emissions. That comes in addition to some $400 million BHP has pledged over five years to reduce its emissions and those of its customers.

Meanwhile, Glencore, the world’s largest coal exporter, is building a pilot plant to capture and store carbon emissions from a nearby coal-fired power station in the Surat basin in Australia, funded in part by Coal21. The plan is to capture some 200,000 tons a year of carbon, but commercial projects in Canada and the U.S. are said to be running at 50% efficiency, at best (in one case, little more than 5%). Glencore will need new technology if it hopes to reach the 90% efficiency CCS plants are headlined to achieve.

Even then, grave doubts remain as to their economic viability for coal-fired power generation.

Source: Financial Times

CRU research is cited by the FT estimates the technology is only viable if the carbon dioxide (CO2) can be sold to other industries as a commercial source of CO2. Generally, it is either simply stored underground or used to boost oil field production by pumping sequestered CO2 back into oil reservoirs.

Without the value generated by selling CO2 to other industries, the cost of the technology needs to fall by 50% to make pure CO2 storage economical, the Financial Times reports. Cynics suggest miners’ focus on CCS as a solution has more to do with countering what they see as an increasingly negative view of coal use as the consequences of rising CO2 levels is more widely accepted.

Coal miners may be facing a losing battle, regardless of public perceptions.

The article reports that in many parts of the world, solar, wind and battery storage produces electricity at lower cost than coal, not to mention the advantages of lower CO2 producing natural gas and the latter’s greater flexibility to provide swing production to balance renewables’ lower predictability.

Although huge sums have been poured into CCS research and multiple pilot plants have been set up around the world, the technology is still less efficient than necessary and more expensive to operate than required if it is to be economical (certainly for coal-fired power generation).

But there are other industries where large quantities of CO2 are generated. The arguments for CCS may be on a firmer footing for industries like cement, steel, and oil and gas.

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If the technology can be further refined to reduce emission from these industries, that would be a huge gain — but for coal-fired power stations, CCS looks like a lost cause.

A recent article in the ever insightful Stratfor Worldview this month underlines how the world is not short of copper ore deposits — they are, at least in this example, just in the wrong place.

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The article covers a long-running dispute between the Pakistani government and mining company Tethyan Copper Co., a joint venture between Canada’s Barrick Gold Corp. and Chile’s Antofagasta PLC, the article explains.

The dispute is over the legality of Tethyan’s claim and rights to exploit the copper and gold reserve at Reko Diq in Pakistan’s remote southwest Balochistan province, close to the Iran border.

Pakistan’s mining rights and practices, not to mention its infrastructure, are not fit for the purpose, as Tethyan’s story underlines all too well.

Rights were originally granted to BHP by way of a decades-old pact called the Chagai Hills Exploration Joint Venture Agreement (CHEJVA), signed in 1993 between the Balochistan Development Authority and the Australian miner. The rights were subsequently acquired by Tethyan, which has been in a long-running dispute ever since.

The company has invested some $220 million in exploration to prove the resource and carry out feasibility studies. However, probably in a bid to wring more out of the firm, legal challenges were taken to the provincial courts. The resulting legal proceedings caused delays, which finally drove the firm to take the case to the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) and the International Chamber of Commerce, resulting in a $5.9 billion fine against the Pakistani authorities.

The current impasse is in neither party’s interests.

Tethyan has offered to negotiate a settlement, but with the Chinese on the sidelines bidding to extend their Belt and Road involvement in the region, conflicting loyalties and priorities are in play.

A solution, though, would be very much in Pakistan’s interests.

The resource is said to be the largest untouched deposit in the world, containing an estimated 2.2 billion metric tons of mineable ore that could yield 200,000 metric tons of copper and 250,000 troy ounces of gold annually for over half a century, Stratfor reports.

But exploiting it requires international expertise and finance.

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The ore must be processed into a fine powder at the mine head before converting it into a slurry concentrate for transport through a 682-kilometer pipeline to the Arabian seaport of Gwadar. At the port, the company planned to dry the concentrate before loading it onto ships for smelting abroad — missing an opportunity to value add to refine it into pure metal.

It should come as no surprise that President Trump last week announced the imposition of a 10% tariff on an additional U.S. $300 billion worth of Chinese goods from Sept. 1.

The new tariff would come on top of the 25% levy that Trump already imposed on $250 billion worth of Chinese imports — resulting in the U.S. taxing nearly everything China sends to it, The New York Times reported.

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The move appears to be in frustration with the slow pace of negotiations since the president and President Xi Jinping met at the G20 summit in Japan in June and agreed to restart negotiations.However, talks have broken down due, the U.S. side says, to a failure by China to implement earlier promises to buy large volumes of U.S. agricultural products, a promise Trump said at the time was to be immediately implemented but was never agreed to by the Chinese side.

In what has become a media circus of twitter announcements and accusations, it is impossible to tell who is telling the truth, whole truth and nothing but the truth.

The reality is both sides use the media to pressure the other by making statements of the other’s intent, only to then accuse them of backtracking when it doesn’t happen.

More importantly, both sides seem further apart than ever and neither side seems willing or able to engage in the meaningful compromises that a negotiated settlement would require. It is therefore a near certainty the tariffs will remain in place, at least until after the 2020 presidential elections and should, if Trump is re-elected, quite possibly continue for many months thereafter.

The Chinese side, much like the Europeans in dispute with the U.S. over Airbus and Boeing subsidies, appear to have decided the current administration is not willing to negotiate or compromise and, as such, only a one-sided agreement is possible. So, if they wait it out until after the elections, there is a chance they may have a different administration with which to deal.

In the meantime, China is likely to impose some reciprocal tariffs against a further range of U.S. goods, but they are fast running out of products to which they have not already applied some form of tariff (as they import less from the U.S. than they export).

China could increase existing tariffs, but are more likely to make life increasingly difficult for American corporations doing business with and exporting to China as a form of retaliation. The New York Times lists surprise inspections, rejections for licenses, and moves to roll out a list of “unreliable entities” that Beijing has threatened to take action against as examples of potential measures China may use other than tariffs.

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Either way, the stock market and currency market’s reaction to the news of additional tariffs says it all — both fell as investors acknowledged the damage the tariffs would cause to global growth and investment.

Last week, the MetalMiner team visited JDM Steel in Chicago Heights, Illinois.

Every once in a while, the collective MetalMiner team takes a field trip to a mill, OEM or service center, just to make sure our virtual world knowledge has some grounding in the real world.

Our most recent trip took us to the industrial park that houses JDM Steel, a specialty flat-rolled carbon steel service center in Chicago Heights, Illinois, just outside of Chicago.

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In procurement school, we are taught to treat suppliers as commodities (OK, they call it procurement and supply chain management at university). However, in all truthfulness, we know that every company must have something special that makes them great.

JDM Steel is no exception.

When asked that specific question, Joe Orendorff, JDM’s vice president of purchasing — who could easily double as a Chicago restaurant tour guide — told us his company’s claim to fame is its ability to stretcher level flat-rolled steel, as well as their ability to clean coils on their SCS Line. The SCS Line is a mechanical brushing system that provides JDM customers with an alternative to pickled and oiled material. JDM also brushes P&O material, which ultimately provides the cost advantages of hot-rolled steel, but with the appearance, along with forming and fabricating characteristics,  more closely resembling cold-rolled steel.

Not every company needs to care about surface finish and flatness, but certain industries — including rail car and tank manufacturers, and electricity box makers, among others — require it.

What Orendorff and Account Manager Erin Wright didn’t know on our tour is that we like to probe to better understand how well the service center buys and whether that service center can come to the market from a cost-advantageous position.

Here are a few questions that we covered on our visit:

  1. What do you consider to be a good CRU discount?
  2. Do you have the mills quote you in dollars or percentages, and which do you use for contracting purposes?
  3. From how many mills do you source material? (We always ask how many tons are purchased annually.)
  4. How do you use scrap prices when making purchasing decisions?
  5. How does a smaller player buy as well as a larger player? (I will preemptively answer this by stating that JDM Steel joined the North American Steel Alliance as a founding member; thus, JDM aggregates its steel buy with other smaller service centers.)

Of course, we can’t disclose JDM’s responses, but suffice it to say that this company punches above its weight class, so to speak.

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We also typically conduct a rapid fire “what did you learn?” session among ourselves after a field trip. Here is what members of our team had to say after the trip to JDM:

  • Belinda Fuller (Forecast Analyst): “It was a great experience to visit JDM in person to watch as commodity grade steel gets metamorphosed into specific steel sheet products as needed for various applications, including getting to see beautiful, application-ready finishes made directly from coil.”
  • Marcos Brioni (Principal Data Analyst): “Based upon high-end quality management and conscientious supplier selection, JDM offers high-standard steel products for its customers. JDM’s machinery balances novel and traditional procedures for exceptional, tailor-made offerings.”
  • Cassandra Weiler (Client Services Manager): “The staff at JDM are very knowledgable on the industry and metal market trends. They have found a niche market with their HRC scrubbing technology to make beautiful pieces of metal. All this, plus a good sense of humor from every staff member we met!”
  • Fouad Egbaria (MetalMiner Editor): “It is always enlightening to see how companies of all kinds leverage their processes to, as Lisa put it, ‘punch above their weight class.’ JDM is certainly an example of just that.”
  • Lisa Reisman (Executive Editor): “What in the world was I thinking about wearing white jeans to a service center?”

India’s retaliatory tariff on 28 U.S. goods, including some finished metal products, has been dubbed the “fruit and nut tax” in trade circles. The facetious label, though, does not take away from the seriousness of the developing situation.

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In India and the U.S., exporters, importers, trade and industry are apprehensive about the turn this fresh step by India will take in the coming days, especially in light of the current U.S.-China trade war.

Will the move by India escalate into a similarly full-blown trade war? Or will it be used as a bargaining chip by the Indian side during the visit by U.S. Secretary of State Mike Pompeo to India later this month?

Last weekend, the Hindu Business Line reported the Indian government slapped tariffs on 28 U.S. products, including: almonds, apples, chemicals, flat-rolled stainless steel products, other alloy steel, tube, pipe fittings, screws bolts and rivets.

India’s Ministry of Finance said the decision was in the “public interest.”

Technically, it comes in retaliation to America’s imposition of a 25% tariff on steel and a 10% import duty on aluminum products in March 2018. That it took a year or so for India to go ahead with this counter was that despite announcing the counter-tariffs on June 21, 2018, the country had decided to go slow on implementing them for various reasons, one of them being general elections held earlier this year.

So why now?

The answer to that lies in U.S. President Donald Trump’s removing India from the list of nations with preferential trade treatment, just one day after a new government was sworn in in India.

Questions are already been asked in India – will the country lose more than it will benefit because of this new move?

The U.S. is India’s largest trade partner, and India sells much more to the U.S. than it buys. Last year, India imported U.S. goods worth U.S. $33 billion and exported goods worth $54 billion. Last year, trade equivalent to $54 billion was conducted between the two nations. The equation is slightly in favor of India only in the IT sector because of the outsourcing of services to Infosys and other firms.

All of this means the U.S., if chooses to do so, could hit back at India with fresh tariffs, which in turn would escalate the trade battle and, in turn, deliver a body blow to India’s already-suffering economy.

An editorial in Indian newspaper The Hindu said the Indian government has sent “a strong message that Indian is not going to be compelled to negotiate under duress.”

“To be sure, India has much at stake in ensuring that economic ties with its largest trading partner do not end up foundering on the rocky shoals of the current U.S. administration’s approach to trade and tariffs, one that China has referred to as ‘naked economic terrorism,” the editorial continues.

“The counter-tariffs have now lent the Indian side a bargaining chip that the US Secretary of State, Mike Pompeo, will have to grapple with during his visit later this month.”

To be fair, unlike countries like Canada and Mexico, India had extended the deadline for imposition of these duties eight times in the hope that some solution would emerge during a negotiation between the two nations. Earlier, India dragged the U.S. to the World Trade Organization’s dispute settlement mechanism over the imposition of import duties on steel and aluminum. India exports steel and aluminum products worth about USD $1.5 billion to the U.S. annually.

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All attention is focused on Pompeo’s India visit, even as backchannel dialogue continues in the hopes of reaching a solution in the interest of both nations.

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On Thursday, two tankers carrying petrochemicals, one of which was a Japanese-owned ship, came under suspected attack in the Gulf of Oman. The incidents compounded the already simmering hostilities in what’s possibly the world’s most pivotal maritime corridor and spurred a significant 4% spike in the oil price, the Washington Post reported.

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The phrase “suspected attack” takes the limits of objective reporting to an extreme — there is no doubt these incidents were attacks, particularly coming hot on the heels of four previous such incidents last month.

The question is: who was behind them?

The U.S. administration is clearly of the opinion it is Iran, by which they mean the Iranian state, the proposition being the Iranian authorities are trying to show they consider the economic pressure the U.S. is exerting to be a form of economic warfare intended to bring about regime change. That is a high-risk game with the most powerful navy in the world floating off your shores, but what is less clear is whether this is the Iranian government or a hard-line faction authorizing actions by the Iranian Revolutionary Guards, or possibly another agency at work.

Iran has denied it is behind the tanker attacks.

The U.S. argues that footage of what appears to be an IRG patrol boat removing an unexploded magnetic mine from the hull of one of the stricken tankers, the Japanese Kokuka Courageous vessel, supports the U.S.’s assertion that the IRG behind this. However, the owner of the vessel contradicted the U.S. account of how the attack occurred, the Washington Post reported.

But there are even veiled suggestions it could be Saudi Arabia trying to prompt the U.S. into an armed conflict with the Saudis’ biggest rival.

In practice, though, neither side has presented any proof as to who exactly ordered these attacks or who carried them out. There has been lots of finger pointing but no proof – yet.

Does it matter, from a metals market perspective, who is behind the attacks? Well, yes. The more likely these incidents are the direct action of the Iranian state, the more likely the U.S. will reciprocate with force, and the greater the chance of further increases in the oil price.

The IMF calculates that for every 10% increase in the oil price, advanced economies suffer a 0.4% increase in inflation and a corresponding impact on the balance of payments, as most advanced economies are net importers.

Source: The Times

As the above graph from The Times shows, Brent crude had been moderating nicely, from a consumer’s point of view, since April.

Due to headwinds from rising U.S. oil inventories, moderating demand expectations in Asia, and uncertainty as to how robustly OPEC+ would be willing and able to continue oil output constraints, the oil price had been declining steadily. That trend, however, has reversed this week; a further escalation of tensions could see the price heading back toward $70 per barrel.

Oil analysts had expected prices to remain between $60 and $70 for the rest of the year according to a report by The Guardian, but further attacks could force prices back over $70. The Strait of Hormuz handles about one-third of global seaborne oil shipments, so any disruption there will have an impact on prices. The global economy will continue to turn, even if tensions escalate further and with non-OPEC supply likely to grow from 1.9 million barrels a day to 2.3 million next year, barring an all-out war.

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The price will likely fall back sharply when this current situation is resolved – quite when and how that will be, though, remains to be seen.

Oil prices are on track for their largest monthly decline in six months, the online trade journal oilprice.com writes.

The Trump administration exacerbated the selloff with another threat of tariffs, this time against its southern neighbor Mexico if it does not stem the flow of immigrants across the border. President Donald Trump threatened to apply a gradually rising tariff, starting at 5%, on goods imported from Mexico beginning June 10.

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The threat was seen by investors as a negative move for both U.S. and wider region growth. The move was also seen as evidence, as if any were needed, that the president will continue to use his weapon of choice, tariffs, as a means to achieve his political ends — with negative consequences for growth.

Meanwhile, OPEC as a group and Saudi Arabia as its spokesman has reacted with assurance that the cartel will continue to limit output to further deplete inventories and keep the market in balance.

OPEC is desperate for oil prices to maintain the gains it has made this year and, if possible, reverse the decline seen during the last 30-40 days.

Source: Oilprice.com

OPEC sees itself in a fight with the U.S. shale industry, worried that it is losing share with limited power to substantially support the market as it was once able.

Some consumers are hoping rising U.S. shale output will permanently consign OPEC to history — at least in terms of engineering higher pricing.

The expectation is rising U.S. output has more than made up for the loss of Libyan, Iranian, and Venezuelan output. However, according to JP Morgan Chase, the market is finely balanced with robust demand, up 5-7% in China and Europe this first quarter, with increasingly constrained supply.

Maybe in recognition of that, Trump has so far exempted Iran from sanctions on its petrochemicals industry. OPEC’s output is currently running at 30.17 million barrels per day (bpd), its lowest level in four years. This comes despite Saudi Arabia increasing output by 200,000 bpd to partially compensate for the loss of some 400,000 bpd from Iran.

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Anyone holding off filling up their tanks in the hope prices will fall further may be disappointed.

Negative sentiment around trade is the order of the day, but supply is becoming tighter and demand has so far not reflected the wider slowing of global GDP.

The oil price is down, yes, but not out.

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Cast your mind back nearly 10 years — for those of you in the metal business at that time, the market was briefly all about rare earths. For the first time in decades, all anyone could talk about was the West’s vulnerability to the supply of this misnamed group of highly important strategic metals and their salts.

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In fact, so excited did the manufacturing sector become that it spurred a whole raft of startup specialists as consultants, analysts and research bodies as metal prices peaked in the summer of 2011 and then gradually fell back.

Not wanting to sound like the harbinger of bad news, but we could be in for a repeat performance if the significance of President Xi Jinping’s visit last week to a Chinese rare earth magnet factory in the province of Jiangxi is looked at with the seriousness Beijing intends.

China is rattling the saber ever so softly to say that it may be more exposed to general trade on a balance of payments position – China exports more to the U.S. than the U.S. exports to China — but the U.S. (and the rest of the Western world, as it happens) is uniquely exposed to China’s control of not just rare earth elements, but the whole supply chain. That supply chain includes everything from mining through refining to manufacturing of myriad components used in high-tech applications including from electric vehicles, cellphones, laptops, missiles and fighter jets.

Source: The Telegraph

An intriguing article in the subscription-only section of The Telegraph newspaper detailed the long-term risk the West has been running for years on rare earths elements (REE) and how REE could be the next flashpoint in an escalating trade war between China and the U.S.

The U.S. is nowhere near self-sufficient in REE, with even ores mined at California’s Mountain Pass shipped to China for processing and Lynas Corp’s proposed U.S.-based processing plant in Texas still years away from shipping a kilogram of refined metal. The post suggests China does not even have to announce an embargo of exports — it could close down selected parts of the U.S. supply chain by restricting supply to any number of component suppliers in China or shutting down a supplier on “environmental grounds.”

With the U.S. reliant on Chinese REE for whole components of U.S. manufacturing (examples cited range from simple car starters to chunks of aircraft), which are pre-finished in China using rare earths before shipping to the U.S.

Arguably, the military-industrial complex is even more exposed than the private sector.

F-35 Joint Strike Fighters need the thermal protection of rare earth coatings. Hellfire missiles, the Aegis Spy-1 radar and the sights of Abrams M1 tank all rely on rare earths. So do precision-guided weapons, the post’s list goes on, yet the White House and, indeed, successive U.S. administrations have been strangely sanguine about this vulnerability that covers not just the processing of ore to refined metals, but the infrastructure to use those refined metals and salts in a wide range of applications in the early stages of multiple supply chains.

Many, if not all, of those roads lead to China.

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Maybe President Donald Trump should have used some of his brief time in Japan devising solutions to this shared problem with Prime Minister Shinzō Abe rather than watching Sumo wrestling and playing golf.