USA Military Spend Causes Anxiety Over Rare Earth Supply

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Core Consultants’ Rare Earth Report  this month focuses on President Trump’s announcement that he intends to increase the military spend by $54bn (+10%). In light of the fact that Molycorp- the US’s flagship rare earth mining producer is insolvent, this announcement to upgrade the military spend has left concern over how the US will procure the necessary rare earth volumes to realise this upgrade.

Meanwhile, Russian Oligarch, Vladimir Iorich has made a bid to purchase Molycorp. This is unsurprising as for the last few month we have detailed Russia’s intentions to expand their rare earth capabilities.  However, this bid may be blocked by the US House of Representatives.

Soon after the Presidential announcement, Duncan Hunter, a Republican Member, revealed that he intends to introduce legislation mandating that the US military procure rare earth elements from US sources. He further stated that they would even look to subsidise US sources as rare earths is seen as essential for military applications.

Meanwhile, China is trying to move away from being a “dig and deliver” country and transform into a downstream supplier.

To this end, Ministry of Information, Trade and Industry (MIIT) has firstly been on the rampage, clamping down on all illegal activity.  Illegal rare earth supply has plagued China’s industry and threatens to undermine its  goal of establishing a vertically integrated rare earth industry, with the ability to control both volume and price. Secondly, China has been focused on establishing research and development zones to develop new uses for rare earths. To date, some 3,000 people are employed in this industry in Inner Mongolia alone and a further eight scientific research zones are soon to be established.

With respect to exports, volumes in January rose 14% y.o.y, even as the value (price) increased by 28% y.o.y. However, if we look closer, we note that the export volumes of heavy rare earths that are integral in magnet, hi-tech and military applications, fell in 2016. For instance, terbium fell 6.4% last years.  The impact in terms of exports of these metals are only expected to get more pronounced as China increases control over its production and enacts environmental stringencies. As such, the US’s concerns regarding sufficient rare earth material may not be unfounded.

Moreover, prices are beginning to rise and we are seeing that Chinese traders are more bullish in terms of their medium and long term expectations. The majority are unwilling to reduce their offer prices too much as they feel that a price increase is a forgone conclusion. Government crackdowns on illegal mining and introducing more environmental stringencies continues to remove capacity from the system and is having a positive impact.

However, China is a way off from becoming a downstream producer as demand is still largely government led. as is evidenced by Chinese vehicle numbers,

China’s vehicle industry, which has been growing each year slowed in January. Whilst a slower January is not unusual, a drop of more than 60% m.o.m in both passenger cars and new energy vehicles is cause for alarm. Subsidies are set to fall 20% each year until they are phased out completely and this has sparked concern that China is still not able to increase demand without assistance from supportive government policies.

 

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