Has China given up its rare earth leverage over the US?

Rare Earth Minerals in Jars
Rare Earth Minerals Photos, Credit Reuters
China considers cancelling countermeasures against latest US tariffs

Core Consultants published their September Issue of the Rare Earth Monthly Report and a key aspect that stood out was that as a show of good faith, China’s Ministry of Commerce revealed that China is now earnestly considering cancelling any countermeasures to the latest US tariffs. This would definitely include a tariff on exporting rare earth to the US.

From our side, this does not come as too much of a surprise as we have indicated in prior issues that between America and Japan, these countries constitute 70% of China’s rare earth exports. So in as much as these two nations are dependent on China, China has failed to adequately diversify their own export customer base and is equally reliant on these two nations.

China’s rare earth exports declined 17% m.o.m in August by volume and 29.4% by value due to lower consumption, particularly from the US.

From China’s side, the Ministry revealed that the reason they’d consider cancelling the countermeasures was to prevent a further escalation of this trade war, an indication that China’s economy is being hurt by this dispute. Some preliminary negotiations will be held in September before the 13th round of senior level trade talks which is scheduled for October.

US agrees to collaborate with Australia

To date there has been no response from the US with respect to China’s cancellation of countermeasures except to confirm the latest round of trade talks will be held in October.

With respect to rare earths, there is concern that even if this time China does not use its rare earth prowess against the US, so long as the US has no alternative sources of supply, it runs the risk of having this threat over them.

As such, the US has now signed an agreement with Australia to collaborate in extracting and processing rare earths. However, to date no state investment has been committed.

While Lynas is already operational and accounts for around 15% of global supply, Australia has another 3 advanced-stage projects that require an estimated $A5.7bn to put into production. While the two nations have agreed to champion the development of the Australian rare earth industry, given the fact that no funding has been agreed, it is unclear as to whether this is a US-priority.

More US-based projects come into focus

Aside from having the Aussie link, since the start of the trade war, many companies have proposed to develop and supply the US with rare earths. In June the Pentagon provided funding to a US permanent magnet recycling business and at the same time sent a request for information from US-based rare earth miners. This request was answered by USA Rare Earths, which together with Texas Mineral Resources they are launching a JV to develop the Round Top deposit.

Round Top has never been productive, but if the deposit is expedited there is the potential to supply the US with heavy rare earths, unlike Mountain Pass whose rare earth basket was weighted towards light rare earths.

Concluding Remarks

October is a critical month for both the US and China. Should a trade deal be concluded then it would buy the US time to seek out ways to diversify their rare earth suppliers. If the 13th round of trade talks fails then it may result in China choosing to leverage their rare earth dominance and apply tariffs against exports to the US. In the event of a negative outcome to the trade talks, the only thing in our minds that will prevent China from using their rare earths would be their own reliance on the US as a rare earth trading partner.

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