BACKGROUND

Rare earths are a group of seventeen chemical elements (more precisely metals) that are considered a strategic resource because they are essential for many of the high-tech industries that drive the modern economy. The U.S. was their leading producer until the 80s, even though it’s home to just one rare earths mine, located at Mountain Pass in California. However, the mine was closed due to environmental concerns (rare earths are usually found alongside radioactive material, which is released into the air during the extraction process). At the same time, China was emerging as an alternative supply source. It had huge reserves; and thanks to its massive, cheap workforce combined with low environmental regulations, it could easily extract large quantities of rare earths at a competitive price.

As such, the PRC soon achieved quasi-monopoly status over the rare earths market. Today, China holds 44 million tons (Mt) of mineral ore, the largest share of the world’s known reserves (around 37%); it is also the leading producer, with 120,000 tons of material extracted in 2018.

Given the strategic importance of these metals, this also grants the PRC considerable economic and political leverage, enabling it to use rare earths as a geoeconomic tool to exert pressure on other countries. This occurred for the first time in 2010 in response to the imprisonment of a Chinese trawler captain by Japan following an incident at sea: the PRC put an embargo on the sales of rare earths to Japan, prompting it to release the captain. Now, it seems that Beijing is considering playing the “rare earths card” once again in its trade war with Washington.

IMPACT

If actually implemented, Chinese restrictions on rare earths exports to the U.S. would have major economic implications. Currently, America imports from China 80% of the rare earths it consumes. On the surface, the rest comes from European countries; but even this largely consists of Chinese raw minerals processed in Europe. Unfortunately for Washington, there are no immediate alternatives that would allow it to reduce dependency on the PRC over the short-term.

Consequently, one option is to revive domestic production in the United States. The Mountain Pass mine was reopened in 2012 after years of inactivity, but the society operating it (Molycorp) soon faced financial troubles and the mine was ultimately bought by a three-party joint venture called MP Materials that includes a Chinese minority shareholder. Nevertheless, 15,000 tons of rare earths were extracted at Mountain Pass in 2018, meaning that the U.S. is now the world’s third-largest producer. MP Materials is now planning to perform all the processing activities on U.S. soil after China announced it would raise tariffs on concentrates to 25%. Yet, America’s known reserves are quite small, consisting of just 1.4 Mt – a fraction of China’s and those of other countries. Moreover, even without considering the environmental aspects, it would be difficult for America alone to break China’s monopoly. The U.S. has to find other alternative sources; but, at the current stage, virtually no other country represents a valid alternative to the PRC. Apart from the difficulties of competing against a deeply ingrained monopoly supplier, in most cases the challenges stem from the lack of infrastructure, know-how, and finance.

This is the case of the majority of the countries holding large reserves and mentioned in the US geological survey published this year. Brazil and Vietnam possess the most important deposits after China, amounting to 22 Mt in both cases. In spite of this, the rare earths mining industry in the two countries has a very limited scale: Brazil and Vietnam respectively extracted 1,000 and 400 tons in 2018. Russia comes next, with estimated reserves amounting to 12 Mt. However, most of them are located in Siberia, and extraction in such extreme cold conditions poses significant challenges that translate in high costs. This helps to explain why Russia only extracted 2,600 tons of rare earths last year. Furthermore, the current status of US-Russian relations represents a major political obstacle; from Washington’s perspective, it would mean substituting dependency from one major geopolitical competitor to another. As a result, Russia can be excluded as a valid solution. India’s situation is similar to Vietnam and Brazil’s. While it accounts for some 7 Mt of reserves, the country only produced 1,800 tons in 2018 because the industry is still underdeveloped. Analogous problems affect various Southeast Asian countries, notably Myanmar, Thailand, Malaysia, and Burundi. In addition, the exact quantity of available rare earths in these countries is still unknown, except in the case of Malaysia, where reserves amount to just 30,000 tons. As far as production is concerned, the most relevant of the four is Myanmar with 5,000 tons extracted in 2018. All these countries have a considerable potential, but it is clear that at the current stage none of them can supply enough rare earths to meet the demand originating from the United States and the rest of the world. The situation may well change in the long term if China actually implements restrictions on its rare earths, as this would provide considerable economic and political incentives to diversify the supply sources; but again, this will require considerable investments and time.

Yet, there is also a more viable solution in the short-medium term, namely Australia. While its reserves stand at only 3.4 Mt (the sixth largest in the world), Canberra is currently the second most important producer with 20,000 tons extracted in 2018; and its output is expected to increase. Australia is likely to benefit the most from the looming China-US clash over rare earths, since it has both the economic and political characteristics to become America’s main alternative supplier until other sources are developed. Australia has a stable economy, it possesses the required know-how, and it already produces rare earths. Politically, it is one of America’s closest and most reliable allies in the world. As a result, it is reasonable to expect that US companies and politicians will look at Australia as a rare earths supplier in case China implements restrictions.

Finally, there have been two recent discoveries of interest. The first of which is in Japan. According to a study published last year, the seabed around the tiny Minamitorishima atoll (located 1,850 kilometers southeast of Tokyo) hosts 16 Mt of rare earths. If confirmed, this would mean that Japan holds the world’s fourth-largest reserves. However, extracting ore from the bottom of the sea poses considerable technical and environmental challenges that translate into high costs. As a consequence, the economic viability of extracting in the area is still being discussed. While its great potential combined with the political necessity of breaking China’s monopoly can justify the initial investments, mining at Minamitorishima should not be expected to become a valid alternative in the short term.

The second find is North Korea. Some sources report that the Jongju site, beside other valuable ore, contains 216 Mt of rare earths. This is a massive amount, and if it corresponds to reality the DPRK has deposits that dwarf those of China and the rest of the world. Needless to say, Pyongyang is not a realistic alternative, first and foremost for political reasons. Even putting aside the economic and technical problems linked to insufficient infrastructure and technology, North Korea’s status as a pariah state and its hostile relations with the U.S. (which has imposed strict economic sanctions on the country) preclude the possibility that the DPRK will supplant China as a key supplier of rare earths for Western economies.

FORECAST

It is clear that the lack of valid alternatives makes China’s threat to put limitations on rare earths a serious consideration for the U.S. Its exact magnitude depends on the type and extent of China’s restrictions. It seems unlikely that it will opt for a complete embargo: first, selling rare earths to the United States is significant source of revenue for the PRC; second, Beijing probably prefers to adopt a moderate stance to avoid a full-on escalation that would damage its own economic interests. Yet, even increasing tariffs or introducing stricter quotas would bring serious consequences for the U.S., which will have difficulties in finding a substitute supply source in the short term.

The most rapid solution (in relative terms) is to increase domestic production and to work with Australia to boost its output. Using other materials is also a possible solution, even though from a technical point of view they represent sub-optimal solutions compared to rare earths. In the longer run, it is to be expected that the U.S. (and American private actors) will make efforts to develop the rare earths mining industry in other countries like Brazil, Vietnam, India, and Japan. For its part, China will act to protect its monopoly. Its ability to influence international prices deeply affects the economic viability of extraction in other countries, but it can also try to take control of their mining sites via joint ventures or acquisitions; as well as employing a variety of economic and diplomatic tools to exert pressures on potential rivals. In conclusion, political reasons will make the global rare earth market more turbulent in the years ahead, as it will likely become the geoeconomic battleground for great power competition between China and the U.S.

 **This article was originally published on June 17, 2019.