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China's rare-earth strategy versus US risks backfiring

As mineral prices rise, drive to build up American industry gains steam

China produces nearly 80% of the world's rare earths, used in high-tech products like smartphones and electric cars.   © Reuters

TOKYO/SHANGHAI -- China is looking to strengthen its dominance over the rare-earth minerals needed for myriad tech products, in part through regulations designed to promote high-end industries. In doing so, however, Beijing risks driving investment into the rare-earth industry of its trade war foe, the U.S.

China produces nearly 80% of global rare earths, used in a variety of products including smartphones and the motors of hybrid and electric vehicles. Amid concerns that Beijing is considering some form of export restrictions, prices of rare earths have jumped over the last few months.

The price of neodymium, mostly used in magnets, has surged 30% to $68.5 per kilogram since April, while dysprosium, also used in magnets, has risen 30% to $290 per kilogram in the same period.

Both materials are crucial. Neodymium enhances magnetic force but its performance declines under high temperature. Since motors can run very hot, dysprosium is added to help the neodymium resist heat. As more electric and hybrid vehicles hit the market, demand for the minerals is expected to soar.

Given the importance of such minerals to industry and defense, Washington excluded rare-earth materials when it raised tariffs to 25% on almost all Chinese imports recently.

Analysts said Beijing is unlikely to resort to the aggressive measures it has used in the past, lest it incur the U.S. wrath. "China's attitudes and remarks are milder [this time] compared with when Beijing restricted shipments of rare earths to Japan in 2010," said Kotaro Shimizu, chief analyst at Mitsubishi UFJ Research and Consulting.

That year, the U.S. tried to revive the mining of rare earths locally by introducing a bill, the Rare Earths Supply-Chain Technology and Resources Transformation, known as the RESTART Act. Even though the law failed to gain traction, Shimizu said, "Now we see again the rise of voices calling for rare-earth production in the U.S."

When Beijing restricted the exports to Japan, tensions between the countries had intensified over the Senkaku Islands, which China claims and calls Diaoyu. At that time, Chinese public opinion was "all about how China can hurt Japan by leveraging rare earths," Shimizu said.

But the clampdown came at a price for China. Facing a sudden supply shortage and price spike, Japanese companies started to reduce rare-earth consumption and instead focused on recycling. According to the Japan Society of Newer Metals, the country's rare-earth demand fell to 13,197 tons in 2012 from 32,390 in 2007.

"Beijing still remembers that they put their own industry in a really difficult situation by restricting rare-earth exports in 2010," said Yoshikazu Watanabe, president of Tsukushi Shigen Consul, a natural resources consulting company. "China's moves now are for show and to remind the U.S. that it could restrict exports."

After the failure of the RESTART Act, prices in the U.S. market slumped for years and mining company Molycorp filed for Chapter 11 bankruptcy protection in 2015. American rare-earth production stopped entirely from 2016 until last year, when the U.S. produced 15,000 metric tons, according to data from the U.S. Geological Survey.

The U.S. still lacks capabilities to separate rare earths. Ores obtained from Mountain Pass, the only U.S. mine under operation, are shipped to China, which has the most advanced separation technology. Beijing already imposed a 25% tariff on rare-earth ores from the U.S. that are sent to China for separation on June 1.

But efforts are underway to fill the gap in the stateside supply chain. Australia's Lynas, the biggest rare-earth producer outside China, announced in May that it had signed an agreement with U.S. rare-earth processor Blue Line for a joint venture to develop separation facilities in the U.S.

Shigeo Nakamura, president of Advanced Material Japan, said the U.S. has alternatives for separation in Vietnam, Myanmar and Estonia. "There will always be export pathways [available] to the U.S. through a third country," he said.

So Beijing is treading carefully as it works to strengthen its position.

China's economic planner, the National Development and Reform Commission, said recently that rare-earth producers should abandon low-end production methods by increasing investment and research to enhance the competitiveness of their minerals.

Meanwhile, Beijing in May began restricting imports of rare earths from Myanmar to stop smuggling. Myanmar produces dysprosium and terbium -- known as medium-heavy rare earths that can be found in very few places on the planet. Large volumes of ores flow illegally into China; reportedly, as much as 85% of China's rare-earth imports come from Myanmar.

When it comes to actual components like rare-earth magnets, which are shipped to the U.S. mainly from Japan, the effects of the tensions appear to be negligible so far.

Shin-Etsu Chemical, which produces the magnets, said the trade war "hasn't had an impact on the production and shipments of rare-earth magnets." The Japanese company imports rare-earth alloys from its Chinese subsidiary in Fujian in southeastern China and makes the magnets in Japan.

Nakamura at Advanced Material Japan suggested China risks a boomerang effect. "The more Beijing tries to weaponize rare earths, the more development and investments the U.S. industry will attract," he said. "China will be the only one to lose out."

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