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China worries over rare-earth supply disruption from Myanmar coup

Decade after drastic cut in exports to Japan, Beijing sees the tables turned

China heavily relies on imports of rare-earth minerals, mainly from the U.S. and Myanmar. (Source photos by Reuters)

HONG KONG -- While China reigns as the largest producer of rare-earth elements, the recent military coup in Myanmar has reminded Beijing of its reliance on and vulnerability to its Southeast Asian neighbor.

China owns the largest reserves of these strategic minerals, which are indispensable in churning out a wide variety of tech products, from smartphones to electric vehicles, wind power generators and missile defense systems, but it also heavily relies on imports, mainly from the U.S. and Myanmar.

The latest annual report by the U.S. Geological Survey states that China produced 140,000 tons of rare-earth oxide equivalent in 2020, almost 60% of the global total. Its reserves were 44 million tons, double those of Vietnam, which are the second-largest in the world.

In the other direction, China is one of the largest importers of rare-earth ores and concentrates. Especially for heavy rare-earth elements -- those with higher atomic numbers among the 17 elements, like terbium and dysprosium -- China counts on imports from Myanmar for over half of its domestic supplies.

The coup, which erupted on Feb. 1, immediately reminded people involved in rare earths in China of the "Myanmar incident" in November 2018, when Myanmar authorities informed the Chinese of a ban on all exports of rare earths.

It is widely believed that the ban was triggered by Beijing's crackdown on unauthorized mining on the Chinese side, as many people had crossed the border to extract the minerals since 2016. The rapid influx and runaway exploitation of resources alarmed Myanmar, concerned over environmental destruction and issues of mining rights in its own territory.

The 2018 ban was later lifted, but occasional export halts were reported. "The political instability in Myanmar could bring about uncertainty in rare earths supplies," wrote Ma Jinlong, an analyst at Zheshang Securities, immediately following the coup, which the Chinese Communist Party mouthpiece Xinhua News Agency reported only as a "major cabinet reshuffle."

So far, no major production disruptions have been reported from Myanmar and by Chinese importers. However, Ryan Castilloux, managing director of Adamas Intelligence, told Nikkei Asia, "Myanmar has become an essential supplier of heavy rare-earth concentrate to China in recent years, and the prospect that those supplies could be disrupted is helping fuel a surge in prices of certain rare earths in China."

The adviser on strategic metals and minerals points out that prices of these minerals were already soaring on the back of tight supplies and a strong resurgence of demand in China, and they were given an extra boost by Myanmar-related speculation, stockpiling and hoarding. Terbium oxide was up 95% by the end of February since October, while neodymium metal and dysprosium oxide rose by 87% and 65% respectively during the same period, according to spot prices in mainland China quoted by Thomson Reuters.

Stock prices of Chinese rare-earth producers have been turbocharged lately as well. Not all of them are publicly traded, but Shanghai-listed China Northern Rare Earth (Group) High-Tech, the company with the largest production allotment granted by the government, had risen 34% by March 3 after the coup erupted in Myanmar. The company has access to the Bayan Obo mining district in Inner Mongolia, one of the largest rare-earth mines in the world, owned by its parent.

While the heat was turned up, China's Ministry of Industry and Information Technology and the Ministry of Natural Resources released a joint circular on Feb. 19 informing of the expansion of the quota of domestic rare earths during the first half of the year to 84,000 tons, an almost 30% jump compared to the year before. The quota is allocated to six selected state-owned mining conglomerates, including China Northern Rare Earth (Group) High-Tech.

"The increase is much needed to help cushion tight markets for rare-earth elements used in permanent magnets," said Castilloux, since demand for minerals such as terbium, dysprosium and neodymium is expected to surge because magnets using them are needed to make traction motors for electric vehicles, wind power generators and a long list of other machines.

On top of that, an increasing reliance on foreign sources -- mainly in the U.S. and Myanmar -- was probably alarming for Beijing. The U.S. is an obvious worry against the backdrop of ongoing tensions with Washington, but "the current situation in Myanmar highlights the risk of this rising reliance," Castilloux added.

Xiao Yaqing, China's minister of industry and information technology, in a news conference on Monday stressed that "the international division of labor based on industrial supply chains and economic globalization is the big trend." It was part of his answer to a question raised by a Japanese reporter on China's intention to create a regulation that could enable further tightening of rare-earth exports. Xiao added that "There is something of each in the other, and we all need to go hand in hand," seemingly hinting that China wishes for trading in rare earths to be unhindered.

It was back in 1992 when Deng Xiaoping said, "While the Middle East has oil, China has rare earths." The then-paramount leader made this remark during the southern tour in order to re-boost the policy of reform and opening up, which had been stifled after the Tiananmen crackdown in 1989.

But Deng also added that a time would come when "the superiority of our country's rare earths will definitely be played out." This only happened years after his death, when Beijing decided to sharply cut back on rare-earth exports to Japan in 2010, at a time when the two nations were mired in a major diplomatic confrontation after vessels from the two sides collided off the Senkaku Islands, which are administered by Tokyo but claimed by Beijing as the Diaoyus.

The Japanese government and companies were thrown in disarray, taking to heart the risk of relying too heavily on a single or very few sources for such important industrial materials. Ironically, after a decade in which China became a larger economic power than Japan and a major global tech producer, the Chinese are now the ones who are unnerved by potential supply disruption from Myanmar.

Kenji Kawase is chief business news correspondent for the Nikkei Asia and an editor of #techAsia, a newsletter on technology in Asia that combines the best reporting from Nikkei and the Financial Times. He has been reporting and editing for Nikkei since 1992, mainly covering corporate and financial news in Tokyo, Osaka, Shanghai, Hong Kong and Bangkok. He returned to Hong Kong for the third time in May.

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