A surprise tariff announcement by US president Donald Trump, 1 August, has raised the spectre of China using rare earths as a political weapon in the trade war with the US.
Part of the speculation is prompted by the fact that China, which supplies 80pc of the world’s rare earth materials, has done it before. But there are also good reasons why China might be loathe to repeat the events of 2010, when it blocked exports following a dispute with Japan.
Trump, 1 August, announced the imposition of 10pc import tariffs on an additional $300bn/yr of Chinese goods on 1 September. But this will probably not include Chinese rare earths, which have been exempted from every tariff round, signalling that the US must really need them.
This would appear to give a strong card for Beijing to play in the continuing trade war, the logic runs. But rare earths are not in short supply around the world. There are plenty of deposits and Australian mining firm Lynas, the great survivor of the last rare earth slump, has the largest light rare earth separation plant in the world. What has prevented the development of the rare earth supply chain outside China for the past 20 years is the absence of the economic conditions needed to develop them. China could do it much cheaper from the ore to the metal to the magnet that rolls down your car window when you press the button.
Rare earths are also critical to defence applications, but the US last week freed up funds to develop a defence supply chain of its own, from mine to magnet.
Those who assume that rare earth prices are now going through the roof are in for a disappointment. After prices spiked in 2010 on speculative trading, they slumped and have not really recovered since, which is partly why so many mining projects outside China failed after the speculative boom.
At the end of May, when President Xi Jinping visited a magnet maker and Chinese media speculated about restrictions, prices for some rare earths jumped by 30pc. But they have since started to fall — Argus export prices for light rare earth magnet metal neodymium have since fallen by 14pc, giving up nearly half of their recent gains.
Why are prices falling back? Well partly because demand for rare earths outside China is not that large. Rare earth magnet production outside China is tiny. To have really high demand outside China you need to have a supply chain outside China — which is unlikely while Chinese prices are lower than anyone can compete with.
But some things have changed since 2010. For one, China is now import-dependent on heavy rare earths dysprosium and terbium, which are needed for magnets. And projects are lining up outside China to fill the gap. More importantly, the large-scale deployment of electric vehicles is on the horizon as countries take measures to meet ambitious climate targets. Electric vehicles rely on rare earth magnet motors, and while growth in demand has been gradual, the upward trend appears unstoppable.