China Trade Fight Raises Specter of Rare-Earth Shortage
By Stephanie Yang
The U.S-China trade dispute has sent prices surging in rare-earth metals, an obscure but critical market for industries ranging from electric cars to fuel makers.
On Wednesday, Chinese media reported that the country may cut exports of such minerals, which are largely produced in China and used for lasers, batteries and other electronic devices. The news weighed on stocks and commodities around the world as an indication of escalating trade tensions.
Meanwhile, the potential for a shortage of rare-earth metals drove prices and shares of Chinese producers higher. The VanEck Vectors Rare Earth/Strategic Metals ETF rose 1% this week, building on gains after President Xi Jinping visited a rare-earths mining site last week and sparked speculation that China may turn to rare earths for leverage in trade negotiations.
China Northern Rare Earth Co. and Xiamen Tungsten Co. Ltd. rose 10.2% and 7.6% respectively this week on the Shanghai Stock Exchange. China Minmetals Rare Earth Co. shares rose 10.4% in Shenzhen.
"The saber rattling, the optics that China is putting forward seem to be intensifying. And that tells us that its hands are increasingly tied," said Ryan Castilloux, managing director at Adamas Intelligence, a research firm that focuses on strategic metals.
Rare-earth metals are a group of 17 elements such as praseodymium or dysprosium that are needed to make everyday items ranging from magnets to glass.
They are far less scarce than their name suggests. However, developing new mines can be costly and time-consuming, and the industry has long been dominated by Chinese producers and reserves.
China accounted for about 70% of global production in 2018, according to the U.S. Geological Survey. Australia and the U.S. are the second and third largest producers, respectively. The U.S.'s only operating rare-earth mine, in California, sends whatever it mines to China, since it lacks its own processing capabilities.
If China limits exports, U.S. companies could find themselves short on manufacturing materials, though many have a cushion of in-house supplies that could last three to six months, according to Mr. Castilloux.
Those affected would include electric-car manufacturers, such as Tesla or General Motors, and wind-turbine makers like General Electric, Mr. Castilloux said. Such a measure would also hurt oil refiners and chemical companies, since rare earths are used to process crude into fuels like gasoline and diesel, he added.
"There would be no overnight full-stop Plan B to remedy the situation," he said.
The last time China flexed its power in rare-earth metals was in 2010, after a dispute with Japan prompted a reduction of export quotas. In 2014, the World Trade Organization ruled the restriction illegal.
"The rare-earths crisis of 2010 was the coming of age for these niche, specialty minerals and metals," said Simon Moores, managing director of consulting firm Benchmark Mineral Intelligence. "Welcome to the rare-earths crisis II."
However, the threat of losing access to rare-earth metals could spur other countries to more doggedly pursue alternative sources of supply. Some analysts warn that curbing exports to the U.S. may ultimately backfire, if prices skyrocket and lead to increased investment in mines outside of Chinese control.
"We saw in 2010 that when the Chinese choke off supply, suddenly a whole lot of projects come out of nowhere," said Christopher Ecclestone, commodity strategist at Hallgarten & Co.
Since rare-earth metals have generally been plentiful over the past several years, investors have been reluctant to put money toward developing new sources of supply. Without prolonged higher prices, that attitude is unlikely to change, Mr. Ecclestone added.
"Prices went up 500% the last go-round. This 10% doesn't cut it," he said. "People want to see that it's not just a crisis of two weeks."
To receive our Markets newsletter every morning in your inbox, click here.
Write to Stephanie Yang at firstname.lastname@example.org
(END) Dow Jones Newswires
May 31, 2019 08:14 ET (12:14 GMT)Copyright (c) 2019 Dow Jones & Company, Inc.