It has only just begun to use it
TO WIN A game of Scrabble, start at the bottom of the periodic table. The 17 “rare earths” that reside there have longish names, such as dysprosium and praseodymium, which are replete with point-worthy letters. They share other traits, too. All are produced and used in minuscule amounts, yet are crucial to a range of high-tech goods, from batteries and renewables to weapons and medical devices. More important still, all are largely supplied to the world by China.
Rare earths are also part of the trade war. On April 4th, responding to Donald Trump’s tariffs, China restricted sales to America of seven rare earths. The move forces producers to apply for export licences. It is not an outright ban, but it could turn into one. China has already imposed such bans on exports of three less rare, but still critical, metals, and tightened controls on others. How damaging would a rare-earth embargo be?
History offers clues. Two years ago China restricted exports of gallium and germanium, which are used in chips, radars and satellites. In December it banned all exports to America of both metals, as well as antimony, a flame retardant. Since then, prices have rocketed and the global market has fractured. Gallium bought in the West is two to three times dearer than that bought in China, according to Jack Bedder of Project Blue, a consultancy. The supply crunch is not yet crippling America. Many buyers had built stocks before the ban; China did not cancel existing supply contracts, which often run for years; and some material has continued to come in via third countries. A source close to America’s defence ministry detects no gallium-related panic in the Pentagon.
Yet China’s latest restrictions could cause more damage, for three reasons. First, the “heavy” rare earths it has picked are the hardest to substitute. Dysprosium and terbium regulate heat in magnets that power offshore wind turbines, jets and spacecraft. “The bigger the motor, the weightier the rare earth you need,” says Ionut Lazar of CRU, another consultancy. The other five metals are crucial for artificial-intelligence chips. Some are also used in MRI scanners, lasers and fibre optics.
The second problem is that China is even more dominant in the production of heavy rare earths than it is for the lighter types. It controls most of their mining, both at home and in Myanmar. Crucially, it processes 98% of the extracted material. Like most elements, heavy rare earths do not exist in pure form in the Earth’s crust. And unlike gallium or germanium, they are not by-products of smelting mass-produced metals such as aluminium or zinc. They must be separated from the chemical compounds they form with specialist skills and a lot of work, for little reward.
This worsens the third problem: China has powerful tools to enforce a ban. Its government can track every tonne of rare earth mined and processed at home and trace where it ends up, says Ryan Castilloux of Adamas Intelligence, a research firm. It also keeps tabs on demand from companies around the world, allowing officials to spot any outlier that might be importing more to re-export to America. “You could get a lot of collateral damage [if China cracks down], because [it] would be concerned about closing loopholes,” says Melissa Sanderson, a mining veteran formerly of America’s State Department. Given the risk of being cut off, third countries may not rush to Uncle Sam’s aid.
And so a Chinese ban would hit America hard. Prices would rise fast, as buyers began to stockpile. Neha Mukherjee of Benchmark Minerals, a research firm, reckons dysprosium prices would hit $300 per kilogram, from $230 now. Companies have some stock, but it would probably run out in months. After that, civilian industries would suffer first. Offshore wind turbines might become uncompetitive or unavailable. Electric cars might switch to smaller engines. Soon the defence industry would be hampered, too, says Gracelin Baskaran of CSIS, a think-tank.
America would speed up efforts to find alternative supplies. Today the country has only one rare-earth mine, in California. It is developing several more, and sponsoring new mines in Brazil and South Africa. It is also using the Defence Production Act of 1950, a law passed in the Korean War, to fund the first major heavy-rare-earth processing facility outside of China, in Texas. Yet America, like other countries, lacks the expertise to turn rare earths into high-performance magnets—the export of which China has also restricted. Analysts reckon that it would take America three to five years to build a mine-to-magnet supply chain which bypasses China.
Admittedly, banning rare-earth exports would hurt China itself, since it would destroy demand. In 2010, amid a fishing dispute, China stopped rare-earth exports to Japan. Within months Japan made concessions, and exports resumed. In the meantime Japan’s carmakers had designed new vehicles that relied less heavily on rare earths. This time, it is more likely that China would reduce exports to America selectively—unless Mr Trump continues with his aggressive approach. The world’s most consequential Scrabble game might then turn truly nasty.
Source: Economist
