The rare earths flap
First thing you need to know, there’s no shortage of rare earths.
But in case you weren’t worried, you should have been.
China, which supplies 97% of the world’s rare earths, cut off shipments to Japan during the nasty East China Sea dispute last month.
The group of minerals known under the umbrella name as “rare earth elements” are essential in the manufacture of precision instruments, hybrid cars, missiles, mobile phones and communication networks.
They are ores, oxides, metals or semi-finished products with unique properties, such as the ability to withstand demagnetization at high temperatures. They comprise the 15 elements in the periodic table from lanthanum to lutetium, as well as yttrium and scandium.
Europium and yttrium are used in making optical fiber. Neodymium, praseodymium, dysprosium, terbium, lanthanum and cerium are essential to mobile phones and PC hard drives.
Now you know, you’re thinking, if China were going to play hard ball with Japan with these minerals, it surely wouldn’t hesitate to do the same with the much-despised western capitalist economies, right?
Investors came to the same conclusion. Shares in the Hong Kong-listed Inner Mongolia Baotou Steel Rare Earth – which accounts for two-fifths of China’s rare earth output - leapt 40% in the days after the ban.
(Incidentally, China denied cutting off supply, but Japanese traders said export licenses had been suspended.)
The key point about rare earths is they’re not that rare. The world dug up 124,000 tonnes of them last year. But mining them is complex and highly polluting and the world has been happy to leave the digging to the carefree mining industry in China.
The view of the US Government Accountability Office (GAO) is that it would take the US defense industry 15 years to re-develop its supply chain to replace Chinese rare earths.
But Tim Worstall, an economist and rare earth trader, argues that “the non-rarity of the rare earths themselves means that China's position isn't sustainable.”
Mines in California and Australia could each supply 20% of the world’s demand, he said in an essay in Foreign Policy.
“If Beijing wants to raise its prices and start using supplies as geopolitical bargaining chips, so what? The rest of the world will simply roll up its sleeves and ramp up production, and the monopoly will be broken.”
China’s use of its rare earth monopoly to threaten Japan “doesn't matter as much as the possibility that it might – and the certainty we'd better do something about it.”