U.S. Risks ‘Devastating’ Blow From China’s Rare Earths Monopoly

(Bloomberg) -- Beijing’s threat to use its dominance of rare earths in the trade war risks serious disruption to U.S. industry, by starving manufacturers of components commonplace in everything from cars to dishwashers and military equipment. And, it’s a stranglehold that might take years to break.

China could wreak maximum havoc by squeezing supplies of the magnets and motors that use the elements, said Jack Lifton, co-founder of Technology Metals Research LLC, who’s been involved with rare earths since 1962. The impact on American industry could be “devastating,” he said from Michigan.

“There is no such thing as an automobile sold in the U.S. or made in the U.S. that doesn’t have rare-earth permanent magnet motors somewhere in its assembly,” Lifton said. “It would be a tremendous hit to the consumer appliance industry and the automotive industry. That means washing machines, vacuum cleaners, cars. The list is endless.”

Beijing is gearing up to use the minerals as a counter in its trade battle with Washington, according to a salvo of media reports in China on Wednesday, potentially exploiting U.S. reliance on China for about 80% of its supply. It would represent a significant escalation in a trade dispute that has already roiled markets and threatened global growth.

Most of the rare earths mined outside China still end up there for processing -- even the sole U.S. mine at Mountain Pass in California sends its material to the nation -- as Beijing seeks to dominate manufacturing of higher-value products.

Fine Wines

“China and rare earths is a bit like France and wine -- France will sell you the bottle of wine, but it doesn’t really want to sell you the grapes,” said Dudley Kingsnorth, an industry adviser and Perth-based executive director at Industrial Minerals Co. of Australia Pty. It’s a strategy intended to encourage end-users like Apple Inc (NASDAQ:AAPL)., General Motors (NYSE:GM) Corp. and Toyota Motor Co. to add manufacturing capacity in China, he said.

The collection of 17 elements, which includes neodymium, used in magnets, and ytrrium for electronics, are actually quite abundant in the earth’s crust, but mineable concentrations are less common than other ores. In terms of processing, China’s capacity is already about double existing global demand, Kingsnorth said, making it more difficult for foreign companies to enter and compete in the supply chain.

For example, rare-earth permanent magnets are used in miniature motors or generators in many, now ubiquitous, technologies. In a car, they allow windscreen wipers, electric windows, and power steering to function. And China accounts for as much as 95% of world output, according to Industrial Minerals Co.

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“The development of alternative rare earth supplies is not something that can occur overnight,” said George Bauk, chief executive officer of Northern Minerals Ltd, which produces rare earths carbonate, a preliminary product, from a pilot plant in Western Australia. “There will be a lag time for the development of any new projects.”

A case in point is the last time Beijing used rare earths as a political weapon. In 2010, it blocked exports to Japan after a maritime dispute, and while the consequent spike in prices saw a flurry of activity to secure supplies elsewhere, and a case brought to the World Trade Organization, nearly a decade later the nation is still the world’s dominant supplier.

“Even if the U.S. government said they were going to fund the supply chain, it would take years,” said industry veteran Lifton. “You can’t just say I’m going to build a mine, I’m going to make a separation plant, and a magnet or metals facility. You have to design them, build them, test them, and that doesn’t happen in five minutes.”