China's tight grip on rare earths shows little sign of weakening
China's dominance of the global rare earths supply chain won't dwindle easily, even if Beijing decides to approve more export licenses through deals with Europe and the U.S.
Three Shenzhen-listed Chinese companies this month said that Beijing approved their exports of magnets with rare earths — metals critical for cars, defense, semiconductors and other industrial products. But another firm, Baotou INST Magnetic New Materials, said last month the export licenses can only be used for one shipment.
In Europe, automotive industry groups have said that, in the case of magnets and heavy rare earths, long-term export licenses from China were only valid for a maximum of six months.
Diversifying away from Chinese sourcing of rare earths is likely to be "extremely difficult" and, at best, a limited long-term solution, according to a Tuesday note from Rico Luman, senior sector economist for transport and logistics at Dutch bank ING.
China is the undisputed leader of the critical minerals supply chain, producing roughly 60% of the world's supply of rare earths and processing almost 90%, which means it is importing these materials from other countries and refining them.
"Europe currently produces no rare earths, and the U.S. has only recently begun small-scale production of neodymium and praseodymium. However, both regions hold only a fraction of global reserves, limiting their ability to scale up," Luman said.
Already, European automakers and U.S. high-tech businesses in China have halted production or warned of a shortage this summer.
China announced export controls on seven rare earths in early April, following a series of tighter restrictions in the last two years on a broad range of critical minerals. Washington had expected a rollback of the April controls once the U.S. and China agreed to a 90-day tariff reprieve in mid-May. After trade talks in London this week, U.S. officials indicated Beijing will soon allow more rare earths exports.
China has approved "a certain number" of export permits for rare earth elements and related items, a spokesperson for the commerce ministry said Thursday, adding that China will continue to step up examination and approval for such license applications.
This has yet to significantly improve business conditions.
The market remains "volatile" even after the U.S.-China trade negotiations in London, said Philippe Kehren, CEO of Belgian chemicals group Solvay, which operates the largest rare earths processing plant outside of China in La Rochelle, France.
In response to that unpredictability, he said the company is using recycled material and studying sourcing alternatives to China.
"This is how we adjust to the current, unpredictable situation and I think the best mitigation in this type of circumstance is indeed to master the technology," Kehren said. Solvay aims to supply 30% of Europe's processed rare earth demand for permanent magnets by 2030.
Beijing will likely keep up its restrictions on rare earths to deter Washington from ratcheting up restrictions on high tech exports to China, said Dennis Wilder, a former senior White House intelligence official.
"If new export controls [against China] are implemented, China may pull back again from the rare earth understanding," said Wilder.
Gabriel Wildau, managing director at risk consultancy Teneo, echoed the view and warned that even as Beijing signaled a willingness to ease rare earth exports, "supply cutoffs will remain an ever-present threat."
Beijing has made the licensing regime "permanent," despite perceptions that it was an "act of retaliation" amid tit-for-tat escalation with the U.S., Wildau noted. That would allow China to deter stockpiling of the critical mineral by U.S. firms and ensure its negotiating leverage remains undiminished, he added.
"Firms now have no choice but to invest in and develop alternative sources, substitutes, and re-export solutions to hedge against the risk of a supply loss from China," said Matt Gertken, senior vice president at BCA Research.
That's easier said than done, as China has built up control over vast amounts of global supply chains. In batteries, for example, China has mined 68% of the graphite needed, refined 60% of the world's lithium and 72% of cobalt used globally, according to a U.S. Congressional report citing data from 2019.
In a sign of the challenge for global businesses to shake off reliance on Chinese rare-earth supplies, several automakers, including General Motors and BMW and major suppliers, have been developing electric vehicles with little to no rare-earth content. Few have managed to scale production to levels that could reduce costs.
Automakers will have to "operate two ecosystems: one exclusively for China in China, and one outside of China," said Lei Xing, an independent analyst on China's auto industry.
Separately, Lewis Black, CEO of Almonty Industries, said it's going to take "a significant amount of time" to find alternatives to China's supply of rare earths.
Speaking to CNBC's "Squawk Box Asia" on Friday, Black said China has protected its market share by pushing prices down to levels at which other countries' companies went out of business and investors weren't incentivized to pour in capital.
Late last year, China increased restrictions on exports of civilian-use products deemed likely to end up having military use. The rules aren't bounded by geographical location, meaning they could cover any Chinese transaction with a foreign entity or individual, pointed out law firm Morrison Foerster.
In February, China then announced export controls on five critical minerals, including tungsten, an extremely hard metal used for precision cutting tools, weapons and semiconductor production. The country controls 80% of the tungsten supply chain.
Last week, a European company that needs tungsten powder shut down for a week, said Oliver Kleinhempel, executive director of EQ Resources, which says it is one of the top two tungsten recycling companies.
He warned of a "complete structural shift" if Western businesses that consume tungsten are forced to shut down, incentivizing their Chinese peers to take that market share.
Almonty Industries is working to reopen a large tungsten mine this year in South Korea, but the company expects its supply of the metal will only be able to satisfy U.S., EU and South Korean defense needs.
"This was always going to happen, it was inevitable, it was not something that caught anyone by surprise until it happened, and then everyone['s question] was: 'What do we do?'" Black said. He said he is hopeful that the company's tungsten lab can make progress in the next two years on recovering more of the metal from tailings currently wasted in production.
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