Much of the trade war talk recently has concentrated on China’s threat to stop exporting rare earths to the US, as the tit-for-tat between the world’s two biggest economies marches on.
This has not only rattled the markets and prompted mass “rare earths” searches on Google; it’s also driven investor interest towards rare earth processing companies outside of China.
As things stand, China accounts for roughly 80 percent of global rare earth mineral supply and one-third of the world’s rare earth reserves. If the country decides to curb the supply of these minerals, it’s bad news for sectors running the gamut from automotive to consumer electronics.
But there are players around the world ready to seize the opportunity.
The Struggle for Light Rare Earths
In the event that China battens down the hatches, other countries and processing companies will try to pick up the slack. But it’s also important not to underestimate the significance of China’s contribution to the sector.
“Most investors completely misunderstand the potential predicament surrounding a [rare earth element] embargo,” writes Gaius King on Smartkarma. “The myriad causation effects it would inevitably have on modern life, and the impact on certain industries, such as non-Chinese made [electric vehicles] and wind turbines, would be calamitous.”
According to King, pundits tend to liken the abundance of elements like chromium and nickel to that of light rare earth elements (LREE) like yttrium, lanthanum, and neodymium. This leads many to think China has much less leverage in this regard, as global demand could be covered elsewhere.
Read the full Insight by Gaius King: PM8 – The Perfect Foil to a Xi LREE Embargo
However, given the market’s increasing needs for certain applications, such as the production of magnets for electric car motors, global LREE supply will have trouble keeping up in less than a decade, King warns.
He further points out that a potential moratorium on LREE supply from China lends to volatility for elements like neodymium, whose price jumped more than 33 percent last week as the market got more jittery.
From Angola to Australia
So what are the alternatives for the US if China makes good on its threat? Currently, the largest deposits can be found at three other places: Longonjo, Angola; Mount Weld, Australia; and Mountain Pass, California.
The first two locations are being exploited by two companies: Pensana Metals (PM8) and Lynas Corp respectively. The two deposits can “partially make up some additional supply outside of Chinese sources,” according to King.
Looking at PM8’s viability, King notes that the Longonjo deposit is approximately half the grade of Mount Weld and not as attractive financially. Still, the analyst believes the company is making a lot of the right moves, even though it won’t be ready to start selling concentrates until end of 2021, if not later.
Lynas, the Australian company managing the Mount Weld deposit, seems to be best placed to capitalise on a Chinese LREEs curb. The company is capable of processing concentrates – the other two locations need to rely on Chinese state-operated companies for processing, which complicates things. For California’s Mountain Pass especially, tariffs in place by the Trump administration are already raising costs.
On 20 May, Lynas announced a joint venture with US-based Blue Line, with the aim of building a rare earths processing facility in Texas. The partnership will “see that US companies have continued access to rare-earth products by offering a US-based source,” according to the official announcement.
But while there are plans for the proposed plant to include LREEs, the initial focus would be on heavy rare earth elements.
In a note about Lynas, Travis Lundy is optimistic about the company based on the opportunities the continuing trade war presents and on the expectation of renewing its operating licence in Malaysia (where Lynas does rare earth refining) – which happened early this week.
Read the full Insight by Travis Lundy: Trump Trade Means Lynas Capex Easier
While the fruits of the joint venture with Blue Line will take a while to ripen, a non-Chinese player with the right capacity and expertise could be attractive to western and Japanese companies looking to step around the trade war fallout, Lundy believes.
In fact, Lynas can benefit from customers and investors who want it to succeed and grow as a viable alternative to Chinese firms.
Whichever way a full-on ban of rare earth supply by China goes, the mere possibility will likely make the markets think harder about the viability of alternative rare earth sources.