“It makes logical sense: Whenever you have a shortage of raw materials in the world, it historically has led to war.” So said investment biker and Vancouver veteran Jim Rogers during a recent address to the Mises Institute in Alabama.
A couple of generations ago, Japan attacked Pearl Harbor within months of a US oil embargo. Monday, China embargoed exports of rare earth elements to the United States.
Rare earths, in case you need a refresher, are a class of 17 elements used in everything from mobile phones, to hybrid car batteries, to flat-screen TVs, to guided missile systems, to wind turbines.
If it involves cutting-edge modern technology, chances are it requires rare earths.
So what’s the rub? Right now, China controls 93-97% of the world supply, depending on the source you choose to cite at your next cocktail party.
Still, the Chinese decision to stop exports to the US marks one of the strangest export bans in recent history.
When Russia banned grain exports in August, Prime Minister Vladimir Putin made the announcement himself and outed his fear that Russians would starve. But when China banned the export of rare earths to the United States, a New York Times reporter had to suss it out through “three rare earth industry officials, all of whom insisted on anonymity for fear of business retaliation by Chinese authorities.”
There’s no indication how long the embargo may last, and a fourth industry official says it appears a stray shipment or two is still being allowed to go through.
It puts officials in Washington in an odd position: “We’ve seen the news report,” says a spokeswoman for the Office of the US Trade Representative, “and are seeking more information.”
On this front, they’re bereft of their usual posturing and indignant outrage. As if they just didn’t see this one coming… Hmmmn…
When China cut off rare earth exports to Japan last month, the motive was pretty obvious: Japan captured a Chinese fishing boat in waters claimed by both countries. But what gives with the stealth embargo to the US?
Of course, there’s headline-grabbing tension between policy wonks in Washington and party apparatchiks in Beijing over the value of the renminbi (CNY)… which has, in turn, played host to a series minor trade disputes: The US government has imposed duties on Chinese tires. Chinese officials have imposed duties on US chicken. Yada, yada… Bureaucrats squabbling: what else do they fill their time with?
As we were looking under the hood, we found a motive with a little more oomph behind it.
Last Friday, the Office of the US Trade Representative announced it was launching an investigation into Chinese subsidies of green energy. The United Steelworkers have been raising a ruckus about this so, of course, given the election cycle, there’s more than one beltway resident willing to go to bat for them.
The union claims the Chinese have adopted “policies that protect and unfairly support its domestic producers of wind and solar energy products, advanced batteries and energy-efficient vehicles…as China seeks to become the dominant global supplier of these products.”
What goes into wind turbines? Rare earths. What goes into advanced batteries and energy-efficient vehicles? Rare earths.
Suddenly, it all starts to make sense. Then again, the US investigation may have simply handed Beijing a pretext for doing something it planned all along.
“China does have 97% of rare earths,” Jim Rogers explains, “and China’s booming. So China’s cutting back on the exports of rare earths, which I guess anybody would do if they were booming and they could see there was limited supply.”
“Since 2006,” explains The Economist, “China has behaved in a way that resembles OPEC, the oil-producers’ cartel, cutting exports by 5-10% a year. In July the export quota was cut by 40%. Prices have soared.” And they’ve soared at the very time demand is soaring, too: “Demand is forecast to increase by around two-thirds over the next five years.”
“If you could figure out a viable way to invest in rare earths,” Jim Rogers concludes, “you will probably make a fortune.”
So who are the winners and losers from all this? Reuters is out this morning with a handy list. The losers include the manufacturers who rely on rare earths. In the US, those are primarily makers of catalytic converters, along with the metal-alloying and ceramic-making sectors.
The winners are the miners of rare earths…and they do exist outside China’s closed system. In fact, 65% of world reserves lie outside China. They just haven’t been developed yet. The United States, Canada and Australia all have deposits that tiny mining firms are scrambling to bring into production.