Rare earths: China’s tariff trade-off with USA

After originally appearing on the draft proposal for US tariffs on imports from China, rare earth products have remained off the US tariff list. In contrast, the response from China has been to include rare earths on its retaliatory list, subjecting rare earth product trade to an increased tariff of 25%, coming into effect from June 1st 2019. Chinese state affiliated news outlets have also indicated that China could potentially look to restrict rare earth and rare earth magnet supply to the USA, with a representative of the National Development and Reform Commission stating that “if anyone wants to use products made from rare earth to curb the development of China, then the people of the revolutionary soviet base and the whole Chinese people will not be happy.”

Roskill view

The USA is currently lacking in terms of a general rare earth processing industry, whereas China’s smelting and separation technology has progressed to capture most of the world’s processing capacity, a distinct contrast to the 2010/11 trade war between China and Japan.

The USA is one of the largest oil refining nations and consumes significant amounts of lanthanum-bearing fluid catalytic cracking units. It imports between 6–9ktpy of lanthanum compounds, worth around US$11–15M. For neodymium-iron-boron (NdFeB) magnets, the USA’s imports from China grew to over US$120M in 2018, with Japan (the only other major NdFeB production base) accounting for US$30M.

Theoretically, there is sufficient rare earth production outside of China to meet US consumption, though this would cause the USA to compete with the EU and Japan, which have established rare earth supply contracts with producers (mainly Lynas Corp). Overall, the USA would be in a difficult position to replace its imported rare earth units from China without causing market disruption.

There are a limited number of US companies that would be able to fill the domestic requirements of US demand (MP Materials being the most advanced), though these projects still require their metallurgical circuits to be commissioned, meaning supply would not be available for a notable period. Furthermore, any rare earth projects developed would not be able to circumvent the Chinese magnet market without investment in downstream capacity. Case-and-point for MP Materials, where its major shareholder in China, Shenghe, is importing the US feed (27.5kt in 2018 worth around US$48M), which is being treated in Baotou and fulfilling increased demand from Chinese processors.

Compared to other base metals, the rare earths trade market is relatively small both in volume and value. Whilst Chinese policy has focussed on country-wide economic growth in the rare earths and associated industries, China could move to favour the national strategy over continued economic growth in the rare earths industry. The on-going trade dispute with the USA and, specifically, tariffs imposed by the USA, could push China to strike back, as trade relations between the two countries have become a national strategic matter rather than just a simple economic issue of trade. For the time being, the Chinese tariff increase to 25% from 10% next month, will place MP Materials as one of the main victims in the rare earth industry. With recently increasing prices, however, the general cost of separation of US material in China may mitigate the tariff increase.