A Trade War Could Spark this Rally

The US recently imposed tariffs on US$34 billion of Chinese imports.

Now the US is looking at imposing another US$16 billion in tariffs. They’ve also released a list of US$200 billion worth of Chinese products that they’re planning to target.

Yet as Bloomberg recently reported, the new list of tariffs could be a shot in the ‘tech’ war.

U.S. efforts to inflict pain on Chinese exporters could end up giving headaches to American technology companies as well. The list of Chinese-made products targeted by the U.S. in a new round of tariffs includes rare-earth elements used in everything from iPhones to wind turbines, suggesting the trade war is also hitting its stride as a tech war…

Tariffs on rare-earth elements “could be a significant pain point for the U.S.,” Dan McGroarty, the founder of Carmot Strategic Group, a consulting firm that advises companies on rare-earth minerals and metals, said by telephone. “For those of us who’ve been watching the trade war unfold, we also understood it’s a tech war not just trade, and that sooner or later they’d be targeting metals in the tech space that China and the U.S. are both intending” to dominate.’

Rare earth elements (REEs) are a group of 17 metals usually found together in the Earth’s crust. Despite their name, they are not that rare but very hard to separate from each other.

REEs are all over the world, but they are hard to mine. Mainly because they are not found in large enough concentrations to make it worth it, economically speaking.

Why are REEs so important?

Well, they are used in many consumer devices like smartphones, TVs, computers, speakers…

They are also quite important for the military. Missiles, GPS, night vision goggles…they all contain REEs.

And they’re also important in producing hybrid vehicles.

REEs jumped onto the headlines back in 2010, after a diplomatic incident between China and Japan. During the conflict, there were reports that China had stopped REE exports to Japan. Prices rallied.

The US used to produce a small amount of REEs.

That is, until 2015, when China flooded the market with cheap supply.

Since then, the US has stopped mining REEs due to rising costs. And China has much of the world´s production, as you can see in the chart below:

World mining of REEs

Source: Geology.com
[Click to enlarge]

Last year, 78% of REE imports to the US came from China.

With increasing consumer devices, demand for REEs is rising. In 2017, the US imported an estimated US$150 million of REEs from China. That’s a 27% increase from the previous year, according to the US Geological Survey data. 

As you can see in the table below, China produced 80% of the world’s REE last year and they hold almost 37% of global reserves.

World mining of REEs

Source: US Geological Survey
[Click to enlarge]

China has been investing heavily in REEs.

The fact that China is now the major producer is a concern for the US and high-tech societies dependent on REEs. As a publication from the US geological survey noted in 2011:

China’s dominant position as the producer of over 95 percent of the world output of rare-earth minerals and rapid increases in the consumption of rare earths owing to the emergence of new clean-energy and defense-related technologies, combined with China’s decisions to restrict exports of rare earths, have resulted in heightened concerns about the future availability of rare earths. As a result, industrial countries such as Japan, the United States, and countries of the European Union face tighter supplies and higher prices for rare earths.

If the latest tariff list goes into effect, it would very likely affect consumer prices.

As Bloomberg recently reported:

‘Imposing duties will “bring home to the American public the reality of how much of what they use in everyday life contains these technology metals,” Jack Lifton, the Michigan-based founder of rare earth consulting service Technology Metals Research LLC, said by phone. “The Chinese mine the rare-earths, they separate them, they refine them. This is the long-term trend and a 10 percent tariff will not do anything to stir any domestic production in the U.S.”

But we could also see higher prices if the trade war heats up.

As we told you before, China has promised to retaliate by matching tariff for tariff. Yet their imports are a much smaller amount than the US.

In 2017, they imported about US$127 billion from the US. The US imported about US$505 billion from China. Which means that they will run out of imports to tariff well before the US does.

But China could decide to restrict REE supply in retaliation for tariffs. And this could spark a temporary rally in the sector.


Selva Freigedo,
Editor, Markets & Money

PS: Author and economist Harry Dent predicted Japan’s 1989 collapse, the 2000 dotcom bust and the 2008 subprime flop. He now has a chilling warning for Australia.  To claim your copy of Zero Hour click here.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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