The geopolitics of Beijing’s threatened latest rare earth elements restrictions: A rare opportunity with a wealth of risk
Beijing, who has a near-monopoly on the export of rare earth elements (REEs), producing nearly 90% of the entire global supply, is considering plans to restrict the export of rare earth materials to the US. This would allow Beijing to explore the impact this might have in hobbling key US industries, particularly its defence sector and specifically the F-35 fighter program which is heavily reliant on REEs.
REEs are 17 elements integral to nearly all modern technologies, from electronics and renewable energy, to petroleum refining and heavy industry. China by far is the largest source for REEs, a 2019 report by the US Geological survey noted China produced 132,000 tons in 2019, compared to the second nearest, the USA, who produced only 26,000 tons. Indeed, China supplied 80% of the USA’s REE needs between 2014-17.
In risk terms for governments and concerned industries, this sets a future precedent that Beijing will increasingly use its REE monopoly to pursue its political interests. The national reserves of REEs for all states bar China, are relatively small, leading to at least in the short term, an economic, if not political, vulnerability to disruption caused by restrictions, giving Beijing a viable tool to exert hard-political pressure.
Though over the longer term, the current global response to China’s threat has seen the US and Australia seek alternate sources of REES which eventually may lessen the effectiveness of Beijing mandated export restrictions, and perhaps see China’s monopoly weakened or nullified in practical terms. Beijing’s threats or indeed action to restrict REE exports thus present an opportunity both in the US, Australia and Canada, but also for developing states in Africa like Uganda, where large REE deposits can be found. However, mining and production of REEs will take a decade or more to set up and benefit from in these places due to the complexity of the required infrastructure and the task of creating an entirely new sustainable global parallel supply chain.
This is where the risk sets in for any prospective investment seeking to take advantage of this new opportunity. Previously in 2010/11 an almost identical crisis unfolded, when Beijing cut rare earth exports due to increased tensions with Japan, only lifting the restrictions at the World Trade Organizations behest in 2015. During this period rare earth prices soared, and alternative sources were invested in. However, being new ventures, production costs were higher than those in China, and before they had a chance to scale-up, Beijing eased the restrictions, causing prices to collapse and the majority of new ventures to be abandoned.
This is something investors, states and businesses will need to be wary of for their current response, though in their favour this time is a radically different political landscape. China has shifted in western polities from being perceived as a key economic partner to be courted, to one that is a competitor to be warily engaged with. It is thus unlikely western states and businesses will be as reluctant to stand-by new sources, or scared off by higher short-term costs, especially as this is the second scare Beijing has initiated over supply in the last decade.
This is a rare long-term opportunity then, though not without risk. Ramping up production to replace reliance on China will take significant time, investment and continuing political will, though there is more of that now than at any previous point in time. New mines though also comes with a heavy environmental cost. In the short term though a geopolitically inspired dearth of rare earth materials and soaring prices is likely on the cards soon, influenced by Beijing's threats, if not actions.