MW China is feeding a tech-based trade war ahead of 2025 with its monopoly on rare metals
By Myra P. Saefong
Latest trade-war flare-up involves gallium and germanium
China has been sending the U.S. a clear message that it stands ready to harness its monopoly on the production of strategic metals used in a variety of technologies, such as computer chips and military applications, as a weapon in trade negotiations, even before President-elect Donald Trump returns to the White House.
It's the latest flare-up in Beijing's trade war with the U.S., but it also serves as a warning shot from China, in that it comes before the scope of any potential new tariffs on goods coming from China are known.
"Global markets are unprepared for the impact of China's recent export restrictions on the semiconductor, battery and defense-equipment industries," said Mark Williams, a risk-management expert and finance professor at Boston University's Questrom School of Business.
"With monopolistic control over rare-earth elements and other strategic metals, and limited substitutes available, U.S. manufacturing is particularly exposed to the escalating tariff war," he told MarketWatch.
Earlier this month, China banned exports of gallium, germanium and antimony - known as strategic or rare metals - along with other key high-tech materials with potential military applications for the U.S. That move came in response to the U.S. putting limits on semiconductor-related exports, according to the Associated Press.
'China is delivering a clear message that it possesses powerful countermeasures to U.S. tariffs.' Mark Williams, Boston University
By restricting the export of these metals, "China is delivering a clear message that it possesses powerful countermeasures to U.S. tariffs," Williams said.
The materials that were banned are essential for the fabrication of semiconductor chips, and the ban could lead to an increase in prices, which could affect the profitability of chip manufacturers and somewhat increase the prices of electronic products, according to Luisa Moreno, president of Defense Metals Corp. (CA:DEFN), a mineral-exploration firm focusing on the acquisition of rare-earth mineral deposits.
Moreno pointed out that China has not actually banned exports of what are known as rare earths. Those are the lanthanide elements at the bottom of the periodic table, which are often confused with rare metals.
Still, China's move has broad market implications. It may lead to a decrease in the supply of certain chips that are critical for the automotive and mobile computing sectors, thus affecting the production of vehicles and certain mobile devices, said Moreno. The industry that would be affected the most is chip manufacturing, she said, but "all the downstream industries that depend on them" would also feel the impact.
Trade-war 'firsts'
China's latest restrictions marked "several firsts in the trade war," Gracelin Baskaran, the director of the Critical Minerals Security Program at the Center for Strategic & International Studies, and Meredith Schwartz, a research associate in the program, wrote in an article earlier this month. This was the "first time Chinese critical minerals export restrictions were targeted at the U.S. rather than all countries, and the first time restrictions on critical minerals were a direct response to restrictions on advanced technologies," they wrote.
"Critical mineral security is now intrinsically linked to the escalating tech trade war," they added.
Baskaran and Schwartz said China is making "significant investments in munitions and acquiring high-end weapons systems and equipment at a rate that is five to six times faster" than the U.S.
"In terms of strengthening military preparedness, China is operating in a wartime posture while the U.S. is operating in a peacetime posture," they said.
The Biden administration's trade policy toward China has "not been warm," Boston University's Williams said, and under Trump, this relationship will most likely "turn frosty."
Trump's statements on the campaign trail, including his proposals to impose harsh trade tariffs on China, have "set the stage for retaliatory actions from one of our top trading partners," he said. And China is keenly aware that it is in a "powerful position to restrict supply and exert upward pricing pressure" on these metals.
Given those threats, China may impose import restrictions "where it hurts for the U.S.," such as access to critical materials that the U.S. is highly dependent on, Moreno said. Those include rare earths, lithium, graphite and many other materials that China is the largest processor or producer of, she said.
Tit-for-tat actions between the two nations can have far-ranging implications, and China's power over the market for these metals, which it dominates, may gain widespread attention in 2025.
Demand for strategic metals, along with rare-earth elements, is expected to expand, driven by semiconductors, optics, lasers and consumer electronics, Williams said. "Unless other countries such as Australia can fill this supply gap, prices will rise, particularly for the most in-demand elements," he said.
Concerns about China's dominant position in this market, and the likelihood that it would use targeted export restrictions, have been "well known for some time," Williams said.
The challenge for countries that rely on these materials is that there are "not large enough other supplies to make up for the trade-war shortages," he said. In the last decade, "much work has been done on seeking suppliers and other substitutes, but this has mostly failed to reduce China's monopolistic grip on the global market."
China's dominance
China has been able to dominate the market for these materials by "being an early mover - benefiting from heavy government investment, lower labor costs [and] lower mining safety standards, combined with weaker environmental standards," Williams said.
Defense Metals Corp.'s Moreno said China understood very early the importance of these minor metals for industrial development, and its efforts to explore and develop these industries has been more than 30 years in the making.
"Once before, the U.S. was the most important producer of rare earths, but as mining in the West has become less and less popular over the years, China has taken over the production and processing of strategic materials," she said.
That said, the U.S. and others have been making moves to help safeguard themselves from supply losses.
The developed world has been offering grants and favorable loans to companies to advance their mining projects, but most funding has been downstream - in refining, metals making, alloying and recycling, Moreno said.
"The reality is that to build a resilient supply chain for these electronic materials, the West needs to improve permitting of mining projects," which usually takes over seven years, and to support junior miners to develop their projects and to find technology processes that can compete with Chinese producers, she said.
All in all, the rare-earth and strategic metals markets are "ripe for greater investor speculation and trading," given their extreme price volatility and close link to geopolitics, Williams said.
The problem is that unlike mature oil-commodity markets, trading instruments to express investor preferences are limited, he said.
Moreno pointed out that it's difficult to invest in these materials because they are usually mined as byproducts of base-metals mining - and China is, effectively, also the largest producer of base metals.
One exception might be Teck Resources Ltd. $(TECK)$ (CA:TECK.A), a germanium producer based in Canada, although germanium is not a major contributor the company's revenues, she said.
There's also the VanEck Rare Earth & Strategic Metals exchange-traded fund REMX. The ETF's index is made up of global companies involved in producing, refining and recycling rare-earth and strategic metals and minerals. The ETF, however, is trading more than 30% lower year to date, with a Barchart article last month citing the fund's exposure to lithium and noting weakness in China's electric-vehicle manufacturing hurting demand and prices for lithium.
"The U.S. has long recognized the risk of China leveraging its monopolistic control over rare-earth and other strategic metals as a trade weapon," Williams said, adding that China produces five times more of these vital materials than the U.S.
"In the short term, it is crucial for the U.S. to maintain open trade with China as a key partner and exercise caution in blindly escalating tariffs," he said. "However, in the long term, the U.S. must prioritize national security by investing in, finding and securing control over the mining of these vital raw materials."
-Myra P. Saefong
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December 16, 2024 13:59 ET (18:59 GMT)
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