Trade War Looms Over Materials

It’s time to pay close attention to rare earths and raw materials–again.

In fact, the supply chain teams and commodity buyers at aerospace, automotive and electronics companies may have some new and potentially big problems on their hands.

For some time, the European Union (EU), the United States and other nations have been at odds with China over rare earths. China, which accounts for 85% of the world’s total production of rare earths, is now apparently stockpiling these elements amid price hikes in the arena, according to reports from the Nikkei Asian Review.

Then, in July of 2016, the EU, U.S. and others launched a new and separate “trade enforcement action” against China at the World Trade Organization (WTO) over export duties for several key raw materials used in the automotive, electronics, semiconductor and other sectors.

When China joined the WTO, it agreed to eliminate its export duties on these materials. But China, according to the U.S., has failed to eliminate export duties on the following nine materials–antimony, cobalt, copper, graphite, lead, magnesia, talc, tantalum, and tin. These raw materials are separate and different than rare earths.

China’s export duties for these materials range from 5% to 20%, according to the U.S. government. But Chinese customers pay a lower price for these materials, according to U.S. officials. This, in turn, creates an uneven playing field for U.S. competitors and customers, they added.

“These duties are China’s attempt to game the system so that raw materials are cheaper for their manufacturers and more expensive for ours,” said U.S. Trade Representative Michael Froman, in a statement last month. “This scheme is directly at odds with WTO commitments China has made, and as we’ve shown time and again, we will hold them accountable to their commitments.”

The EU, meanwhile, launched a similar action against China. The materials involved in the EU’s case include graphite, cobalt, copper, lead, chromium, magnesia, talcum, tantalum, tin, antimony and indium.

China’s total exports of these products are worth around €1.2 billion (US$1.4 billion). Of that, one-sixth is exported to Europe, according to the EU.

China, according to the EU, has a tight grip on several materials. For example, China supplies two thirds of the world supply of graphite, a carbon material used in several industrial applications.

Half of the production of cobalt is done in the Democratic Republic of the Congo (DRC), according to the EU. China has limited production of cobalt, but has secured many contracts with mine operators. This, in turn, allows China to be the world’s leading producer of refined cobalt, according to the EU.

The situation is not as dire in copper. China accounts for approximately 10% of the world’s mined production of copper, according to the EU.

China, however, accounts for about half of the world’s mine production of lead, the EU said. It is also the leading chromium-consuming and ferrochromium-producing country, it said.

In addition, China holds 70% of the global mined production of magnesite. It is also the largest global producer of talc with about 30% of the world production, according to the EU.

Rwanda, the DRC and Brazil were the leading producers for tantalum in 2015. China is not a big tantalum producer, but it imposes an export duty on tantalum waste and scrap.

China is the world’s leading tin producer with 37% of world production, according to the EU. Meanwhile, antimony is mined in 15 countries, but mine production is concentrated very heavily in China with 78% of the world total, the EU said. And not to be outdone, China accounts for half of the refined indium production.

More problems for rare earths?
In addition to these materials, the EU and U.S. might be headed on a collision course with China regarding rare earths—again.

Rare earths are different than the materials as stated above. Rare earths are chemical elements found in the Earth’s crust. They are used in cars, consumer electronics, computers, communications, clean energy and defense systems.

There are 17 elements that are considered to be rare earth elements. Fifteen of those elements are in the lanthanide series and two additional elements share similar chemical properties. They include scandium, yttrium, lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium and lutetium.

The big driver for rare earths is magnets, which are used in disk drives, electric motors in cars, wind turbines and other products. Magnets represent one-fifth of the world’s consumption of rare earths. Other end products include alloys and petroleum.

In 2014, the WTO issued a ruling, saying that China’s export quotas and tariffs on tungsten and molybdenum violated the General Agreement on Tariffs and Trade (GATT), and China’s accession agreement to the WTO. China disputed the ruling, saying the nation was being unfairly treated.

Then, at the end of 2014, China abolished its quota system for rare earths. Export quotas for tungsten and molybdenum were also abolished.

Now, though, China appears to be hoarding various rare-earth elements, according to reports. Prices are rising for some elements as China cracks down on illegal mining and smuggling in the arena.

“You can’t do anything about (illegal mining),” said Jon Hykawy, president and director of Stormcrow Capital. “Instead, (suppliers need to) concentrate on finding ways to make money in rare earths despite the low prices. And the only ways to do that are to find the right niches, verticalize to include other ways to generate profits, and work on developing technology to cut your costs of production. So far, not many people are following the advice, and not many are making any meaningful amount of money in the space either.”

Regardless, rare earths and raw materials are critical. Keeping close tabs on them is essential, given the dynamics taking place in the delicate market. Finding new sources of supply might be a good idea, that is, if you can find them.

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