There have been a lot of discussions and claims about China withholding rare earth supply, you can read more here, here, and here:
How did we get here?
We need to remember that the United States and China had an effective “embargo” on each other up until the Geneva Agreement between both sides reached the weekend of May 10th.
The United States says China has “violated” the agreement with the US.
What did the agreement actually do and say:
The 90-day “pause” achieved only a temporary halt to the ongoing deterioration of the US-China relationship. It gives both sides time to maneuver, and recalibrate.
For the US: Christmas is saved, retailers are not pushing back on the Administration as much, but prices are going up despite political pressure.
For China: Large backlogs of goods and inventory in the supply chains get moved, even if margins are low, and factories (read employment) are stabilized at least until the latter part of the year.
What the agreement does not do:
It does not have the formality, rigor, or exactitude that one would need from such an agreement to be adhered to, or to reduce any misunderstanding.
The White House announcement states tariffs will be rolled back and a framework to negotiate will be established, but does not mention rare earths. If rare earths are so important, why was it not mentioned? There have been mutliple comments from US officials that the Chinese side “agreed” to soften, or get rid of, rare earth controls, but what exactly that means and what is understood by both sides remains unclear.
What is happening now?
The US is taking more actions against Chinese interests, especially related to restricting (or kicking out) Chinese students studying in-country, further technology restrictions (such as more restrictions on Huawei one day after the agreement was announced), and export controls that are related to “national security.”
From the Chinese side, putting more restrictions on them, especially during any negotiations, is seen as an afront and not serious. As one former official told me “why should we do anything when this is the case, they can change their mind tomorrow?”
There have been threats and speculation that new US restrictions are related to a “lack of adherence” by China to the 90-day agreement, or that China is using rare earths as leverage to get more negotiating power. The reality is rare earth restrictions were already in progress before the announcement, and reducing them takes time. Add to this Chinese hesitation because of US actions, especially against its own citizens, and it is a slow walk to approval.
What is it about rare earths that gets countries concerned?
China dominates the rare earth mining and processing areas of the supply chain. The Western powers and allies (including the G7), are not serious players in rare earths, and have few options.
Refining
Mining
Mining + refining
You can find out more about these charts here:
Why isn’t China approving rare earth export licenses?
China was slowing down approvals, and withholding others for certain firms to put pressure on the US until the mid-May “90-day” pause agreement. Afterwards, what to the US appears to be a Chinese withholding of licenses or outright rare earth bans, is more related to the sheer volume of applications received and a bureaucracy known for its hesitation to step out from current policies or guidance.
There are many rumors and half-truths about what is happening. Here is the reality:
1: The sheer amount of applications for licenses received is many times the normal number. The bureaucracy has been overwhelmed, but is working through them. Given the current political and trade situation, any approval will be thoroughly reviewed by several levels of staff to ensure it follows current regulations or any “window guidance” before it can be granted.
2: There is an internal battle between the business, security, and trade portions of the bureaucracy. Some don’t want to give anything to the Americans as it decreases leverage, others want to ship as much as possible because its good business. This sounds very much like the on-going discussions within the US government.
3: Customs is letting some products through without approved licenses. The caveat is they have to be long-term buyers (usually a history of a decade or more), and the items are used for the same purpose as in the past. Once new licenses are approved, any shipments that have taken place are updated to reflect that.
4: There have been crack-downs on goods that were being sent to non-approved addresses or businesses (smuggling). This has slowed down the approval process further as buyers have to go through more “formal” and “approved” channels, adding to the workload.
5: There are many others in the approval que besides the United States, including firms from Mexico, Canada, Japan, South Korea, Malaysia, Russia, the European Union, India, etc. It isn’t just the Americans who need product.
6: Customer can buy processed rare earths, including magnets, in Southeast Asia. I was there in late April/early May, a myriad of products were available without restriction, but in smaller quantities and higher prices.
You can read more in this Financial Times article.
What’s next?
1: The US will need to cut another deal with China if it wants unfettered access. There are no alternatives to China for processed, volume rare earth supply, especially at reasonable costs.
2: Alternatives to China are being discussed and developed, but these are decades away from having meaningful impact. Don’t fall for the noise of “we will develop it in the US,” it won’t be. If it was going to be, it would have already been done.
3: China will use increased leverage in these areas to push back against US policies including export controls, semiconductor restrictions, and Chinese student restrictions.
4: China will continue to invest vast resources, around the world, to build out rare-earth supply chains. The US still has not formulated a global strategy to build anything close to what China can, and will, offer.
5: Expect global tensions on rare earths to continue for at least the next decade.