China’s export controls on rare earth elements have exposed major US supply chain vulnerabilities.
Now the US is scrambling to plug the holes – and China is working to maintain its leverage.
The big question is: how far will each side go in these efforts?
In this podcast, Trivium Co-founder Andrew Polk and Cory Combs, Head of Critical Mineral and Supply Chain Research, take stock of China’s maturing export controls, the evolving US response, and where this all leads.
They break down:
What China is doing to bolster its leverage
Where the US side’s response is succeeding and failing
What a stable end-state might be for global manufacturing supply chains – balancing the upsides and downsides of Chinese supplies
Complete transcript follows:
Andrew Polk:
Hi, everybody, and welcome to the latest edition of the Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Cofounder – Andrew Polk. And today I am joined by my colleague, our Head of Supply Chain and Critical Minerals Research, Cory Combs. Cory, how are you doing, man?
Cory Combs:
Good to be on. How’re you doing?
Andrew:
Great to have you, as always. We are going to get in today to the latest on the critical minerals back and forth, and specifically, the rare earth export controls between the U.S. and China. And, of course, the Chinese have put on the rare earth export controls as part of the way to build leverage in the back and forth on U.S.-China trade talks. Cory runs our research in this area, not only on rare earths in particular and the export controls, but a whole range of critical minerals and supply chain issues. So, great person to have on. We are kind of doing this now. I mentioned we’d do this last week. It’s basically the last week of summer, or at least before school starts in D.C.
So, everybody’s still kind of riding the summer wave, end-of-summer wave. Not a lot happening in China on the back of the Beidaihe beach meeting by the senior leaders. So, we wanted to take another kind of step back like we did last week, and look at an issue in broader context. We will talk about the latest developments that have happened on this front, but that is what we’re going to get into today and why we have Cory on the pod. We will talk through specifically the ways that China is looking to maintain its leverage over rare earths, even as other countries have now seen China’s leverage and are trying to diversify away from the Chinese supplies.
We will also look at what China is doing in terms of investments at home and abroad to maintain that leverage. We’ll look at what the U.S. response has been, and we’ll talk a little bit about how all of this kind of fits into the broader back and forth in terms of U.S.-China trade talks. We have touched on it before, but a good time to kind of catch up because it’s a fast-moving thing. And, as we have mentioned before on this pod, really, I think I’ll get into this, but in my view, this issue and the chips issue, the export controls from the U.S., so chips for various kind of export controls are now much more important and much more seminal and central to the discussions between the U.S. and China than the tariffs, the specific tariff level per se. And so we’ll get into kind of how that all fits in.
But before we do that, kind of start with the customary vibe check. Cory, today is August 18th, like I said, kind of last, I guess, full week of August. Next week we get a little bit of September in there. So, how’s your vibe right now?
Cory:
Not too bad. I mean, really, on a operational front, we just finished a few big projects, which is always satisfying. And also, if I’m being honest, a relief to get those done, but also really exciting too. Long and short, we’ve been working to figure out production chain vulnerabilities and really get into the details of what these export controls mean for companies and for other actors, and actually being able to work on some of the strategy there. So, wrapping those projects have been very gratifying, and now we get to do a bunch more of them. So, excited for that.
Andrew:
Yeah. Well, hopefully, you get some time to relax. Cory has been a hardworking man the past few weeks, although he did get a little bit of a vacation or, you know, vacation, is that the right word? You had your honeymoon out in Japan recently, right?
Cory:
Yeah, it is correct. It was lovely, two weeks in Japan. Finally got to see Kyoto. It’s been years. I’ve been wanting to spend time out in the mountains out there. Really going out there was absolutely fantastic.
Andrew:
Yeah, that’s great, man. Well, I’m glad to hear that you’re excited about the work you’re doing. My vibe is quite positive. We’re both actually strangely in Maryland. Cory normally resides in LA. I’m normally in D.C. I’m out in the Western Hills or whatever in Maryland, Deep Creek Lake. I guess it should say an undisclosed location, but just hanging out, enjoying the last bit of summer with the family. So, trying to enjoy that. Recording this pod in a tiny basement bedroom with four bunk beds around me, where my children sleep. So, that’s a little bit strange. But anyway, I’m just trying to enjoy this last bit of summer before heading back to D.C. and jumping in with both feet as always, kind of Labor Day is the big marker.
You get back to school, then political season, and work picks up. So, just trying to ride out what’s left to summer. But I’m glad to be here with you today, Cory, and we’re going to get into a lot of different stuff. But before we do, of course, last little bit up top is the housekeeping. Quick reminder here that we’re not just a podcast. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. So, that includes various policies in China, whether that be net zero policy, climate policy, tech policy, you name it. But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on any of those fronts, please reach out to us at hq@triviumchina.com.
That’s hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. Otherwise, if you’re interested in receiving more Trivium content, check out our website, again, triviumchina.com, where we’ve got a bunch of different subscription options, both free and paid. You will definitely find the China policy Intel you need on our site, so go check it out. And finally, as always, tell your friends and colleagues about Trivium, both about the podcast so we can grow our listenership, and about the company so we can grow our revenue streams. Both very important, equally important –our pod listenership and our revenue streams have equal weight in my mind. That may or may not be true. Anyway, I digress. Let’s get into it, Cory.
See, I’m feeling loose today. You can tell it’s the last week of summer. Okay, critical minerals. Just to start out, set the stage where we are. I know a lot of listeners will know that this has become a primary issue in the back and forth between the U.S. and China, so we won’t do the full story of this. But Cory, just kind of set the stage on where we are in terms of how China has used this as a lever in these negotiations with the U.S., and where that has brought us to as of mid-late August.
Cory:
Absolutely. So, the latest major action, as many folks will know, is the set of rare earth export controls, and that applies to seven of the 17 rare earths, most of the heavy, medium and heavy rare earths used in additives to magnets, and really critical to the military applications of rare earths. So, where did that come about? Those came in just two days after the liberation data, so the White House imposed on the world. In this case, particularly China, obviously was eager to defend its interests when it came to trade. But this really reflects the broader strategy that Beijing has employed. There have been a variety of different provocations, if one will, actions by the West, usually the U.S., although not quite exclusively, that impacts, negatively impact some particular key interest of China’s, typically something to do with economic upgrading, whether that be its ability to export critical high value exports or whether that has to do with China’s access to high end chips and things like that.
Beijing has found that it doesn’t necessarily have the same leverage in a trade negotiation as the seller as the U.S. does as the buyer. And so how does it counteract that discrepancy, that asymmetric leverage? Well, it deploys more of what it does have leverage in, and a huge portion of that, there are other mechanisms that work as well, and you’ve written a great piece on China’s economic toolkit, but one of the key pieces is critical mineral controls. It produces so much of what the world needs to make things. In addition to making the things that the world needs, it produces the upstream components that go into them. So, it makes it really hard to diversify the goods you need if you can’t get the materials to make those things.
Andrew:
And China employed that to great effect, like you said, after sort of Liberation Day tariffs. What’s your read on sort of, again, some of this will be a rehash, but on how ready the Trump administration was for that? I mean, this is something you just mentioned. I wrote a big paper on this with Evan Medeiros about China’s evolving economic toolkit. We, at Trivium, have been following this forever. And yet it seemed like you see all the time, right? People commenting publicly, “Oh, this came out of nowhere,” and it really feels like it came out of nowhere for the Trump administration. Am I reading that right that they didn’t see this coming but, arguably, they should have?
Cory:
I would absolutely think both counts are correct. First, Trivium was not the only group, but we’d specifically not so said export controls will continue. But that rare earth specifically were going to be on that list, along with tungsten and others that were then used well over a year ago publicly. And we have discussed with various actors who had the same sense, and we were not alone in this. There are many groups that were able to say, “Hey, we think this is an evolving trend.” And, specifically, rare earths are among the high-risk zone of materials to be controlled. And so, one can never really know what happens in the White House on a day-to-day basis, given that things change very quickly there. But in any world in which someone had anticipated these kinds of controls, there are a number of actions that the U.S. could have taken to mitigate the impact of Chinese export controls on rare earths, or anything else.
In no case did we see any such mitigation efforts out of the White House that one might have expected. And so, that leads me to believe they either did not expect this, or really did not think it would be a big deal if they did expect it. In either case, they were wrong.
Andrew:
Well, okay, so I don’t want to go over history, all the history, I mean, it’s just back to April. So, it feels like a lifetime ago. But either way, whether they were unprepared or just thought it wouldn’t be a big deal, I think the reporting around all this tells us that, very clearly, the export controls, when they were put on, got the attention of the White House, of D.C. more broadly, and is part of what brought the Trump team sort of quickly back to the table to start negotiating. Of course, it was first in Geneva, then it was in London, then it was in Stockholm. And there was, of course, a matter of public record, some confusion on what was agreed in Geneva, specifically on the rare earth. The Chinese were saying, “We will start to sell you rare earths.” In their minds, actually, what they were promising, but we believe, was we will start to review the applications, which means we’re not going to necessarily sell them to you next week, but probably in about 45 days, you’ll start seeing shipments again. The Trump administration or the Trump negotiators heard — you’re going to get rare earths. And then after that meeting, they didn’t get them as quickly as they wanted. There was a back and forth. This has really become a sticking point, yada, yada, yada. We’ve gone through Geneva, London, and Stockholm.
Stockholm meeting was the third of the series between the U.S. and China. And it seems, on the back of that, that they have had a meeting of the minds in terms of general outlines of what both sides want from this negotiation. They agreed to extend the truce on tariffs so that they don’t go back to it is extremely high levels for another three months. And it seems that the U.S. at least is satisfied generally with sort of the understanding on rare earth. And so, all that is a long preamble to say, okay, we understand maybe the administration didn’t see it coming or didn’t think it would be a big deal. But where are we today? Are these rare earths flowing, or are they not flowing? And how satisfied is business? How satisfied is the administration with what China has been doing? Talk us through some of the data you’ve been seeing and the anecdotal kind of evidence you’ve heard around what the current state of play is.
Cory:
Absolutely. So, first is things are more encouraging than they were two months ago. But we’ve had to be very careful about the interpretation there. So, long and short, what we expected to come really in London and Stockholm really reinforce this, but what we expected is that Beijing would start reviewing, MOFCOM, Ministry of Commerce would start reviewing applications, probably some procedural delays, but we’d start seeing things approved. Specifically, we would see magnets and rare earth products of various sorts approved to commercial users and not approved to military or dual-use end users, which is, again, kind of the on-paper rules of China’s export controls, no military end users.
Andrew:
That was never on the table. Yeah, sales to defense users was never on the table. Right.
Cory:
Exactly, right. And we expected that to the commercial users, they would flow and probably take a couple months to come through. And when first kind of discussion started happening on May, everyone was like, “Oh, that June data, it was very bad.” And exports were very limited. There was, “Oh, no, the deal is bust.” And it’s like, “No, no, no, no, this is actually completely on schedule for what we’d anticipated.” Not necessarily what the White House had anticipated. As you mentioned, that was part of the expectation gap. June rolls around, and we see a pretty significant pickup. And then July, there’s actually mixed data. People have probably seen both headline that the exports have come down and the headline that they’ve gone up. What you’re looking at is different segments of the data, right?
Total rare earth product versus magnets versus rare earth elements and compounds and oxides. We’re not going to go into that in here in the podcast, obviously, we do for clients, but long and short is the stuff that people actually want and need has stabilized significantly. So, is that reason for optimism? Well, I would say it’s certainly it’s reason to believe that the original expectation were more or less on point. But the big question that we don’t know is what happens in the next quarter. What we’re really waiting for is to see what the new normal is. And the reason that’s really hard to say is we know a couple things and we don’t know everything else. One thing we know is that, or have strong reason to believe, I should say, is that a lot of the exports we saw on June were backlogged, were basically applications that were still being reviewed, but had been submitted probably over 30 days before that.
More of the exports that we see in July were probably, I’ll say a much bigger proportion, were within 30-days applications. And so, what we’re going to start seeing is monthly data that looks a lot more like monthly requests or monthly import requests and licensing submissions. And so, I think we’re getting much closer this month to what the “new normal” looks like. But one of the big uncertainties there is, to what extent have various producers been able to rely on Japanese intermediate products where they had some stockpile? Most of the world didn’t. Japan had a little bit. So, to what extent have we seen kind of an artificial low demand or low applications as people wait? To what extent have we seen actors trying to substitute materials in various ways?
I think that’s going to take a bit longer, but that’s going to be one source of demand destruction that could be negligible. It could be significant over the next 6 to 12 months. It’s really hard to parse that right now. So, I’m always a little bit like things are better, things are, I mean, pretty close to what we kind of anticipated, but things are very, very uncertain, and the next one’s due course.
Andrew:
So, that’s good to hear. The applications are flowing through, MOFCOM’s approving them. Commercial entities, for the most part, as we understand, are starting to get the licenses and the exports of these rare earths and the rare earths magnets and things like that to use. Over the past two or three months, we’ve had a debate internally, and we’ve had a lot of people debating us externally around how much this process was weaponized and politicized by the Ministry of Commerce in terms of saying, “Oh, we’re doing the applications, but it’s just taking us a while.”
We’ve heard that the Chinese used this process as leverage in not just negotiations with the U.S., but with other countries. But at the same time, we’re also are hearing legitimate on the ground reporting or anecdotes from clients and other industry players that are saying, “No, it actually just is a total cluster over there." And they’re totally backlogged, and they’re working around the clock, but they are super risk-averse and they can’t get the applications approved quickly enough. So, classic government question, how much of it is malice and how much of it is, what’s the other word? Malice versus ineptitude. There we go. So, how much is this weaponization versus actual bureaucratic backlog or, aka, malice versus ineptitude? Where are you falling on that these days?
Cory:
Yeah, it’s certainly trite to say a bit of both, even though that’s a reality, but in a bit more detail, I think it’s really shifted the balance of proportion there has really shifted. Initially, I mean, this was the pre-London, pre-the talks, we certainly expected that this was just politically, they can say whatever they want. They were not reviewing American applications or applications for American buyers. So, that was part of the weaponization. That was like, “Hey, you’re going to tariff whatever it was, over 100% you’re not going to get these materials.” That was implicit, I think, quite clear. But after the talks, I think Beijing has, as far as we can tell, and yes, from anecdotal evidence, but also from the trade data, since it looks like Beijing was sincere.
It said, “No, we’re going to obviously maintain controls, but we’re not going to categorically cut off American or other specific buyers absent military.” Obviously, that was this other thing. Since then, though, there had been a number of delays. Obviously, June was still seeing delays, and it’s a couple months after the controls are in place. And this isn’t the first time that China’s impose export controls, obviously. It’s quite a few rounds in now. So, there was a lot of confusion about how can there be bureaucratic delays that are not political in nature.
A lot of the evidence really was clear that, no, those are actually customs issues that are slowing down already approved exports. And the question we got a lot of the time, the debate point, which is a valid question to raise, is, at this point, isn’t that inept? Isn’t that itself a choice? If it’s like your 17th export control and you’re still unable to actually move the things you’ve approved, at what point is it your fault for not hiring more people?
Andrew:
Yeah, well, so that’s a good point. That’s more of a philosophical point. I take your overall point that it’s a little bit of both. I think more than most, you’re still inclined to just think a lot of this, at least 60% is just the bureaucracy not knowing when it’s due.
Cory:
I think it’s higher than that, honestly. I think it’s even higher. I’m with you.
Andrew:
Yeah. Surely some amount of weaponization. But I think there is a conversation out there that it was all weaponization, and they could get these things done if they wanted. It’s an authoritarian state. They can do this stuff. And those people are just, I think, not really thinking through how the nuts and bolts of Chinese government work. But what I wanted to follow up on one thing you said was one issue is the approvals of the licenses themselves from MOFCOM.
And then there’s been this separate issue that has cropped up, which is the customs issue, which is a whol,e obviously separate government agency. Talk us through the issue that we’ve been hearing about on the customs side or the issues.
Cory:
Yes, absolutely. So GAC, General Administration of Customs, so if I say GAC, I’m referring to customs, long and short, they are responsible for, among other things, making sure that material doesn’t get smuggled. Now, if anyone saw that Reuters report on antimony a little while back, massive quantities of antimony had appeared out of nowhere to get into the U.S. via Mexico and Thailand. Obviously, there was smuggling going on. GAC’s job is to make sure that doesn’t happen. And rare earths, arguably, is the most sensitive material that’s being moved. Smuggling has been an issue domestically for a long time just by the nature of that industry, I won’t go into detail, but it has a long history of small-scale smuggling. And now, because there’s such inflexible demand for rare earths in most of the world, the financial incentives for smugglers have skyrocketed.
So, yes, there’s high risk to smuggling, but it’s incredibly lucrative. And so, the kind of market around this has created really strong incentives for smuggling. And so, GAC is extremely risk-averse, not just in kind of an abstract principle, but in a very practical, they’re failing when we find material get out of China that was not supposed to get out of China. So, here’s the real problem is mislabeling. It’s very easy to mislabel a lot of metals and minerals that look very similar to the naked eye, where the non-experts wouldn’t be able to tell apart. It’s very difficult to test these things quickly for chemical composition. So, what GAC had taken to was going to shipping containers and taking samples of material, sending them to a lab that can take a week or more, especially with a backlog, to actually chemically test before they actually approve the export.
So, you might see, a few days after approval, material moving to a port, and then it gets stuck there for a week, maybe two weeks as GAC reviews it, and then ultimately decides whether or not it trusts all the evidence of whether to release the shipment. And when I mentioned earlier this kind of distrust of, isn’t it really a choice? It is a philosophical point, but what’s interesting is I think it demonstrated a couple of things. One, it was by a lot of entities that had been hurt really bad. And so it’s understandable they’re like, we don’t believe that this is… there has to be a deeper reason why we’re being screwed over.
But it also meant they just really had no insight. I think, practically, the people buying the stuff very frequently did not know what was happening on the ground with their goods. What was happening was a legitimate bureaucratic issue in many cases.
Andrew:
Yeah. And we heard that MOFCOM was sort of pointing the finger at the GAC, right? And saying, “Hey, we’re doing our job. And now they’re slowing down the process.” And that’s pretty classic Chinese bureaucratic finger-pointing and bureaucratic infighting, not just Chinese, but kind of happens all over the place. But the point being, there’s a lot of steps here, and especially in a place like China, where officials tend to be very risk averse. I mean, I’ve seen this a million times living in China when I lived there for ten years. When you’re submitting paperwork for your visa, or whatever it is, you get one little coma wrong, and the visa officer’s like, “No, rejected.” And he looked, I’m like, “Come on, it’s a one comma or whatever.” And they’re like, nope.
No one wants to be the one that messes up. You know, gives the okay that then you let something bad happen. And so it does not shock me that GAC is doing this. Do you know if that’s getting better or worse, or have we heard anything on that side?
Cory:
We only have scant circumstantial evidence for that, so I’m a little hesitant to make a claim on it. But I do think it has gotten better in the sense that we have not been hearing nearly the same volume of complaints, although it’s possible people have just given up complaining, so I can’t really be too confident on that one. Yeah.
Andrew:
Well, one other just quick point is like, I don’t know, I’m an economist, and mostly believe in free markets for the most part, although do support certain government intervention to address externalities, as I would call them. But it’s not shocking that the smuggling happens. We’re reading these stories about the smuggling of Chinese rare earths. We’re also reading stories about the smuggling of Nvidia chips and other high-end chips into China because their export controls the other way.
Guess what? I mean, this goes back we’ve talked about this on the pod before about whether or not export controls are really effective. Market actors are going to, when there’s such demand for these goods, are going to have an incentive to start smuggling stuff. And it’s not shocking that these goods are getting smuggled from the U.S. into China and from China into the U.S. at scale, often. And both sides are increasingly trying to crack down on the smuggling. And we’re talking about the whole geolocation of chips in the U.S. Kendra and I talked about that a few weeks ago. It’s a cat-and-mouse game. People will find a way always to get these goods where they want them to go. Now, the flip side is, yeah, the export controls are going to slow down the trade of these goods or the export of these goods from one country to the other.
Maybe that’s enough. Maybe it’s enough to throw some sand in the gears to at least from each government’s perspective. But it does kind of, I don’t know, in case it’s not obvious, I am not wholly convinced that export controls are all that effective, much like I’m not convinced that sanctions are all that effective. But we won’t get into all that here. Okay. Cory, yeah, yeah, go ahead.
Cory:
But one thing on that is the only place where I think it has, it depends on how we look at Chinese leverage, I think it’s absolutely valid. It’s not absolutely keeping out materials in a sense here. But smuggled goods can go 5, 10 times the cost. So, you have produced 5 to 10x. And so if your job is to inflict economic pain on foreign producers, certainly good at that for a certain point of time, a certain period of time. So, different goals. It’s interesting.
Andrew:
Pushing up their costs. Yeah, I mean that’s interesting.
Cory:
If that’s the goal. But I don’t think it’s a useful goal.
Andrew:
I don’t want to delve too far into this. I mean, actually in a weird way, though, when you talk about rare earths, the whole point is we, America, should be willing to pay more for rare earths. We’re addicted to Chinese rare earths because they’re cheap in part. Right? And the only solution is to pay more. So, in a way, the smuggling kind of fits into that paradigm. But also I would say for both of these, the high end chips and the rare earths, the limiting factor is not price. Both sides will pay whatever they have to pay for both of these goods. So, I mean, it is a good point. Yeah, you’re extracting some pain because they have to pay more, but I think like they are totally price insensitive to these goods.
I mean, you need stuff that go in F-35s, You’re going to pay whatever you have to pay to get it, right? So, anyway, I’m getting worked up, so we’ll move on. It’s a good point. We’ll debate this more some other time.
Cory:
No, I totally agree.
Andrew:
But we did a little bit of background kind of some of the latest we’ve been hearing. And now I want to just touch on kind of really the latest, which actually, in a way, kind of supports the idea of China weaponizing these export controls on rare earths, or at least trying to blunt some of the negative long-term impacts. So, we’ve talked before about export controls in a way, or a weapon you can only use once, because as soon as you use them, it incentivizes the other side to say, “All right, well, now we know they’re unreliable for rare earths. We need to build up our own rare earth ecosystem.” That takes a while. But like, you kind of shoot the starting gun as soon as you use these.
But what China’s trying to do is kind of slowdown that shift away, or at least slow down companies’ and countries’ risk mitigation efforts, specifically by trying to keep companies from stockpiling rare earths.
You know, say, once they get an export license or a purchase sizes, whatever it is, buying as much as they can so they don’t have to keep reapplying. So, this is from the FT, sources telling the FT, China is telling companies they cannot go out and build huge inventories in rare earths, or they will face shortages, according to one source. Another source says that Chinese authorities were deliberately limiting approved export volumes to prevent foreign stockpiling. That source says this will be a leverage point from now on. Now, this policy is not written down anywhere, but it is clearly an effort to maintain, as I was saying, some amount of leverage. So, talk us through what you think’s going on here and your analysis of how this impacts the overall situation.
Cory:
Yeah, absolutely. I think it’s quite clear that Beijing has been seeking any way it can to extend the duration of its leverage. I think it’s quite clear it has one real chance to use this, and it’s going to maximize the opportunity. There are two dimensions to that, one of which happened actually, incidentally, a while back when it banned the exports of equipment to produce or to process, I should say, rare earths a long time ago. And that was really a competitive issue, not really retaliatory issue. But certainly, if they hadn’t done it before, they would have done it by now. And the other side now is to crack down on smuggling. So, first was to make sure that they’re not going to let anyone use Chinese equipment to replace Chinese production. That’s point one. Point two is they’re going to crack down as much as they can, as we just talked about with GAC, to make sure that unapproved actors can’t undermine China’s controls in any way.
And smuggling obviously directly undercuts your export control. It basically takes the power away from the government to decide who gets what and when. So, that’s obviously a target. And on that point about the policy, we’ve heard since the very beginning from actors who actually import, and from exporters as well, that licenses are being approved specifically on the basis of what is needed for production. Now, we don’t know exactly how that’s calculated. I don’t know exactly how specific that gets. But we do know that if you try to import a year’s worth of supply for your company in a month, you’re just not going to get it. And the reason for that is it would undermine China’s leverage. And so, the fact that we now have sources confirming this, it really is a reconfirmation or reaffirmation of something we’ve known for a while. But yeah, I don’t think that’s going to change anytime soon.
Andrew:
Yeah. I mean, at the very least, China’s trying to maintain the leverage, or at least, I guess what I’d say, the way I’d put is mitigate the downside of having imposed export controls, which is, like I already said, you incentivize countries to diversify, but if you can kind of keep countries and companies from diversifying, then that helps mitigate that part of the issue. Other things China is doing to kind of make sure that it sort of maintains its central, highly important role in the supply chain is investment, both at home and abroad. While other countries are trying to diversify and buying up whatever minerals they can, China is not sitting back and just saying, “Okay, we’re good to go.” It’s doing investments in this industry, both at home and abroad. Talk us through some of what China is doing on those fronts.
Cory:
Within the rare earths mineral, within rare earths space specifically, there’s a lot of domestic movement, as well as a lot going with Myanmar, which we’ll touch on. And then more broadly, I just want to add on kind of broader note that this applies to a lot of other critical minerals. China’s going abroad to secure its interests and to make sure it has both, on one hand, leverage, but second, to make sure that other countries don’t have leverage over it. And so this is very clearly on the minds of policymakers. We’re looking at policy discourse. This is very clearly, China knows this is a two way street. And there are minerals that China does not produce in large quantity. There are minerals they’re 80% import dependent on. And they want to make sure that they don’t become subject to the same controls that they’re currently imposing against the U.S. and others.
But, actually, the rare earths piece specifically, and I think one of the things we see that’s notable is not just new mining investments, but a lot of research and development money. And this has gone on for a while, but I think it’s intensified. We see very strong efforts to support efficiency increases. And that means basically whatever geological resource you have, getting more resources out of that on a percent basis. And, typically, Bayan Obo is one of the best deposits in the world, alongside, incidentally, Mountain Pass of the U.S. MP Materials mines. You might get 8% grade out of that. A lot of places it’s more like 4% to 6%. A lot of the material you’re getting, those margins matter.
And so, China’s put a lot of research and development into increasing those and looking at recycling, saying, “Hey, how can we boost supply from recycling so that we can have less environmentally damaging, etc., impactful and more efficient production?” There are a lot of ways in which China is upgrading that entire industry. Now, why does that actually matter? Well, one, a lot of reasons semantically, but two, the reason it matters for foreign producers, right now, the world is trying to diversify against China’s current price based on current costs, or cost curve. China is going to move that cost curve down, and so it’s going to be even more of a gap in the future to compete against Chinese supply.
So, these are the things where it would be one thing if China were the biggest producer of something, but it was pretty low grade and kind of inefficient and had a really high cost level, cost basis. That would be one thing. That’s not what’s happening. You’re competing against what is also the most innovative and biggest player in rare earths. And I think that’s going to exacerbate the challenge. It’s not like a hopeless situation, but it’s a different challenge than has been conceptualize in some cases.
Andrew:
It’s the best, it’s the most efficient, it’s the cheapest. And even though China has just incentivized everyone else to try to diversify, they’re also now trying to do everything they can do, like keep up the addiction of foreign countries and companies on China and to make sure, like you said, that they don’t get caught out by any other countries leveraging China. So, they thought this through. We’ll just put it that way.
Cory:
Yes. I mean, on the flip side, I do have to mention, in case anyone feels like it’s left out, China also faces massive overcapacity industry, overcapacity issues in rare earths specifically as well. That’s part of why the price is low. But when we say the cost basis goes low, what it means is China can maintain that with a less government subsidy, with less kind of pain on the back end. So, China is still trying to deal with its own issues domestically with these industries, especially rare earths. It’s kind of a mess of an industry. They’ve been trying to fix it for certainly over a decade, I would argue, over two decades. So, there’s more complexity to it than that. But at the same time, China is in a strong position.
Andrew:
Yeah. Well, we’ll see if countries are successful in starting to diversify. China is not going to go quietly on that front. But in the meantime, let’s talk through sort of what the latest U.S. response has been, not just on the immediate issue of negotiating export licenses for people who want to buy rare earths, but more generally, what is the U.S. been doing in the face of what is now clearly a vulnerability on the U.S. relying so heavily on China for these specific rare earths? What’s going on, on that side?
Cory:
The U.S., among others, has been trying to diversify. And a couple dimensions. Now, I would start by just a high-level argument. I think one of the problems of the way the U.S. has approached this is that the U.S. has looked to China itself, as far as I can tell, it looks like U.S. policy is trying to copy what China has done and where China has succeeded. China succeeded in two ways in various-
Andrew:
We see that all the time.
Cory:
Yeah, right?
Andrew:
I feel like we see that all the time these days. It’s mind-numbing. Anyway, go ahead.
Cory:
Absolutely. So, in one case, it’s domestic development utilization. Right? So, the first thing the U.S. has done is say, what can we get domestically? The second is Myanmar. Myanmar has the best, heavy rare earths deposits. Doesn’t matter the details there, but really important segment of rare earths. A huge portion of China’s processing is of ores that come from Myanmar. So, where is the U.S. looking? Oh, look, Myanmar. Both are bad ideas in different ways as a way to fully diversify away from China. And the first point, there actually has been, I don’t want say two, yeah, it’s frankly a rare bright spot in policy. I think the U.S. has done one thing really, really well recently, and that’s the DoD deal that I’ll talk about in a moment.
But basically everything else has been kind of pretty poor because it’s trying to do things that worked for China because China holds certain advantages that the U.S. does not have. And so, the U.S. needs to play to its strengths, and it has two, it’s kind of halfway sort of playing to one, and completely screwing up on the other one. So, I’ll go through this in detail. The first is, as I mentioned before, Mountain Pass is actually a rich deposit. MP Materials is the company that owns that area. And they have a really hard time competing with China, obviously, on a cost basis. Until very recently, they actually had to export almost all of the material to China for processing it. Still completely dependent on China.
So, what’s happening now is Trump administration, even more aggressively than the Biden administration before, has pushed to support that project. This is obviously contrary to typical conservative doctrine of picking industry winners. In this case, I think it has good strategic reason. It’s the best site in the country. And, basically, what the structure of the deal is, is that DoD, Department of Defense, has a massive investment, $400 million into the company, and specifically will off-take a significant price floor. I’m not going to give exact percentages because numbers vary, but many, many percentage points higher, double digits higher price floor than it can be bought from China. Now, why is DoD effectively subsidizing off-take? Why is it paying a massive premium on MP Materials output? The reason is the military can’t get it otherwise, and the DoD wants to encourage this project to produce more so that the military has supply.
DoD also has terms in that deal that allow it to sell to the commercial sector. So the DoD will have a way to try to package other deals and incentivize other commercial actors who generally just want the cheapest supply they can get, frankly, because otherwise they’re not going to subsidize American industry. That’s very clear. So, DoD is looking at this saying, if we have all the offtake, maybe we can cut a deal and we can certainly protect military interests and then supply by investing in processing, etc., maybe we can get commerce involved, too. Now, I think that was well done in the sense that it would be a foolish mission to try to compete with China on cost at this stage. It would also be foolish to not try to shore up military shortages in this case.
So, I think they did a good job. They didn’t try to compete on price. They just said, “You know what, we’re going to pay for it. We’re going to get it done. Cool”
Andrew:
Can I just interject quickly?
Cory:
Yeah.
Andrew:
I don’t want to stop your flow. But yeah, this totally makes sense to me. I have argued this before, like we’ve talked about how when it comes to rare earths, critical minerals generally, we actually don’t buy huge quantities of most of these things, right? In general, but specifically for the military. So, it’s just figure out how many tons or whatever it is you need of each of these. Get it from anywhere but China, pay whatever you have to pay to do it, and secure the military interest. And then, on the commercial side, we can do business with China. Maybe companies want to diversify. Maybe the U.S. government wants to incentivize companies to diversify. But that totally makes sense to me. Like, we’re not talking markets when it comes to getting the defense industry the stuff they need to build the critical systems, and tools and weapons, whatever, that they are making.
So, this just like is a no-brainer. And in a way, in my thinking, should be kind of separate from our commercial reliance, U.S. commercial manufacturing need for critical minerals. It’s like much more complicated on the commercial side to me. Anyway, just wanted to throw that in there. Keep going. Don’t let me stop you.
Cory:
Absolutely agree. That’s exactly the point. And, actually, the next point was that, and you already alluded to it, defense demand is somewhere in the range of a few percent of total demand. The high end I’ve seen is maybe five. The low end I’ve seen is 1% or 2% of demand. This is not going to change the market, it’s not going to change the industry, and it’s certainly not going to scale up MP to be able to provide all of the U.S. or North America. Now, here’s one of the issues. I agree it shouldn’t be trying to do that, but in the minds of a lot of policymakers that I’ve heard from, and it seems to me in the spirit of the DoD deal, their goal actually is to reshape the domestic industry.
This deal is not going to do it. And I don’t think there is a means for the U.S. to do that very productively or constructively. It’s not going to work the way that China’s able to do it, and not just because China’s been decades and subsidizing and developing this industry, but for a host of other reasons, too. So, really, this solves one specific problem, but not the big problem. One of my concerns is that D.C. wants this to solve a problem it cannot solve. Now, the other piece is, and what can solve the problem, I think, is China has obviously very close relationship, obviously Myanmar is a very complicated situation, and the civil war going on. There’s a lot of complexity going on.
China is really the only actor who’s able to operate there, frankly. And it sends military officers to basically act as diplomats fairly recently to tell the Kachin Independence Army, “Hey, if you don’t stop trying to take this Bhamo, this one town, for strategic reasons, we’ll cut off purchases of rare earths." They’re able to basically influence policy through rare earths because China has a basic monopsony on that. And they have the ability to operate in that environment. The U.S. does not. It doesn’t have the logistical, it doesn’t have the knowledge, it doesn’t have the political capital. It doesn’t have any of the means to operate in that environment. China does. So, we shouldn’t be looking very frankly, and then certainly there’s the ethical arguments, and there’s a lot of critique on both sides of the aisle of recent cancellation of sanctions on junta-affiliated entities in Myanmar by the Trump administration recently.
So, there’s a lot of complexity there. But long and short, even if you set aside politics, Myanmar is just not a good option for the U.S. It really isn’t the secure supply. What the U.S. has that China does not have is a strong, strong relationship, in principle, with Australia, Japan, South Korea, Canada, the EU, others. Right? And the one actor who is producing heavy and processing heavy rare earths outside of China at any scale is an Australian company, Lynas, working in Malaysia, largely selling to Japan.
Why on earth is the U.S. not all over that deal and trying to become part and throwing in capital to support that? And I will say there’s a Lynas project, processing projects forthcoming, hopefully, into Texas. There was some movement that’s purely commercial, but if the government wants to be involved in this in a commercial basis, the last thing it should be doing strategically, from a supply chain choke point perspective, is making enemies of all of the actors who would love to split capital costs and develop this outside ecosystem.
The U.S.’s greatest advantage, apart from the Mountain Pass deposit, which can’t solve everything, is its partnership network. And so, by eroding the partnership network there, specifically around trust around trade, I think it’s cutting off its feet while trying to run this race toward reduced, what am I trying to say? Trade deficit. That’s the focus. And it’s undercutting everything else.
Andrew:
And the Australians would jump in with both feet on this thing. They want to be a part of the solution, right? And they want to sell this stuff to anyone they can. And if the U.S. said, “Listen, we’ll put in capital and we will buy again at a price," for which I think totally makes sense, if we’re trying to engineer a move away from China, I think taxes would be all over it. Just to recap, so the two strengths you said were the Mountain Pass deposit and the alliance network with Australia, Japan, others that could form a coalition, willing, to turn a phrase, to coin a phrase, to go get this or go get that mine and process and have the separate market for these critical minerals. Right? Is that what you’re saying?
Cory:
Yeah. And this is because there’s so many different pieces. And sometimes I get the question of, well, if there’s a good mine, why is it not enough? And there’s a bunch of reasons, but in brief, it doesn’t have all the freight rates you want. It only has a certain portion. The processing technology, the U.S. doesn’t have the best or the most efficient. Lynas has been developing it. The talent, the U.S. literally doesn’t have the talent to run out of the stuff on the processing side.
Andrew:
That’s… sorry. Finish your point. But I want you to expound on that, on the talent piece.
Cory:
Absolutely. And then basically across different countries in different regions, I think there is that sum total of resources that no individual country can compete with China. But, collectively, there could be a competition. And for what it’s worth, this isn’t hypothetical anymore. You know, Lynas is selling at a price premium. How do they do it? One, it’s not an extreme premium. They got the cost down quite a bit from what it would have been using a lot of innovation and very capable project design teams. But they’re selling specifically to Japanese and other actors who are willing to pay a price premium, who are looking at their very strategic auto and motor industries and battery industries and saying, “Hm, you guys need this and you’re really concerned about Chinese supply specifically.”
Whereas, all these, the rare earths that are used in LEDs and glass polish, you know, these industrial catalysts, I’ve talked to some of these people. They’re like, “We’re not going to pay a penny more for something that we can theoretically get anywhere else." But you find the segment of the market you can actually meet, and they’ve designed the projects to do that very effectively. And that’s experience that they have that is real that other partners could leverage as well. So, everyone has a piece to play, has a role potentially to play. And that’s where the benefit of joint investment and joy planning can come in. Whereas going it alone, you’re not only recreating the wheel technologically and talent-wise and all of the capital and risk, you’re also limiting your total market potential, which means you basically have less supply at higher cost to less demand. It doesn’t pan out very well.
Andrew:
Well, it sounds like we’ve got a long way to go if we’re going to wean ourselves off of Chinese rare earths and critical minerals more generally. It sounds like you’ve got some pretty good actually policy suggestions recommendations. So, hopefully, some of the U.S. policymakers are listening to this. I know some of them do, but the ones that matter, hopefully they do. But we’ve touched on a bunch of different stuff. I just want to wrap up with one kind of final segment. I don’t know if we can call it that or not, that official here, but The Economist had a piece this week titled China’s power over rare earths is not as great as it seems. Everything we just said leads me to believe that that headline is not accurate, but I just want you to just quickly walk us through because listeners may have seen that article, read that article, walk us through the general arguments of the article. What do you make of the argument?
Do you agree? Disagree? It sounds like it’s basically The Economist trying to be a little bit provocative, but walk us through what they’re arguing in you assessment of that argument.
Cory:
Yeah. So, full disclosure, I was a source for that article. I will say the author is fantastic. I think she’s done great research. And I think what’s funny is it’s kind of talking to a different audience. I think a lot of the policy conversations I hear, not just in the U.S., but embassies in Beijing and those in Europe and elsewhere, that’s becoming nuanced over time. But, I mean, even a month ago, it was still either we can fix this with enough money or it’s completely hopeless. There’s nothing we can do to counter China. Again, have tended one way or the other. And I think, you know, what we’re trying to get at in this podcast, for example, is to say like, look, money is not quite enough, like, obviously, money is important, but it’s necessarily not sufficient. Right? There’s a lot more to do. And to your point about tech and talent, this is not an easy sector to replicate.
I mean, copper refining, anyone in the copper industry would push back and say, “Look, it’s actually quite complicated.” It is. It is. It’s a beautiful set of processes. But it’s a lot easier than separating out rare earths. And just on a quick note of why, the whole point of calling these 17 elements words is that they’re so chemically, magnetically similar. You’re trying to separate things that are basically near identical on a chemical pieces from each other. It’s really difficult. Of course, they’re different applications and everything, but China’s really got that down to a science, really meaningfully, and it’s really hard to replicate that.
And that’s what leans to the other side of the equation, which is like, look, it’s really complicated. Without the talent, we don’t have whatever. Therefore, it’s a done deal. China dominate this. That’s the end of the story. What this article is rightly saying, I think, is that’s not the end of the story. There are ways, specifically through combining the tech and talent that Lynas and others have developed with some of the resources, the Mountain Pass and others in the U.S., and Brazil and some parts of Europe are offering, along with capital that comes from entities are willing to pay a risk premium.
If you bring those ingredients together, it is possible to reduce dependency. Is it going to be possible to completely replace China and all non-Chinese supply chains? Honestly, I think no, that’s not possible. But beyond that, I don’t think that’s even desirable from an economic standpoint. I don’t think that’s the goal. I think the goal should be to de-risk military supply chains. Obviously. Every government in the world should have that interest. Secondarily, to make sure that no single country in any market has the ability to cut things off and prices jump 400%. That’s just not economically sound in any market. So, certainly diversify to the point where there’s enough diversity to handle supply chain shocks, political, or even weather related, whatever it is.
That’s just good economics. But the goal should be some kind of balance point that is achievable. And I think that’s the key is what are you actually aiming for? Complete decoupling? No, not only impractical but not even desirable. Partial decoupling to a point of safety from a security perspective and tolerable risk from a commercial perspective? Absolutely. I think, with the right policies in mind, that’s doable. And that’s kind of what, Sarah, I think is getting at with much of this article.
Andrew:
Yeah. Okay. Thanks. That’s great. The question, though, always though, I mean, I’m not trying to come at you here, but all the time I hear people in this discussion on reliance on China to be like, “Yeah, we just need a certain level of safety. And we need to take care of our military supply chains and reduce reliance on China to some degree.” What is the brass tacks? How much is it? Can they have 60% of the market?
Cory:
50%.
Andrew:
Yeah, 50, 60, 80. What is it? And, obviously, I’m not expecting you to have the answer. I always just see the conversation get up to that point and then stop. How do you figure out what is actually appropriate on that side?
Cory:
Yeah, I’m not going to tie myself to a specific number, but I’d say somewhere above 50 and below 70 is probably more or less it. And 50 sounds like a high floor. But the reason I say that, and a lot of people I’m sure will disagree, and I look forward to the discussions, but the reason I say that is look at the number of things that China already produce is 50%, 60% of the world’s supply of, and a lot of them are generally considered low risk goods. Why is that? Because they’re not China’s best leverage geopolitically, because China’s much stronger leverage. So, there’s probably 20 materials that I’m worried about before we get to things that still have… you know, China has 50% of global production. And the other piece is that when we look at rare earth specifically, it’s really down to end use. I think, realistically, the number comes down to the actual end uses. F-35s, 0% dependency is ideal
That’s probably less than 1% of demand, right? It’s certainly less than 1% of demand. A lot of kind of banal chemical catalyst uses, I don’t really care if it’s 60%, 70%, 80% because these are oversupplied materials that China wants to get rid of. These are different. These are not dysprosium, for example, neodymium, and these other materials that also can be produced pretty cheaply outside of the country. So, on that side you have a different demand structure and a different sensitivity. And then there’s everything in between. You know, magnet makers, it depends on the magnet nature. If you’re European and feel comfortable, if you’re a Japanese and feel not so comfortable, that’s going to drive your risk tolerance. But I think it comes down to the end use and the specific risk tolerance of those relationships.
And I don’t think that’s kind of avoiding the question. I think that’s what it comes down to, and specifically why it needs to be a commercially driven answer. This is not something where the government should be, any government, should be saying, we target x percent of anything because as you change the market, you’re also changing what materials are going where for what application, what gets offshored entirely. For example, batteries are not produced in large quantities in the U.S., but let’s say they were, because it’s an easy example, they would probably not be comfortable using Chinese magnets or Chinese magnet materials, rare earth materials. So, what I expect, what you would see to happen is before they start buying all American rare earths, they would just offshore entirely.
And so, you’d lose that entire industry. That’s something we’re concerned about with a lot of specific applications when it comes to rare earths, when it comes to critical minerals more broadly, actually. So yeah, policymakers taking high-level action reshapes the markets. But if you’re really interested in efficient and effective outcomes, let the market handle the rest.
Andrew:
Well, I got to say, that was the most specific answer I’ve ever heard to a question like that, and a much better answer than I expected you to give. So, you know, not that I-
Cory:
No flyer for another day.
Andrew:
I don’t know, maybe I should have had more confidence in you, but that was great. I think that’s an excellent starting point. So, on that positive note, let’s leave it there, man. I think we covered even more than I expected to today. And, again, last week of summer. We can wrap it up, enjoy the rest of the week, and head into the fall. Thanks a ton for the time today, Cory. I learned a lot and enjoyed it. Thank you.
Cory:
Thank you a lot. And to everyone who listened this far, thanks so much for being interested in this nerdy stuff. I think it’s the kind of stuff that has once niche now in the headlines a lot, and it’s really valuable to be able to go beyond the headlines so we can really understand this stuff. So, we’re looking forward to comments and questions as they come in.
Andrew:
Yeah. Please do hit us with your comments and questions. Great plug. And with that, we’ll leave it. Thanks everybody for listening, and we’ll see you next time. Bye, everybody.
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