Turnabout Is Fair Play

“Magnetism, as you recall from physics class, is a powerful force that causes certain items to be attracted to refrigerators.”—Dave Barry

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Good morning!

Throughout this latest U.S. trade dispute with China, the Middle Kingdom has wielded one potent weapon: its dominance in supplying the rest of the world with critical minerals and materials, including rare earth metals, critical to the manufacture of durable, high-powered magnets. As readers likely know, these are vital to modern life, used in a broad range of technologies – including military armaments. 

As it turns out, there are supplies of such precious resources – particularly dysprosium and terbium (critical to advanced missile technology, electric motors, and nuclear reactors) in one of China’s southern neighbors, Myanmar. The catch is that Myanmar is not exactly a friendly, peaceful beacon of liberty. A civil war has raged there for decades, and in the past year, the Kachin Independence Army has gradually taken de facto control of Kachin state – where those materials are found. 

To be fair, that’s not much of a catch: securing commodities from problematic parts of the world can be done—your morning coffee and your afternoon chocolate break are evidence of that. Among those linked to purchases of Myanmar’s rare earths are multinationals like Ford, Siemens, Tesla, Hyundai, and Volkswagen. 

The real catch is that because China also dominates in processing those ores to extract the good stuff, so Myanmar still needs send what it extracts from its mines to China. Yet there too, when there’s a will, there’s a way. We have written previously that Chinese importers had found ways to circumvent U.S. efforts to halt the flow of cutting-edge Nvidia chips into China (for instance through third-party buyers and outright smuggling, a practice that continues today.)

Well, two can play at this game. Shipping data shows that U.S. companies are suddenly getting unusually large quantities of materials like antimony (used in batteries, chips, and flame retardant) from Thailand and Mexico—countries not known for producing them but that suddenly started importing such materials in vast quantities from China around the same time. A Reuters report noted that this surge coincided with this year’s U.S.-China trade war and China’s restrictions on exports of critical materials.  

In the meantime, efforts are underway to source critical materials from friendlier countries like Brazil and France, as well as right here at home. MP Materials (MP 3.33% ) surged recently after it was announced that the Department of Defense had entered into a deal with the company, which owns the only operational rare-earth mine in the U.S. As part of the deal, the DOD agreed to take a significant ownership stake in the company and purchase all magnets from a new plant MP plans to build, effectively putting a rather elevated floor (far above current market prices) on revenues derived from new production for the next 10 years. (As of yesterday’s close, MP shares were up about 291.9% YTD, with most of those gains coming after the July 10 announcement).

China is not oblivious to U.S. efforts to find other supplies of these resources. But as we noted above, China also has a significant lead in understanding how to most effectively extract the materials from ores, and it has moved to control the people who have this knowledge. Just as China treated papermaking as a state secret 1,200 years ago (Europeans at the time were still relying on exorbitantly expensive parchment made from animal skins), it is now keeping those with advanced knowledge of the processes Chinese companies use to process rare-earth ores under surveillance and restricting their travel, hoping to keep their expertise a secret. 

The Chinese emperors of old didn’t succeed in keeping the secrets of paper from the West, and it seems unlikely that China’s leaders will succeed this time either. The learning curve for efficiently processing such ores is steep. However, with efforts to catch up and surpass China already underway around the world — throughout the U.S., as well as various countries in Europe, South America, and Asia, no secret remains that way for long. All the paper products in your house are proof of that. 

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Catch up with Fundstrat

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