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setting the stage

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China sets sights on rare earths as trade war persists - FT

Feb. 16, 2021 5:15 AM ETLockheed Martin Corporation (LMT)By: Yoel Minkoff, SA News Editor24 Comments

• Beijing is exploring whether it can hurt U.S. defense contractors by limiting the export of rare earth minerals that are crucial for the manufacture of Lockheed Martin's (NYSE:LMT) F-35 and other sophisticated weaponry, according to the FT. The Ministry of Industry and Information Technology has proposed draft controls on the production and export of rare earth minerals from China, which controls about 80% of global supply. Industry executives say government officials have even asked them how badly companies in the U.S. and Europe, including defense contractors, would be affected if China restricted the exports.
• Backdrop: The decision follows deteriorating ties between the U.S. and China. What started as a trade war has morphed into a technology war, and at times, possibly a currency war. The latest move suggests a rare earths may be the next front, or could be used as leverage in some of those battles. The Biden administration has indicated it would maintain pressure on China (no quick lift for tariffs), but take a more multilateral approach. China's Foreign Ministry also said last year it would also sanction Lockheed Martin, Boeing (NYSE:BA) and Raytheon (NYSE:RTX) for selling arms to Taiwan, the self-ruled island which Beijing claims as its sovereign territory.
• What are rare earths? The minerals are a group of 17 chemical elements used in everything from high-tech consumer electronics like smartphones to military equipment. Despite the name, there are deposits of some of them all over the world, but it is unusual to find them in a pure form or in concentrated quantities, hence the title "rare." The U.S. is highly dependent on them for its defense capabilities (i.e. a recent Congressional Research Service report found that each F-35 required 920 pounds of rare-earth materials).
• Outlook: Hopes of U.S. companies that looked to break into the industry have been dashed in the past due to strict environmental regulations on extracting and processing. China also undercut world prices in the 1990s, leading to additional barriers to entry. There is also currently no refining capacity in the U.S. (ore mined here must even be sent to China), but that may be changing. The Pentagon recently signed contracts with American and Australian miners to boost their onshore refining capacity, awarding contracts to MP Materials (NYSE:MP) and Lynas Rare Earths (OTCPK:LYSCF) for facilities in California and Texas.