Sabre rattling is not getting rare earth mines built

Geopolitical fearmongering is constraining the rare earth industry, and perversely worsening supply concentrations, as Western mining juniors insist on portraying China's soaring demand as a problem, rather than an opportunity.The latest outbreak of panic in the rare earth markets came with the news that China's Ministry of Commerce has expanded its reporting requirements for imports and exports of bulk commodities, including for a number of rare earth metals, alloys and ores. These reporter rules include the key magnet rare earths neodymium, dysprosium, and terbium.The data, which will be collected China Chamber of Commerce for Minerals, Minerals and Chemicals Importers and Exporters, is intended to increase transparency of trade flows.A change in export data reporting requirements would hardly seem to be major news, but a whole field of study has sprung up, examining every tweak to Chinese rare earth trade policy, driven by fears that the world's biggest rare earth exporter will start to weaponize its market share, banning exports to starve its geopolitical rivals.Fears of a Chinese rare earth export embargo have been breaking out more and more regularly over the last decade. They have repeatedly proved a boon for Western rare earth miners, providing regular boosts to their share prices.What this breathless coverage has failed to do, so far at least, is to deliver many new rare earth mines.Weaponised tradeIf China's rare earth policy is over-politicised, there is a good reason for it. In 2010 China banned the export of rare earths to Japan, in a clear retribution to the arrest of a Chinese fishing boat captain, after a clash with coast guards in waters contested between the two countries.What is less often noted is that those restrictions, which only lasted two months, had no series effect on Japanese industrial capacity. And the response, the funding of Australian miner Lynas, made China less, rather than more, dominant in the rare earth market.It is true that targeted trade restrictions certainly remain tools in the diplomatic arsenal in East Asia. In 2019 Japan restricted the export of certain chemicals used in chip manufacturing to South Korea, during a dispute over compensation for the use of forced labour by Japanese firms in WWII.And in 2022 the PRC restricted the export of sand to Taiwan, in an apparent response to the visit of US politician Nancy Pelosi to the island. The move threatened both the Taiwanese construction sector, and the supply of high purity silica used in chip manufacturing. The activity of sand dredgers from the mainland close to Taiwan is a key flashpoint in the region.But it would be a mistake to view every change of rare earth policy in China as a sabre rattling. What is undiscussed is China's soaring domestic rare earth demand.China has been the world's largest rare earth consumer for decades, thanks to its huge domestic manufacturing sector. But whereas those manufactured goods were once mostly re-exported, China's green push has transformed the domestic demand picture.Looking just at magnet rare earths, currently the most in demand elements, China has surged ahead in electric vehicle manufacturing, thanks to supportive domestic policies driving demand. All the widely available Chinese electric vehicle models use rare earth magnets, and unlike Tesla, Chinese automakers seem to have no plans to phase those out.And China also boasts by far the world's largest installed offshore wind capacity and is investing in more. The large, gearless systems used in offshore wind are a key demand driver for neodymium magnets.Other drivers of domestic magnet demand include energy efficiency rules for domestic devices, such as air conditioners, which encourage the use of rare earth magnets to low power demand.A similar story played out in October this year, when the news of export restrictions on certain grades of graphite sent shares in western graphite miners soaring. This widely viewed as a salvo against western battery manufacturers, overlooking that fact that China has by far the largest battery sector, and by far the most need to secure supply of anode material.Repeatedly China watcher have preferred to interpret Chines trade rules as just a tool of foreign policy and diplomacy, and completely overlooked Chinese industrial strategy.The cost of paranoiaWhen China flipped from rare net exporter to net importer, in 2019, this was generally seen as a sign of the continued dominance of the country in processing. Imports of rare earth ore for processing in China were treated as a policy failure by the west. But they also reflect the shortage of new projects in China's own domestic rare earth mining sector.The politicisation of the rare earth market might seem to be too good a crisis for miners to allow to go to waste. But it creates a problem. If rare earth projects are sold to investors and regulators as the antidote to Chinese dominance, then miners have a perverse incentive to seek non-Chinese buyers. But non-Chinese ore processors cannot proliferate without a steady source of supply. The result is that despite Chinese appetite for imported ore, Western investors are wary of funding the mines that would be needed to fund that supply. The supply chain remains stuck between chicken and egg.Nobody benefits from this situation. China remains hungry for the rare earths needed to fuel its industrial strategy, while Western governments grow increasingly nervous about their thinly stretched critical mineral supply chains. The irony is that if Western miners would stop peddling the geopolitical narrative, the supply chain problem might ease. The search for non-Chinese offtakers presents a massive drag on new mine development. A global proliferation of rare earth ore mines, even if they were initially set up to feed Chinese demand, would inevitably increase the availability of ore to non-Chinese buyers, opening the possibility of Western ore processing. If rare earths are to retain their key role in the global economy, miners are going to have to learn to work with China, rather than voluntarily cutting themselves off from the biggest and most liquid market.

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