What has Happened:
As relations with China remain strained economically, politically, and militarily, renewed attention is being paid to China’s dominance of rare earth mining and production. These materials have wide ranging uses in green technology, defense technology, medical systems, and in everyday tech. It was announced that President Biden will sign an executive order requiring the government to assess key U.S. industries (and their supply chains) including semiconductor manufacturing, electric car batteries, medical supplies, and their access to rare earth elements. This action seems like it was expedited after it was reported that China is evaluating how to leverage and potentially weaponize their dominance in the field of rare earth production/export. Academy’s exceptional geopolitical and ESG expertise enables us to discuss the risks and vulnerabilities posed by the increased need for rare earth minerals.
Why it Matters:
“Our major concern with China right now should be focused on China’s dominance in processing rare earth minerals, some almost exclusively. Yes, production is a concern, but the major consideration should be with the supply chains. China has and continues to use exportable processed rare earth minerals for economic leverage and influence against Japan, Australia, and other nations in the region.
In 2010, China restricted rare earth minerals to Japan for two months after the Japanese Coast Guard arrested a Chinese fishing boat captain near the contested Senkaku islands. Japan recognized the potential impact this could have on its supply chains in the future and partnered with Australia to develop a facility to process rare earth minerals for export/import to Japan, decreasing its total reliance on China. China is now threatening the U.S. by potentially reducing exported rare earth minerals, which will not be the first time China has sought to punish a country for political purposes.
Japan and Australia are grateful that we are waking up and recognizing the challenges China poses to the region. They understand that QUAD/multilateralism is the only way to push back against China and win. The dialogue with respect to rare earth minerals needs to be focused on the strategic minerals used for commercial technologies. Commercially, China is making a specific play with lithium due to the move towards electric/hybrid vehicles. This is not an immediate threat, but something we need to focus our R&D on for the future.
The good news is that we are finally waking up to China as a strategic competitor. No cabinet member will be confirmed without being asked about their view on China. The pivot to the Pacific discussed over 10 years ago may actually happen.”
– General K.K. Chinn, Academy’s Geopolitical Intelligence Group
“My thought is that we have long needed to replace our dependance on lithium. Sealed lead acid looked promising in 1990, but proved challenging to reduce in size and weight. Technology needs to find the “next” power source provider that shifts the dynamic from rare earth dependance.”
– General Mastin Robeson, Academy’s Geopolitical Intelligence Group
“Rare earth resource demand is going to continue to grow rapidly due to electric vehicle growth globally. China’s pollution tolerance currently was mentioned as a condition for its refining capacity. I am not sure the U.S. political conditions are right for added pollution, so targeting R&D money for rare earth refinement capability processes would be smart and would also be better framed as an “allied effort” given that the entire world will need to find a solution. The pandemic has fueled many discussions on China’s global supply chain dominance, but I have not read much lately on supply chain diversification. China’s export controls could rekindle the urgency fires.”
– General Frank Kearney, Academy’s Geopolitical Intelligence Group
“The global power competition for rare earth minerals is more a uniquely U.S. challenge than an external one. We can change the conversation ourselves. However, we should frame the demand for rare earths in terms of our relationship with China and our priority to attack climate issues. This has more to do with Beijing’s sanctioning of U.S. aerospace and defense companies for their military sales to Taiwan. As the new administration gains its stride, the number one national security challenge is the United States’ competition with China. Embedded in that competitive venue is climate change and protecting the environment.
America is part of a global marketplace. Even considering the pandemic, the end of globalization is not imminent. We must have an over-the-horizon reach to global resources. Rare earths exist here in the U.S. and can be exploited, but we have hamstrung our capacity to get them. The U.S. Bureau of Mines was shut down by Congress in 1996 and its functions were either eliminated or migrated to other government agencies such as the U.S. Geologic Survey, Bureau of Land Management, and Department of Energy. Of note, 100% of all munitions in all military weapon systems contain the rare earth antimony. The antimony America uses “to support and defend the Constitution of the United States” is mined and imported exclusively from China…100%.”
– General Spider Marks, Head of Geopolitical Strategy at Academy Securities
“COVID-19 was a wakeup call to most Americans in learning about our deep reliance on China for PPE when they choked our supply chains. During the run up to the election, President Biden was more focused on engaging China over climate and human rights than he was on defense-related national security issues. Since the inauguration, President Biden and his administration have taken a much harder stance on China from a national security perspective, including his comments made during last week’s Pentagon visit.
The shift by the new administration is huge and is expected to follow the Trump administration’s efforts to break our reliance on China for rare earth elements. The national security focus on rare earth elements is driven by the Department of Defense. It is the Pentagon that is leading the discussion for the U.S. to cut its reliance on China for precious metals. This month, the DoD awarded a contract to boost domestic production in an effort to secure our supply chains. Last spring, the DoD awarded a similar contract. Before the end of his term, President Trump signed an Executive Order directing a strategy for critical minerals after heavy influence by the Pentagon through the Defense Production Act.
While the Pentagon is focused on eliminating our reliance on China for critical rare earth elements used in munitions, missiles, micro-electronics, lasers, hypersonic weapons, and vital semi-conductors, the defense sector is also closely tied to the commercial market for batteries and magnets as well as the emerging electric vehicle market. The larger issue beyond defense concerns will be China dominating these markets through state supported subsidies and running U.S. vehicle makers out of the global market as they have done in the solar panel industry. Both the defense and commercial markets should unite in breaking our dependence on rare earth elements supplied by our number one strategic competitor.”
– General Robert Walsh, Academy’s Geopolitical Intelligence Group
“In addition to the national security concerns of rare & critical minerals (R&CMs), including the extraction & production (E&P) taking place in other countries, namely China, there are also ESG/stakeholder concerns. China owns large majority stakes in several mineral operations throughout the Congo, including cobalt and copper. Companies that purchase power storage from China could indirectly be supporting threat actors in a conflict nation like the Congo, as well as Beijing’s treatment of Chinese Uighurs. While it is no longer being enforced by the SEC, Section 1502 of the Dodd-Frank Act required reporting companies to carry out a multi-step process to see if they were sourcing from a conflict nation. Many companies continue to monitor R&CM supply chains and are looking to develop technology that does not require (or requires less) R&CMs like cobalt, while simultaneously bringing supply chains home.
On the environmental front, as countries look to reign in R&CM supply chains, there is the real risk of contributing to further water stress. For instance, extracting and producing lithium, one of the primary components of batteries, is a water intensive process requiring upwards of 500,000 gallons to produce one ton. Parts of South America, where the lithium triangle is located, have reported groundwater depletion and soil contamination as a result of operations. There is also the question of what to do with what’s left when lithium-ion batteries and other R&CMs meet the end of their product’s lifecycle. Recycling will play a critical role, but efficacy will be highly reliant on how accessible recycling services are at the end point of a product’s lifecycle.”
– Michael Rodriguez, Head of ESG at Academy Securities
A Comprehensive, Prioritized, Science Based Plan of Action with Follow Through
As our macro strategist, I get the pleasure of tying together the wealth of information shared by the Generals, of which this report is only the tip of the iceberg. What I am looking for and think is an absolute requirement, is something along the following lines:
- While rare earths may be the “topic of the day”, let’s not lose sight of all the areas we need to be thinking about. As General Walsh highlighted, PPE remains an issue. Virtually every little blue mask still comes from China and N95 masks remain nearly impossible to obtain as an ordinary citizen. The KN95 masks, which seem somewhat abundant, are also surrounded by quality questions, along with the bigger question of why we can’t get N95 masks. So, as we plan what to do, let’s not focus on one subject at a time and create a scattered approach that doesn’t get us what we really need.
- As Mike Rodriguez points out, the path to sustainable energy is littered with pitfalls and potential risks. Water should be a top priority. Water is the resource that no human can live without for very long. Much like doctors pledge the Hippocratic Oath to do no harm, we all must make sure that we think plans all the way through, incorporating all the issues and ramifications. Michael’s comments resonate with me, as several of the early solar deals, glamorized by the green movement at the time, actually were extremely wasteful of water, especially in areas where water was (or should have been) a greater concern. So, let’s prioritize what we need, and I’d start with clean, safe water.
- Follow the Science. We need to truly “follow the science” and not use it as a catchphrase when someone disagrees with us. As General Robeson succinctly points out, what options are there other than lithium? Getting back to Michael’s water issue, let’s focus on all the consequences. Let’s think about where things are sourced, how they are sourced, how they are used, what is the realistic cost of use, and what are the disposal and recycling options, etc. Just because we want something to be “good”, and on the surface it may be “good”, doesn’t ensure that if we dig deeper, it really is. And if after that full exploration, it is “good” then we are all better for it. Science is about thinking, evolving, incorporating new information, and progress. Sometimes, I fear that gets lost in the shuffle.
- Follow Through. Once we develop this comprehensive plan, we need to then follow through with it. Make the commitment to struggle through the rough patches to get to the ultimate goal. That seems like common sense, but so little common sense seems to make its way to politicians who have a seemingly never-ending election cycle to get through.
As the world shifts more and more attention to rare earths and critical minerals there will be opportunities for investors and corporations to capitalize on those shifts and staying one step ahead of “where we are going” will be critical to outperformance. If oil drove our geopolitical strategy for much of the past 50 years or longer, look for these rare earths and minerals to drive our geopolitical strategy going forward.
With the help of the GIG, we can hopefully gain insight into where we are headed geopolitically, so that you can make good business and investment decisions.
– Peter Tchir, Head of Macro Strategy at Academy Securities