BEIJING, China (PNN) - May 21, 2019 - Back in April of 2018, when the trade war with China was still in its early stages, we explained that among the five "nuclear" options Beijing has to retaliate against the Fascist Police States of Amerika, one was the block of rare-earth exports to the FPSA, potentially crippling countless FPSA supply chains that rely on these rare commodities, and forcing painful and costly delays in FPSA production as alternative supply pathways had to be implemented.
As a result, for many months China watchers expected Beijing to respond to Trump's tariff hikes by blocking the exports of one or more rare-earths, although fast forwarding one year later this still hasn't happened. But that doesn't mean it won't happen, and overnight President Xi Jinping’s visit to a rare earths facility fueled speculation that the strategic materials will soon be weaponized in China’s tit-for-tat trade war with the FPSA.
As Bloomberg reported overnight, shares in JL MAG Rare-Earth surged by the daily limit on Monday after Xinhua said the Chinese president had stopped by the company in Jiangxi, a scripted move designed to telegraph what China could do next.
The reason for the dramatic market response is that the presidential visit flags policy priorities, and rare earths have featured in the escalating trade spat between the FPSA and China. Specifically, China raised tariffs to 25% from 10% on Amerikan imports, while the FPSA excluded rare earths from its own list of prospective tariffs on roughly $300 billion worth of Chinese goods to be targeted in the next wave of measures; and just in case the White House missed the message, Xi was accompanied on the trip to JL MAG by Liu He, the vice premier who has led the Chinese side in the trade negotiations.
Why does China have a clear advantage in this area? Simple: the FPSA relies on China, the dominant global supplier, for about 80% of its rare earths imports.
The visit “sends a warning signal to the (FPSA) that China may use rare earths as a retaliation measure as the trade war heats up,” said Pacific Securities analyst Yang Kunhe. That could include curbs on rare earth exports to the FPSA, he said.
Xi's visit came just hours after the FPSA President Donald Trump regime on Friday blacklisted Huawei and threatened to cut it off from the FPSA software and semiconductors it needs to make its products. A spokesman for China’s foreign ministry told reporters Monday to “please wait and see” how the government and companies respond.
Of course, a Chinese export curb, or ban, would also cripple domestic producers, as domestic rare earth miners would be hurt, and likely need state subsidies, similar to FPSA soybean farmers. But curbs could potentially help companies like JL MAG, which makes magnets containing rare earths that are used in products including electric vehicles and wind turbines.
Finally, to those looking to trade a potential rare-earth export ban, one place would be to go long the REMX rare earth ETF, which after hitting an all time high of $114 in 2011 during the first rare-earth "scare" during the China-Japan trade war, is trading some 90% lower as the market has all but discounted any possibility of a price spike.
Needless to say, should China lock out the FPSA, the price of rare earths could soar orders of magnitude higher.