I always enjoy reading or watching a good mystery. And frankly, who doesn’t. Being led through the twists and turns of a devious plot, taking mental notes of the clues as they are strategically rationed, acts as a powerful drug. As proof, just consider that the board game Clue has been in continuous production since 1948, including over 20 spin-off board-and-video versions, stage and screen productions, and television game shows. There is little doubt that intrigue holds universal appeal.
Lately we’ve been watching a different sort of game playing out: China’s “moratorium” on shipments of rare earths to Japan that was reportedly lifted last Friday. However, the “whodunit” in this case becomes “whydoit.” What advantage is sought or gained? What is the endgame?
The widely pitched explanation has it that China acted in accord with lex talionis (the law of retribution) concerning a maritime territorial dispute with Japan. But that seems about as likely as betting on “the butler did it.” Too obvious; too easy.
Recall that the pretext for China’s action was an incident that should have passed largely unnoticed; a Chinese fishing trawler strays into Japanese waters and is detained. The story is given 3 column-inches at the bottom of page 12 and that’s that.
But considering the speed at which China reacted and with the target of the retaliation so precise, this event could easily be seen as a contrived provocation. Dispatch a vessel with instructions to loiter in Japanese waters. When confronted, act uncooperative and impertinent. Once the vessel and crew are detained, commence with the premeditated response.
Also note that the export “moratorium” was done via an “administrative” maneuver; the government denies issuing any regulations halting shipments or targeting trade partners for export restrictions. China’s General Administration of Customs in Beijing claims that any delays in shipping are the result of port procedures.
Reports from those on the scene confirm this claim. Dock workers say that shipments have backlogged due to new and lengthy customs inspections and clerical delays.
This tactic thus precludes Japan, or any other nation, from pursuing legal action with a complaint filed at the World Trade Organization. This was no knee-jerk reaction. A few comrades in central planning have put some thought into this.
Backing up a bit in the story, this hypothesis starts to look increasingly plausible.
China has for some time been “encouraging” its trade partners that import raw rare earths (RRE) for processing to relocate that step of the supply chain to China. Although China has a monopoly on RRE production – they produce about 93% of the global total – less well known is that it accounts for roughly 65% of global demand.
How is that? Foreign companies process the raw material into pure, refined powders in plants built in China. The refined material is either exported or consumed by a China-based manufacturer into a product that is subsequently re-exported.
So there’s the motive. Japan is the largest consumer of RREs. And over the past five years China has been ratcheting lower its quota of exportable RRE, an action that will hit Japan harder than others. It appears that this latest move by China is intended to “incentivize” Japan into moving more processing and manufacturing of raw and refined rare earths to China. Japan currently has some facilities in China, but apparently not enough to satisfy their hosts.
This tactic is straight out of China’s “resources for technology” playbook. We’ll supply the material if you bring the know-how and expertise, so we can see how it’s done while expanding our manufacturing base. Regarding RRE, China sells it for local processing at way below export prices – up to 90% below depending on the mineral.
China’s goal looks to be an incremental move to secure all, or nearly all, processing of RRE in-country. And a similar strategy is underway to have as much of the refined product used in onshore manufacturing as well.
It is reported that a few shipments of RRE bound for Japan left port last Friday. But for how long that continues, and how much is actually shipped, is uncertain. In the meantime, the dispute has caused rare earth prices to spike upwards, some by several hundred percent, and put this resource sector on the front pages. As readers of any duration know, we do not recommend buying during runaway price episodes. We suggest waiting for the inevitable correction before making any investment decisions.
