China Threatens U.S. Companies — Putting Rare Earths Back in the Spotlight
Thanks to the impending election, most U.S. media are ignoring a story that ought to be front page business and/or national security news.
Yet there’s not one word about it in major media; not in the New York Times, for example.
I found it in Global Times, a Chinese newspaper with strong connections to the Chinese Communist Party (CCP).
It begins: “China announced to sanction [sic] firms including Lockheed Martin, Boeing Defense, Raytheon as well as individuals and entities that are involved in arms sales to the island of Taiwan.”1
If this sounds familiar, Chinese officials made similar threats against Lockheed over the summer, as I discussed here.
So far, China hasn’t pulled the trigger on its sanctions. And it would be easy to dismiss all of this as just typical saber-rattling.
But this matter is far more important than you might think. The U.S. is truly painted into a deep, dark industrial corner, and China knows it.
Chinese sanctions on U.S. defense firms are highly visible and rise to high levels of geopolitics. In the process, sanctions shine a light on the precarious future of the U.S. economy.
Whatever happens with the upcoming election, U.S.-China relations – commercial and military – will remain a contentious issue, either for President Trump or a possible President Biden.
Meanwhile, these developments also strengthen investment angles that could benefit you.
Let’s dig into this…
Basically, the announcement about sanctions reflects CCP rage over U.S. arms sales to Taiwan, which the Mainland Chinese government views as a breakaway province.
The CCP views U.S. arms sales to Taiwan as “interference in the internal affairs” of China.
Over the summer, one Chinese official said his government would sanction Lockheed Martin for shipping torpedoes to Taiwan.
Now it seems the country is threatening to punish other U.S. defense contractors that supply weapons to the island.
As I explained last July, one key aspect of Chinese sanctions could revolve around China’s near-monopoly on producing “rare earth elements” (REEs).
REEs are essential to almost all modern electronics, and to much other advanced technology.
Needless to say, they’re essential for building cutting-edge weapons systems. They’re also critical to the things we use in civilian life.
You’ll find REEs in your smart phone, flat screen television, laptop computer, refrigerator, car and much more.
REEs are also critical to so-called “renewable” power systems, electric vehicles, and many other products ranging from magnets to lighting phosphors.
Again, we’ve covered all this before.
About a month ago, we talked about California Gov. Newsom’s plan to mandate electric cars in coming decades. All those future electric cars and battery systems will require large amounts of REE to work.
And just the other day, we discussed how the vast numbers of solar panels and windmills required by Biden’s energy plan will require large amounts of REE to work.
The big takeaway from those articles was that China controls about 85% of global output of REE.
And the U.S., meanwhile, produces exactly zero refined, end-product REE out of domestic mines and minerals.
In other words, the U.S. economy — civilian and military — is almost entirely reliant on Chinese REEs.
And it’s not like we have “replacements” or substitutes.
Each of the 17 REE possesses a unique atomic and electronic structure that offers astonishing characteristics.
REE: 17 critical elements to the future economy.
So China could do grave harm to the U.S. economy by limiting exports of REEs.
But just sanctioning U.S. defense contractors would be painful enough.
A U.S. Virginia-class submarine uses over three tonnes of REE just in the electric drive-motor system. An F-35 aircraft uses nearly one tonne of REE. Other weapon systems — from missiles to sonar to night-vision and much more — rely on REE.
So you might think that the U.S. military-industrial complex would long ago have emphasized security of the REE supply chain.
Heck, with U.S. submarines, the Navy tracks the steel back to the steel mill, and even iron ore back to the original hole in the ground.
Yet for some strange reason, U.S. military “Systems Commands” — the large organizations that actually buy weapons from defense contractors — have never insisted on U.S./Canadian sources for something as critical as rare earths.
Over many years, I’ve specifically asked Defense Department contracting officials why they don’t buy local REEs.
The answer was typically along the lines of, “Well, we obtain the rare earths from Japan, so it’s all ok.”
Ok — Except that Japan obtains its REE source materials from China.
Once, I even asked a senior rep from a major defense contractor — one of the above-named companies that is now subject to Chinese sanctions — much the same question. “Why don’t you guys put some money on the table and fund a rare earth play in the U.S. or Canada?”
His answer was, “We’ve never had a problem with our supply chain, and our board of directors sure as hell doesn’t want to get into the mining business.”
Well, well, well… How is that working out for you?
Now, according to Global Times:
China’s retaliations against such foul acts by the U.S. [i.e., selling weapons to Taiwan] could range from restrictions on rare earth imports to obstructing entry into the civilian market entry from the firms, individuals and entities involved.
Global Times is well known for using third parties to verbalize the inner thinking behind CCP policymaking. This time, the newspaper cited Li Haidong, a professor at the Institute of International Relations of the China Foreign Affairs University.
According to Prof. Li, restricting rare earth supplies to U.S. defense contractors is high on the list of planned Chinese actions.
Chinese officials are sometimes subtle. But this particular comment strikes me as “subtle” like a brick thrown through the front window.
What else does it take to get the U.S. bureaucracy moving?
China has now laid out its cards on the table…
China and its CCP is angry about U.S. arms sales to Taiwan. So China is planning to embargo REEs to a list of key U.S. defense players.
Does this matter? Yes, absolutely!
Do Chinese government officials make idle threats? Well, that warning in 1950 about China entering Korean War comes to mind…
Ok, sure… There’s a “global” market in REEs after they leave China.
That is, China might export REEs to another country, and the material winds up in the hands of a third party, etc.
Eventually, Lockheed, Boeing Defense and/or Raytheon might be able to buy the product and take delivery.
Then again, suppose the Chinese begin slapping sanctions on second-tier exporters and third-tier re-exporters. It’s entirely possible that China could make those sanctions stick.
Now, imagine a defense contractor telling a Systems Command, “Sorry, we can’t deliver on time because we can’t obtain critical components that use REEs.”
It’s a national security nightmare… All self-inflicted.
And of course, the U.S. long ago should’ve been focused on this issue.
In 2010 — a decade ago! — China embargoed export of REEs to Japan due to a dispute over fishing rights.
It sparked a boom in rare earth plays in the junior mining space.
But sad to say, little evolved from the 2010 boom.
Eventually, China and Japan settled their differences, which took much of the pressure off of the REE supply chain.
And all along, despite the clear writing on the wall regarding REE availability, large industrial companies –— from defense contractors to automakers — were reluctant to support junior mining development.
Sad to say, but for several billion dollars of speculative money that flowed into the sector back then, virtually no REE capacity came out.
Although again, I want to mention two REE plays that come across to me as most promising: Medallion Resources and Defense Metals. Both trade over-the-counter (OTC).
Medallion has an advanced-stage program to process mineral sands comprised of monazite, which is rich in rare earths. Miners have been extracting rare earths from monazite since the 1940s, so the technology is de-risked. The company is moving towards a deal to set up industrial-scale operations in North America.
Defense Metals, meanwhile, is an early-stage exploration play, holding a well-endowed body of rare earth minerals in the middle of British Columbia. Drill results so far indicate large-scale, high grade mineralization to make up a significant ore body.
Whiskey is not a portfolio newsletter, but I spend quite a bit of time following the mining space, including REEs.
I can’t say who will win the upcoming election. Nor can I say what the U.S. government or its defense contractors will do about Chinese sanctions.
But I can say that we’re looking at a new sense of urgency for REE development outside of China.
It’s a fair bet that the Chinese government isn’t kidding around. They are marking out their position regarding Taiwan, weapon sales and REE sanctions, plain as day.
The U.S. government “ought” to do something… But that’s out of our control.
Meanwhile, you “ought” to position yourself to make some money out of it.
On that note, I rest my case.
That’s all for now… Thank you for subscribing and reading.
Managing Editor, Whiskey & Gunpowder
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1 China may restrict rare-earth imports, issue financial blockades over US arms sale to Taiwan, Global Times