乐生活On Wednesday, Reuters’headline article mentioned that China would use rare earth to counter the United States. The market further opened the risk off model. International copper prices fell below $5,900, and the yield of 10-year Treasury bonds fell to a low of 2.23% (fig. 1).
Compared with the post-perception of the international market, the capital scent of A shares is obviously more sensitive. With the escalation of US trade oppression against China, it has been rumored that China is going to play the "rare earth brand" for a long time, and the capital market is in a flurry. The share price of rare earth in northern China has performed remarkably in the past two weeks, rising more than 30% above the index.
Rare earth is not "scarce" in fact. According to the consumption in 2018, the known reserves can be used for 700 years worldwide. Of course, the cost of rare earth mining varies greatly, and many sources have no economic value.
Taking phosphate carbonate as an example, only 6 of the 500 known sources in the world have economic significance. Although China’s rare earth reserves account for only one third, its output has reached 70% of the global supply (see figure 2).
But this is not what individual media say, what is the reason for overexploitation. Instead, China’s mining resources have significant cost advantages in terms of mining and utilization.
Rare earth, known as "industrial vitamins", is widely used in the field of high-tech products. Including clean energy, electric vehicles, optical instruments and converters.
In the early 1990s, China’s rare earth production accounted for only about 30% of the world’s total, then climbed all the way up, and by 2005 it had almost monopolized global supply (97%). Last year, 80% of U.S. rare earth imports came from China. The remaining 20% come from Estonia, Japan and other countries, but the source can also be traced back to China, so the import of rare earth from the United States is highly dependent on China.
In fact, China’s rare earth export policy is not the first time to stir up global nerves, the last time in 2010. At that time, considering domestic demand and environmental pressures, the government restricted production and export, which directly led to a five-fold increase in rare earth prices in the short term, triggered protests from many countries, and the WTO intervened in the investigation.
After the "rare earth crisis", many countries increased their investment to ensure demand. By 2018, China’s share of rare earth production in the world had dropped to 70% (Figure 3).
As China’s potential countermeasure tool in the trade war, rare earth has once again become the global focus. Major investment banks have published special research papers, but there are no small differences on their possible effects.
Goldman Sachs believes that China is dominant in the supply side of rare earths and that the material is irreplaceable.
Credit Suisse, however, apparently does not agree, noting in their research that the substitution of rare earths has been greatly overestimated in many areas. Moreover, illegal/unauthorized mining in China has been prohibited repeatedly, and this grey capacity, combined with the potential capacity of other rare earth powers, can fill the supply gap in a short time.
Although the actual effect of rare earth countervailing is controversial, "such a move is a clear signal of the warming trade war, investors expect further retaliation from the United States, and the pressure on risky assets will probably only be greater," Goldman Sachs wrote at the end of the study.
