GM. This is Milk Road Macro, the newsletter that digs deeper than China’s rare earth mines.
Here’s what we got for you today:
- ✍️ China’s rare earth threat and why it’s rocking markets
- 🎙️ The Milk Road Macro Show: Retail vs Wall Street: Why The Odds Are Stacked Against You w/ Benn Eifert
- 🍪 Shutdown may last until November
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CHINA’S RARE EARTH THREAT AND WHY IT’S ROCKING MARKETS
Everybody is now suddenly talking about rare earths.
Rare earths this, rare earths that…
So, I thought I’d talk about rare earths too.
China is threatening to weaponize rare earths against the US and the West more broadly. So, Donald Trump responded by threatening 100% additional tariffs on China.
This is quite a big deal.
Global markets have whipsawed in recent days as this tit-for-tat negotiating process between China and the US intensifies.
Both countries are posturing as trade talks continue ahead of a big meeting in two weeks’ time.
So, what in the world are rare earths anyway? Why are they important? What exactly is China threatening? And what’s the latest in the China-US trade war?
Let’s take a look…
So, what in the world are “rare earths”?
Rare earths are a group of 17 metallic elements. Most of them you probably won’t have heard of.
And most of them sound either made up, or like the name of some obscure species of elves in the Lord of the Rings.
They include:
- Samarium
- Gadolinium
- Yttrium
- Dysprosium
- Lutetium
And many more.
Why are rare earths so important?
The reason rare earths matter is not so much what they do on their own - but what they do when combined with other materials.
They can make alloys stronger or more heat resistant - and they can make magnets more powerful.
Rare earths are all around you, but you might not know it.
They play an incredibly important role in defense manufacturing.
For context, Sky News reports that:
- An F-35 fighter jet contains 418kg of rare earths
- A Type 51 Destroyer contains 2,600kg of rare earths
- A Virginia class submarine contains 4,600kg of rare earths
But rare earths are also vital for things you use every day.
Including:
- The tiny speakers in your wireless earbuds
- Basically any kind of motor (like the one that moves your car seat backwards and forwards)
- Many modern screens (like your computer screen or your phone screen)
So, we need a lot of rare earths, for a lot of things.
Here’s the problem…
69% of the rare earths mined in the world are mined in China.
That’s a big number. But there’s more.
When you take into account refining and processing of rare earths, more than 90% of the total supply of rare earths is Chinese.
And this “refining and processing” part is the difficult part - it’s a complicated (and messy) process.
So, it’s not easy for the world to shift the rare earth supply away from China - it would take years.
However, despite the name, “rare earths” aren’t actually that rare.
There are a lot of rare earth deposits in China - but there are also a lot in places like Brazil, India and Australia.
But these countries aren’t doing much mining, and hardly any processing or refining.
In fact, a large portion of the entire world’s rare earths are mined, processed and refined in and around one single gigantic city-sized mine in northern China called Bayan Obo. It’s enormous.
Source: National University of Singapore
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CHINA’S RARE EARTH THREAT AND WHY IT’S ROCKING MARKETS (P2)
How has the world found itself in this situation?
It’s partly because China has purposely concentrated on cornering the market in rare earths. Beijing spent years building this export-control system.
This means China can now produce rare earths at a vastly cheaper (in some cases multiples cheaper) price than anywhere else in the world, which in turn crushes competition.
But, it’s also partly because mining, processing and refining rare earths is extremely dirty (from a “green” point-of-view) and is very carbon intensive.
Most of the world decided it didn’t want to do this because it’s seen as “too dirty” - so they were happy for China to do it instead.
There has been some big talk from the West about “diversifying supply” in recent years.
But the truth of the matter is that the West mines only small amounts of rare earths and then sends most of it to China to be processed.
So, what exactly is China threatening?
Last week, China announced that, effective December 1, it would require export licenses for anything that contains even 0.1% of Chinese rare earth minerals.
This seems like a small bureaucratic issue. But in reality, it’s a big action.
This move would mean that China could, in theory, have complete control over rare earth trade for the entire world, and restrict anything it wants at any time.
The threat of strangling the supply of rare earths is a significant tool of leverage for China in trade talks.
Here’s a good chart from Goldman Sachs outlining many of the use cases for different rare earths, and how an inability to source rare earths could affect output and employment in the US.
So, what’s the latest in the China-US trade war?
Both China and the US are posturing for leverage ahead of an anticipated big meeting between Donald Trump and Chinese President Xi Jinping.
The pair are expected to meet on the sidelines at the upcoming Asia-Pacific Economic Cooperation (APEC) meeting taking place on October 31 and November 1.
An exact date for the meeting has not been publicly confirmed. But this week the White House confirmed that this meeting is still scheduled to take place.
It’s also worth mentioning that US Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng may also potentially meet in the meantime in Frankfurt, Germany.
In an interview this week with the Financial Times, Bessent accused China of trying to hurt the global economy.
He said:
“This is a sign of how weak their economy is, and they want to pull everybody else down with them. Maybe there is some Leninist business model where hurting your customers is a good idea, but they are the largest supplier in the world. If they want to slow down the global economy - they will be hurt the most.”
Citing “people familiar with the matter”, the Financial Times reports that the US has drafted counter-measures to be taken if the two sides do not reach an agreement.
It’s reported that these measures might include requiring companies that export software to China to obtain a license. So, a similar tactic to China - but for software instead of rare earths.
But, away from rare earths, there is another peculiar and very public side plot ongoing. And this is all to do with soybeans and cooking oil. No - that’s not a joke.
President Trump has accused China of an "economically hostile act" for not buying US soybeans.
Trump says he is considering "terminating business with China having to do with cooking oil, and other elements of trade”, as retribution.
Wrapping up
As I’ve written before - this is all likely part of a grand negotiating battle before the meeting between Trump and Xi.
Yes - the rare earths issue is a big deal and could have huge consequences for the entire global economy if supply is withheld. But, in my view, this is extremely unlikely to happen.
It would just hurt China too much - and I don’t believe they would go through with stopping a large portion of rare earth trade globally.
Likewise, the US imposing additional 100% tariffs on China would hurt America too much.
But, between now and the APEC meeting - there’s likely to be more twists and turns.
And new headlines might rock markets again. So keep your eyes peeled.
That’s it for this edition - catch you in the next one.
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