U.S.-China Trade War Targets Rare Earth Minerals; Boosts Molycorp (NYSE: MCP)

Election-year politics have heightened a U.S.-China trade war, and the latest move is focused on limiting China's control over rare earth minerals.

The United States, Japan and the European Union intend to bring a case at the World Trade Organization against China's rare earth minerals exports, a U.S. official confirmed yesterday (Monday).

China currently restricts exports of rare earth metals - 17 elements involved in the production of everything from batteries to light bulbs to smartphones to electric cars. Authorities say China's trade regulations damaged profits to manufacturers and the restrictions have to be removed.

This is the latest move in mounting tensions between the United States and China over trade regulations. U.S. President Barack Obama announced in his Jan. 24 State of the Union address he would create a Trade Enforcement Unit to police China's unfair trade practices. The U.S.-China trade deficit has been growing and has caused more economic friction between the countries.

The WTO recently ruled against China's trade restrictions on raw materials, in a sign that countries' claims against rare earth minerals exports could get traction with the WTO.

China's Xinhua News Agency called the U.S. move "rash and unfair" and could trigger China backlash and further damage trade between the countries.

"Past experiences have shown that policymakers in Washington should treat such issues with more prudence, because maintaining sound China-U.S. trade relations is the fundamental interests of both sides," Xinhua reported.

Why U.S.-China Trade War Hit Rare
Earth Minerals

China produces more than 90% of the world's rare earths, giving the Red Dragon almost complete control over global supply. China also dominates rare earths mining and processing.

EU officials estimate that China's rare earths metals restrictions mean European manufacturers pay double the price than Chinese competitors pay for the same materials.

China has been lowering export quotas on the metals over the past few years. The country claims controls are necessary to crackdown on illegal rare earths mines. It reduced the quota in 2010 to 40% from the year, to 30,184 tonnes.

China also said quotas are needed because mining rare earths result in excessive pollution, and the country doesn't want to carry the brunt of the environmental concerns surrounding rare earths.

"Despite huge environmental pressures, China has made efforts to maintain a certain level of exports," Liu Weimin, spokesman for China's Foreign Ministry, said in a daily briefing. "We hope other countries with rare-earth resources can share the responsibility to provide rare-earth supplies."

The quota system pushes up prices for foreign rare earths buyers, adding cost on top of China's high export taxes.

Rare earth prices are already high as Chinese traders last year started stockpiling the metals and mining groups built rare earths reserves. Lower global demand has dropped prices a bit, as rare earths buyers found lower-cost alternatives.

But China is still positioned to control global rare earths pricing.

Rare Earth Minerals News Boosts Molycorp (NYSE: MCP)

So far this year rare earth minerals demand is low, and prices have fallen 25%. Industry insiders have forecast a rebound that could buoy rare earths related stocks, especially Molycorp Inc. (NYSE: MCP).

Colorado-based Molycorp owns the largest rare-earth deposit outside China. Molycorp rose as much as 8% Tuesday after the trade dispute was reported, closing up 3.21% at $30.83.

Molycorp has climbed more than 32% so far this year. It announced last week it would pay $1.3 billion to buy rare earth processor Neo Material Technologies, combining Molycorp's production capacity with access to Neo Material's rare earth processing abilities and patents.

"(We are) putting those two together and forming the best full supply chain capability known in the industry," Molycorp's CEO Mark Smith told Reuters.

Neo, which owns facilities in China, Thailand, Germany and North America, produces rare earth oxides, alloys and magnetic powders.

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