Chinese reference prices for rare earths have risen by around 40% this year. One of the triggers for this increase was the Pentagon’s investment in the US mining company MP Materials in July. Emerging rare earth producers such as Ucore Rare Metals (TSXV: UCU, OTCQX: UURAF, WKN: A2QJQ4) are also benefiting from the higher prices. The company is building its first RapidSX plant in Louisiana to produce rare earth oxides on a commercial scale.
Ucore is particularly focused on so-called heavy rare earths, which are indispensable for the production of permanent magnets, among other things. Any industrial company that does not have access to them is effectively excluded from certain markets. The permanent magnets produced are used, among other things, in electric vehicles, wind turbines, and also in military applications.
At this point, it quickly becomes clear why the Sino-American conflict is not only a trade policy issue, but also a geostrategic one, because whoever is able to control access to these elements also regulates their competitors’ access to important military and civilian markets.
US Department of Defense Pursues Clear Strategy with Support of MP Materials and Ucore Rare Metals
When the US Department of Defense made its investment in MP Materials, North America’s sole rare earth producer, in July, the struggle for rare earths was elevated to a new level, because previously, the US company had supplied Chinese refineries with the rare earths it mined. Consulting firm Adamas estimates that before the Pentagon’s investment, MP Materials’ supplies accounted for about seven to nine percent of China’s supply.
This supply chain has since been completely severed, as the US Department of Defense wants the ore to be processed in the US itself in the future. For this reason, one condition for the Pentagon’s entry into MP Materials was that the company cease its exports to the People’s Republic in the future.
Instead of being shipped to China, the ores will be refined in the US itself in the future. By building up its own refining capacity, the United States wants to break China’s dominance in rare earths in the medium term. The strategy makes sense because, although China currently controls “only” about 70 percent of rare earth production, it controls an extremely high ~90 percent of global processing capacity.
Because industry does not need raw materials but processed end products, China effectively holds the entire global industry in its hands. Anyone not supplied by Chinese refineries is practically excluded from the global market and may have to cease production.
Prices are sensitive to recent changes
Since this is effectively a matter of economic survival or death, the affected companies react extremely sensitively to market changes. This sensitivity can be seen, among other things, in the price. Not long ago, a prolonged price weakness led to many rare earth projects in the West being uneconomical and discontinued.
As obvious as these decisions were at a business management level, they had devastating effects at a macroeconomic level, because the West’s existing dependence on China for rare earths was not reduced, but preserved and strengthened. Only since Western states have actively counteracted and, in some cases, enforced higher prices for rare earths, has the process towards greater independence from China gained momentum again.
While producers have since enjoyed significantly higher prices, manufacturers of permanent magnets and wind turbines are concerned. They fear that their profit margins could suffer due to the higher purchase prices for rare earths.
Only producing rare earths domestically will ensure long-term independence from China
Ultimately, however, they too can live with the higher prices much better than with a Chinese export ban. Such a ban was used as a weapon by Beijing in April as part of the tariff dispute, leading to partial shutdowns of automobile production factories because the necessary products from China were not available.
For Western industry, rare earths from China – even if they are cheaper – are nothing less than a dangerous drug. Not having to rely on them, because domestic production facilities and refineries are available, is therefore the optimal path. On this path, Ucore Rare Metals’ RapidSX plant represents an extremely important step.
Because if it can be demonstrated in Louisiana on a commercial scale that a China-independent, technically superior domestic rare earth production is possible in the USA, the barrier is broken and the basis for lasting independence from China is laid. The Pentagon in Washington knows this too. That’s why they didn’t hesitate to invest 22.4 million USD to support Ucore Rare Metals in building the facility.
For Ucore, this decision is not only a significant validation that underlines the international significance of the project, but with the support and funding of the US Department of Defense, the challenging business decisions that lie ahead can also be made more easily. Because Ucore knows that it is not fighting the battle against Chinese supremacy alone, but has a powerful ally by its side. This development has not gone unnoticed by the market. Currently, Ucore shares are trading near CAD 4.00, a 5-year high!
