Morning Commentary: “Don’t Say I Didn’t Warn You”

Foreign Exchange - Morning Commentary
“Don’t Say I Didn’t Warn You”
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
News reports in China overnight floated the idea that China is “seriously considering” weaponizing its supply of rare earth elements (rare earths), critical components in a variety of applications from smart phones to electric vehicles and wind turbines.  China is currently the world’s biggest producer of rare earth elements and supplies about 80% of US imports.
Notably, Chinese newspapers used a rare Chinese phrase that translates into “don’t say I didn’t warn you.”  This specific wording was used before China went to war with India in 1962 and before conflict broke out in 1979 between China and Vietnam. 
The irony with rare earths is that they are not rare at all.  Rare earths comprise of 17 different materials.  Save for promethium, rare earths are all more plentiful than gold, silver or platinum with cerium more plentiful than copper.  However, deposits are concentrated in certain countries, and individual deposits do not always occur in commercially mineable quantities.  As a result, only a handful of countries are active in this industry.  By suppressing prices, Chinese suppliers have reduced the appetite of Western producers to operate, further consolidating the industry. 

This isn’t the first time that China has used rare earths as a bargaining chip in international trade/negotiations.  For example, in 2010 a Japanese Coast Guard vessel collided with a Chinese fishing ship in the East China Sea.  Not long after, China reduced its export quotas, causing global prices to spike.  Ultimately, the WTO ruled that China’s export restrictions were illegal and prices subsequently dropped. 

In response to China’s strategic use of rare earths, other countries have been working on ramping up production and companies have been working on reducing their dependency on them by reducing the amounts needed or developing recycling processes.  What this means for the markets is that China might have the ability to influence the rare earths markets in the short term but should struggle to sustain shortages. 
  • The Treasury Department issued its semi-annual report on exchange rates to Congress. In the report, the US refrained from naming China a currency manipulator.  With the release of this report, the US has not labeled a major trade partner a currency manipulator since 1994.  However, the report did expand the number of countries under scrutiny from 12 to 21. 
  • US 10-year yields continue to fall with yields dropping as low as 2.2203% on global trade tensions.  The 3-month/10-year curve remains inverted and has hit its most inverted point since 2007.  
  • US mortgage applications fell by 3.3% versus a 2.4% rise last print. 
  • German unemployment claims came in at 5.0% against expectations for 4.9%.
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