China Might Weaponize Rare Earth Supplies; Futures Slide

Don’t panic yet. Try to bear in mind this is all a self inflicted wound. But it might get away from Trump and spiral, which would be immeasurably bad for markets. My gut tells me Trump will panic if markets start to panic. Here were are now, futures off by 180 and the Chinese media running rare earth stories, implying they’d stop selling them to America — an embargo of sorts. Some people think an embargo of rare earths could ‘devastate’ US supply chains.

“You suggested that rare earths could become one of China’s countermeasures against the U.S.’s unwarranted suppression…What can I tell you is that if anyone were to use products that are made with the rare earths that we export to curb the development of China, then the people of [south Jiangxi province where rare earths are mined] as well as all the rest of the Chinese people would be unhappy,” said the Chinese official, in an interview. The speaker was described as a “relevant official” from the National Development and Reform Commission.

Rare earth imports are a relatively small part of the $420 billion U.S. goods deficit with China, but their worth far outstrips their dollar value. The materials are critical in the creation of such things as iPhones, electric vehicles and advanced precision weapons.

The Chinese tabloid Global Times also reported Tuesday that China is “seriously considering” limiting rare earth exports to the United States. “Based on what I know, China is seriously considering restricting rare earth exports to the U.S. China may also take other countermeasures in the future,” Hu Xijin, editor-in-chief, wrote on his Twitter account. The editor’s account is followed by traders.

The rare earth card: China's reserves account for roughly 30% of the world's total, and the country produces more than 80% of the world's supply. 80% of the US' rare-earths imports between 2014 and 2017 are from China. pic.twitter.com/7rzoQ7QVd1

— Global Times (@globaltimesnews) May 29, 2019

More importantly, WTI is off by 3%, the 10yr is off 4bps to 2.22% and gold is +0.5%. Classic risk aversion. You were told — you ignored — now you pay the price.