On October 9, China’s Commerce Ministry published new policy measures further restricting the export of rare earth minerals and their downstream products from China. The measures expand the number of companies that must obtain export licenses, restrict military manufacturers from receiving approval, and add five new rare earth minerals to the list of affected products. These new rare earth export controls will come into effect on December 1. Additionally, China will also require licenses for the export of certain lithium batteries and the equipment and materials used to make them, effective from November 8.
Five new elements added to Chinese export controls
In addition to the seven rare earth minerals previously included in export controls, the Chinese government has added holmium, erbium, thulium, europium, and ytterbium to the list of controlled materials. These rare earth products are mainly used in the medical, defense, and fiber-optics sectors. Elements affected by the previous rare earth export controls enacted in April include samarium, gadolinium, terbium, dysprosium, lutetium, scandium, and yttrium.
New Chinese rare earth mineral regulations further restrict export licensing process
The new export controls contain several new major restrictions. The first is that all products containing rare earth materials originally sourced from China now require a license, regardless of whether a Chinese company is involved in the transaction. This change is designed to ensure that the Chinese government is informed of the ultimate end use of finished and semi-finished goods containing Chinese rare earth products.
The regulations further codify an unofficial but reportedly common existing practice of the previous rare earth regulations to prohibit the export of regulated materials to defense companies. It is unclear how exports to manufacturers of civil and defense aviation products for civil purposes will be regulated. The Chinese government also indicated that export licenses for companies in the advanced chip sector will be scrutinized and only approved on a case-by-case basis. Affected chip products include 14-nanometer chips or more advanced chips, memory chips with 256 layers or more, and equipment used in the production, research, and development of these items
Additionally, all products with a regulated rare earth material content of greater than 0.1% will now be affected. Given the small total volume of rare earth materials used in manufactured products, many finished goods including smartphones, laptops, and automobiles are unlikely to be affected. However, the trade of intermediate goods containing rare earth minerals, such as motors, will likely be more impacted due to the higher percentage of rare earth material content.
Enforcement details are unclear
Although the Chinese government has not specified the precise details for how these export controls would be enforced, the process will likely resemble that of the rare earth material export controls enacted in April. Under that mechanism, companies applied for licenses and supplied detailed information on the end users of the rare earth products. Reports on the processing time of these licenses varied but averaged around 4 weeks, with decisions being required within 45 business days of the application. However, in September, reports surfaced that application processing times had increased to an unspecified length due to Chinese government requests for additional end user information. As a result, Chinese rare earth exports dropped by 31% from August to September. It is unknown if this increased scrutiny will continue with the expansion of the policy.
Concerns around supply shortages
The new regulations have raised concerns about supply shortages outside of China. In response to the new export measures, the United States has threatened to enact 100% tariffs on China on November 1 if the export controls are not removed. The U.S. has also threatened to enact export controls on airplanes and aviation components from Boeing, as well as on “any and all critical software” with no further details on what software products could be affected.
European Union officials have asserted that the export controls are unjustified and have advocated for a coordinated response with allies. In Germany and Italy, automotive industry associations have issued warnings that the measures could have dire business impacts due to negative effects on the battery and semiconductor industries. Additionally, in Taiwan, while officials have indicated that the semiconductor industry sources rare earth materials from other locations and is unlikely to be affected, manufacturers of motors, cars, and drones could face disruptions.
All 12 minerals now affected by Chinese export controls have few supply alternatives outside of China. Since the first announcement of rare earth export controls in April, many companies and governments have enhanced their investments in new rare earth mineral mining projects from alternative countries. However, constructing mines can take years or even decades, so these alternatives do not present a solution that could avoid supply disruptions in the short-term
Chinese government enacts export controls on batteries and battery materials
In addition to restrictions on the export of rare earth materials, from November 8, China will also enact export controls on certain battery materials, including high-end lithium-ion batteries, cathodes, and graphite anode material. The global supply of these products is expected to be severely impacted, with China dominating the global market for all affected items. So far, the Chinese government has not specified if military, defense, and semiconductor industry end users will be restricted by the battery export controls. No details have been released on how the export control process will be enforced, but companies should anticipate longer processing times and delayed exports of battery products from China.
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