Rare earth quake

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1:00Cushkin. Rob Armstrong, first sea lord of the unhedged newsletter, and Hak-yung Kim, Rob's glamorous and able assistant. Are you ready to play a game? Sure. Heck yeah, what game is this? Rare Earth I Just Learned About on the Internet, or Word I Just Made Up. Let's do this. I love this. Let's begin. Okay. Number one, prasiodemium. Rare earth or thing I just made up. Say that for us one more time. Prasiodemium. See, I know that's not a rare earth because it's a character in the second Lord of the Rings movie. So I'm going to say that's not a rare earth. Hak-yung, what's your view on prasiodemium?

1:47I'm also going to say not a rare earth. Well, you're both wrong. It is a rare earth and it's used in strong magnets. Yes. Katie. Bleademium. That has to be a fig. Yeah, golly. It has the word golly in it, Katie. You can't trick us with that. Okay, you're both right. I made that up. Terbium. I think that sounds legitimate. Yeah, terbium sounds real. It sounds like a scientist. Yeah, yeah. Yeah, okay. You're both right. This is a rare earth. So we went two out of three. We're basically metallurgists. Hak-yung and I. The rare earth used in lighting and display screens. So there you are. Okay, last one.

2:33You ready? Lutetium. Eh, not real. Oh, I'm going to go the other way. You're going to go, oh, so this determines who the winner is. Lutetium, real or made up? So Hak-yung's saying real. Yes. She is. Hak-yung is correct. It's one of my personal favorites. It's used in cancer treatment, petroleum refining and electronics and high performance optics. This is a very versatile science thing. What's it called again? Lutetium. I'll be taking no further questions about rare earths. I don't know anything else about them. But all of these things are like, you know, super important in a super wide range of different electronics and all the rest of it.

3:18Anyway, the other day, China said it would impose export controls on these magic elements. And your man Donald Trump did not respond well. Stock markets, as a result, also did not respond well. Yes, we're doing this whole thing again. So today on the show, we're going to tell you just enough about rare earths to blag your way through a conversation about them and ask if this is the new front in Trump's trade war. This is Unhedged, the markets and finance podcast from the Financial Times. I'm Pushkin. I'm Katie Martin, a markets columnist at the FT in London. And I'm joined down the line from New York City by the dynamic duo from the Unhedged newsletter, Rob Armstrong, refreshed from a short break, and his trusty sidekick and podcast newbie, Hak-yung Kim.

4:08Hak-yung, welcome to the show. Thank you so much, Katie. This is exciting. It's like I went away on for a few days of break. Hak Young did all the work on the newsletter. And now she's going to do all the work on the podcast. It's all working out exactly according to plan. OK, so Hak Young, Rare Earths, big in the news at the moment. None of us know what any of these funny rocks are. So tell us like what's going on here and what these things do. Yeah, so I have taken a crash course basically in the past few days on these rare earths that it turns out are not very rare at all. You can pretty much just drill a hole anywhere in the world and get these rare earths.

4:53But the thing is, China has this incredible advantage in not only mining these rare earths, but also processing them. Because basically, as the West bolstered up their environmental regulations, China took a more relaxed approach, say, and they really went in on processing. That's a very diplomatic way of saying it, Hak-Yung. A relaxed approach to environmental regulation. Yeah, basically a higher tolerance for the pollution involved in processing these rare earths. Because they're filthy dirty to get out of the ground and to process, right? This is a very mucky business. Exactly. It's not pretty at all.

5:31And basically, the West was pretty happy for a while just to let China do all the dirty work and just accept the cheap rare earths exports. And they're critical for defense, semiconductor companies, chips. EVs. EVs, yeah. So all the big important stuff. And China knows that it's prepared to dig this stuff out of the ground that no one else is prepared to do. And it's prepared to process it. And it has stockpiled this stuff. And then, end of last week, it said, right, we're going to use this as a very big bargaining chip. I have two questions for the group about this. Question number one is, do we think this is all a case of let's take out the sabers and give them a good rattle?

6:18In other words, we have this trade negotiation session coming up. When is that, Hakyung? So it's a meeting at the APEC forum. Do you call it that? Yeah, I think it's a forum. Yeah, later this month in Korea. Right. And maybe we can write this off as standard posturing ahead of a big negotiation. Katie, are you a buyer there? Hakyung, what do you think? Did the market overreact? Perhaps would be another way to put the question. Did the market overreact? So there were, you know, markets have been going up and up and up and up forever. and there was a pullback on Friday. We're talking like one and a half, two percent or something.

6:54It's not like it crashed. But then fast forward to Monday. So China said we might impose these export controls. Trump flipped out, as he so often does, and said, right, well, I'm going to slap extra trade tariffs on China. But then by the time the weekend had ended, this had all just like gone away because as someone close to this show has observed previously, Trump always chickens out. The taco trade is still on. It is true. But I would slightly, I think you're underplaying the market's reaction a little bit. It was very violent. It responded very specifically to Trump's truth social post saying, I'm going to put 100 % on.

7:36And it was enough of a move that the administration had to walk back its comments. I don't even, I still don't know what a truth social post is called. a truth? I think he's called it. I don't know. So he had a truth that said, we're trying to help China not hurt it. So like it was a violent enough reaction that the president did a classic taco and said, you know, everyone calm down. We're going to be able to work this out. I think I agree with Katie. Yeah. I think it would have been weird enough for the market to just completely brush it off because even if you talk it up as posturing, these are still really wide ranging curbs that affect pretty much every major U.S.

8:20industry to brush it off. That would have been even more concerning. And maybe we wouldn't be where we're at now if we didn't have that sell off. This whole thing tells us two really important things. The first one is like Trump is not done with his tariffs. So we think that we've reached a sort of relatively happy place where we kind of know what the outline of the tariffs is and everyone knows where they are. But he can just jack these things up and down whenever he wants to based on whoever insulted him last. The other thing is we should never fall into the trap of assuming that China has no cards here.

8:58They have plenty of cards they can play. And this is a really big one. Like the US does legitimately need these rare earths. So again, you've got two pretty, you know, they can square off against each other and cause real consequences. Agree on both points. What I don't understand, and Hak-Yung, maybe you learned something about this in your recent research, and this was the second question I wanted to ask. If this stuff is in fact not rare, and there is a lot of it sitting around in the dirt all over the world, how long can China play this card? Because if you just, for example, type rare earths into the FT search function, you will get like eight articles in the last six months about investment in rare earths mining and processing capacity in Canada, in the United States, in Australia.

9:57So the world has gotten the memo that China has a firm hold on them in this very specific, very important area and is responding. One of Armstrong's basic beliefs about economics is never underestimate the elasticity of supply. If you make something scarce and you make it expensive and people want it, new supply turns up. And that seems to be happening. So how long can China play this card, Hak-Yung? Well, so the thing is actually quite cheap currently supply. So one of the things that Scott Besson, the treasury secretary, floated is that he's going to put a price floor on rare earths to help the domestic U.S.

10:43rare earths industry. Very classic capitalist free market move. But that's fascinating. I had no idea about that, that this stuff is cheap. Yeah. It's just a pain in the ass to get. China's just producing so much that they're just doing it at such a cheap cost. Right. But we've got to have it. Yes. It's cheap, but we've got to have it. So I guess the trade-off is, are you willing to just engage in the art of a deal? Or do you think that is worse than just mining through the ground on your country and kind of somewhat destroying the environment and the process? Yeah. Which is more appealing to you.

11:23Yeah. It kind of personifies in an interesting and important way the trade-offs that Trump's economic policies force us into. We lived in a world where there was a sort of distribution of production labor. I guess you just call it distribution of production, where we traded this for that or whatever. But under nationalism, everybody's got to make everything, or at least everybody's got to make all the really important stuff for themselves. Right? And this is the kind of issue this really brings to a head. But Hakim, you didn't quite answer my question. If I want to start Armstrong's rare earths mine in my backyard in Brooklyn, what am I looking at?

12:05A year? Ten years? You know, if I want to get into the biz? Yeah, I mean, as our energy colleague Jamie Smith pointed out, in the U.S., as it stands right now, it takes around nearly three decades to get approval for somewhere to mine. So that's a pretty lengthy process. So you can scrap all those environmental regulations put in place and just start kind of mining immediately. It's the big point right now where China has the control is the processing. And the government also put restrictions on basically Chinese nationals being able to kind of export this technology and the know-how they have to foreign companies.

12:44So what we're saying is Mrs. Armstrong can rest easy. Rob's not going to be trying to dig any lutetium out of his back garden when he gets home. That's a reassuring sign. But what do we all think? Is this likely to keep rumbling on? Do you think China's going to keep playing hardball here? I don't see why it wouldn't. My view, I'm just going to stick with the view I've stuck with so far, you know, in this presidency, which is that Trump is not strongly committed to much of anything. And that if you put pressure on him, he will come to an accommodation. And that's the process we've seen with his trade policies so far.

13:29He ended at a point where he imposed tariffs that were enough for the rest of the world to pay while business going on generally as usual. And he didn't push it, except in a few very specific cases any further than that. And I think that's where we're going to get in this case, too, that Trump is not willing to deal with the serious economic and political pain involved in a proper tariff war with China. And China, by the way, seems to be making the same bet that I'm making. Yeah, I think I'm in agreement with you, Rob. China has a very big card with this, but it's not like they want 100 % tariffs on their goods either.

14:13So I think both sides are very aware of this fact. I mean, I can't remember much game theory, but there must be something in game theory that will explain. We started this podcast with metallurgy, and now we're ending on game theory. Yes. It's a beautiful combination. Very intellectual group of people we have here. That's it. But listeners, please do not head out into your garden and try and find Nutitium. But if you do, let us know at unhedged at ft.com. We are going to be back in just one second with Longshore.

15:04supplanting the traditional 3C7QP closed-end fund. And we think that demand will continue, and that's making Alt more accessible to wealth. Hear the full conversation on P. Jim's podcast, Speaking of Alternatives. Okie doke, it's time for Long Short, that part of the show where we go long, a thing we love, or short, a thing we hate. Hak-yung, have you done your homework? Have you got a long or short? I'm going to go long on running. One, because of personal reasons, I can finally run after months of knee issues. And two, Strava is thinking of doing an IPO. What is Strava? It's like a running app where you log your runs, but then it has a social media aspect to it.

15:48So you see your friends, your enemies. I don't want other people to know anything about my running habits. They are my secret shame. but like pretty much everyone who runs is on Strava at Hakian. I'm very happy for your knee. I've had knee issues in the past and they are a real pain. Katie, you have a long or a short? Well, I am short protein. I wish everyone would shut up about protein. Everyone is going on about protein all the time and making it their entire personality. I just think eat an egg, shut up about it. Get on with it. Stop putting protein in coffee. Go running and stop talking about protein.

16:31Actually, there was an article the other day that said there's been lead in a lot of major protein powders. So that's a good short. They're going on about it. It's the lead. There you go. Your instincts were right. I'm going to surprise you, Katie, and I'm going to go long ESG, environmental, social and governance. Have you been on the lead as well? This is a bit No, I mean, as you know, I hate ESG and all of its works. And I thought with the change in the political environment that it was going to wither away and die. But then there was a huge announcement by JP Morgan of like a multi-trillion dollar initiative to invest in tons of things that would make America strong again.

17:15And I realized that ESG is just a bad idea that won't die. It will just change its political affiliation every four years. Right. And we'll have to put up with this nonsense forever. So all you can do, if you can't beat them, join them. I'm long ESG. It'll never die. Rob is long ethical investment. Folks, you heard it here first. This really is a turnaround. Listeners, we will be back in your ears on Tuesday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. Topher Forhears is the FT's acting co-head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler.

18:00FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

18:27We'll be right back.