As the US takes steps to restore a full rare earths supply chain onto American soil, a Chinese rare earths giant is embedding itself more deeply into the global supply chain.
China is currently the world’s dominant producer of rare earths, used in a wide range of advanced tech products, having taken that crown from the US in the 1990s. Because of their crucial role in the global economy, rare earths hold national security importance and their supply chain is as much a matter of geopolitics as business. As the US seeks to reduce dependence on China, China’s shoring up its dominance by more closely regulating its domestic resources, while at the same time expanding ties with businesses and projects worldwide. At the center of that global strategy is Shenghe Resources.
The Shanghai-listed company is one of a few rare earth firms in China with operations spanning every part of the supply chain, from mining the minerals to processing them into higher-grade material to using the processed metals in high-tech products. It is already involved in major rare earths projects abroad, including in the US, Vietnam, Greenland, and Australia, where it is also developing new partnerships.
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Against this backdrop, a forthcoming executive order from US president Joe Biden to review the country’s critical supply chains is expected to include rare earths. Industry experts and politicians alike have urged the US to team up with allies like Japan and Europe to counter China’s dominance. Though Washington has inked deals with Australia and Canada to collaborate on rare earths, it must also contend with a China that’s aggressively pursuing global alliances—and reportedly considering using rare earth export restrictions to undermine the US defense industry.
A global gameplan
Earlier this month, Shenghe signed a memorandum of understanding with Australian rare earths company RareX. The agreement lays the groundwork for a majority Shenghe-owned joint venture and potential Shenghe investment in RareX’s rare earths project in Western Australia. Meanwhile, a public consultation is underway for a major rare earths project in Greenland that Shenghe has a minority stake in, and for which it hopes to soon acquire a mining permit from Greenland’s government.
The partnerships mark an effort to deepen the “three grands” (link in Chinese) strategy that Shenghe’s chairman Hu Zesong emphasized in 2017, which includes the ”grand breakthrough in overseas rare earth resources.” The firm’s strategic plan (link in Chinese) for the next two years involves “consolidating the results of overseas cooperation projects” so as to guarantee a stable supply of rare earths. This is particularly important for China, which in recent years has become a net importer of rare earths, critical to establishing electronic manufacturing prowess in smartphones, electric vehicle batteries, and military equipment.
Hu’s speech came the same year Shenghe made one of its most significant overseas investments. It has an 8% stake in MP Materials, an American company that operates the only active rare earths mine in the US. The California mine, Mountain Pass, was bought out of insolvency in 2017 by a rescue consortium that included Shenghe—and secured the Chinese company rights to Mountain Pass’s output.
According to MP’s listing prospectus filed last October, Shenghe is currently the firm’s principle source of revenues as the sole buyer of MP’s rare earth concentrate, which Shenghe sends to China for processing. In its 2020 earnings forecast published last month (pdf, link in Chinese), Shenghe credited its stake in MP as the primary reason for its almost 200% growth in net profits compared to 2019.
Shenghe’s minority stake in MP prompted concerns among US government scientists over Pentagon funding for the firm, though funding resumed following a review. In November, the US Department of Defense further awarded MP an investment agreement to establish domestic processing capabilities.
While investors appear to have taken the Pentagon’s funding for MP as a national vote of confidence—the company’s shares have more than doubled since listing in New York in November—others fear the US is being outflanked by China. After all, Shenghe describes its ownership as “mixed“—that is, partially state-owned. It has close ties with the Chinese government: its largest shareholder is a research institute within the government-owned China Geological Survey, which sits directly under the ministry of natural resources. It is also affiliated with the Aluminum Corporation of China (Chinalco), one of the six major state-owned firms that dominate the domestic rare earths industry. A Chinalco representative sit on Shenghe’s board of directors, and according to Chinese stock analysts (link in Chinese), Chinalco is “involved in Shenghe’s production, operation and strategic decision-making.”
Some rare earths analysts warn China’s latest moves to more closely regulate rare earth production and exports are part of the country’s longer-term bid to offshore mining and processing—the lowest value and most environmentally damaging parts of rare earths production—so as to maximize development of the lucrative downstream sector to manufacture high-tech products that require rare earth inputs. Far from helping restore American rare earth capabilities, Shenghe’s involvement in MP “maintains and even heightens US vulnerability,” said James Kennedy, president of rare earth advisory Three Consulting. Kennedy owns mining rights for rare earths at Pea Ridge, Missouri.
“As crazy as it sounds, the Pentagon is using US defense funding to prop up rare earth resource suppliers who then feed China’s monopoly,” Kennedy said, adding that the Pentagon “has committed the US to being a low-value supplier into China’s high-value rare earth metal and magnet monopoly.”
Matt Sloustcher, senior vice president of communications for MP, said “[t]he insinuation that MP Materials is being ‘propped-up’ by U.S. government funding is false, defamatory, and absurd.” He added that the company, as “the only US entity producing rare earth materials at scale today…is the only viable path to rapidly restoring the full domestic supply chain” to the US.
Win-win. But who wins more?
Beyond the US, Shenghe since 2016 has had a roughly 10% stake in Greenland Minerals, an Australian company developing a major rare earths mine in Greenland. The Kvanefjeld mine, according to Greenland Minerals, has the potential to become “the most significant western world producer of rare earths,” and possibly at some of the lowest costs globally (pdf), too.
It’s undoubtedly an attractive prospect—so much so that it may have motivated former US president Donald Trump’s suggestion that Washington should buy Greenland.
Shenghe describes its investment in the Greenland project as a “win-win situation:” the firm needs “support from global industry,” its chairman said (pdf) at a trade conference held in Copenhagen in 2019, and scoured dozens of rare earths projects around the world before settling on the Kvanefjeld project. Meanwhile, just as Shenghe offered its technical expertise to MP’s Mountain Pass project, it brings “full rare earth value chain proficiency to the Kvanefjeld project,” Greenland Minerals notes in its latest quarterly report.
In another indication of Shenghe’s close ties with the Chinese state, and how foreign companies’ tie-ups with Shenghe can end up serving China’s economic goals, Shenghe in 2019 announced (pdf) that it was partnering directly with the state-owned China National Nuclear Corporation (CNNC), one of the country’s largest nuclear power producers and last year designated by the US as having ties to the Chinese military. Under the terms of the joint venture, Shenghe and CNNC would import rare earths containing uranium and thorium from Kvanefjeld to China. Uranium and thorium are radioactive byproducts of rare earth processing, and both can be used as nuclear fuel.
So when Shenghe emphasizes its “win-win” approach to foreign investments, it raises the question: who wins more?
Kennedy, the consultant, wagers it’s China.
“China’s brilliance is they just move their monopoly,” he said. “Instead of monopolizing every part of the value chain, they just slide their fulcrum” to the critical point, which in this case is the rare earth metals, alloys, and magnets that are crucial for producing high-tech products.
The far less lucrative and much more polluting mining sector is outsourced abroad, and China then partners with countries and firms that become their suppliers.
Update: The story was updated on Feb. 23 to note James Kennedy’s affiliation with a Missouri rare earths deposit.