For most of us, smartphones have become an integral part of our everyday life. Playing games, staying connected with friends, sharing photos, watching videos, online banking, ordering a taxi or dating – all happen on the phone. But how many of us realise how much critical but toxic raw materials are embedded to drive these interactions?
“Reliance on CRMs [critical raw materials] means reliance on China”
Charles Yonts, CLSA’s head of sustainable research
“Reliance on CRMs [critical raw materials] means reliance on China” says Charles Yonts, CLSA’s head of sustainable research. The recent report we guest-authored for CLSA U®, warns that as China says no to pollution and yes to a high tech future, transitional risks are abound. Clearly these can have profound impacts across industries.
But is this too alarmist? There have been recent articles reminding us that the impending apocalypse in world’s supply of rare earth elements has yet to appear. Mitigating factors like new supply and substitute materials are cited as reasons. But our deeper dive reveals something different.
I had the dubious pleasure of speaking on the same day as Steve Bannon at the CLSA Investor Forum in Hong Kong. He talked about economic nationalism and protecting America. No surprises there. However, (in addition to Paris) I fail to see his logic in ensuring US national security by trying to take back the iron, steel and aluminium industry from China (the world’s largest producer of these materials), only to sell the only rare earth mine on US soil to a China-led consortium.
According the US GAO report last year, 16 out of 17 rare earth elements are on the Defense Logistics Agency-Strategic Materials 2015 report watch-list for potential disruption supply. These were just handed to China In June this year. That said, the deal is pending approval and given that Trump has literally just denied China the acquisition of Lattice, surely there is no way it will be approved?
After all, what’s the point of a 301 investigation of China regarding technology transfer, intellectual property, and innovation when you have just given away access to the minerals essential to making most of the tech work? Having the IP but giving away control to the minerals to effect the tech makes no sense. Surely, rare earth deposits in California form a more secure supply than a rare earth foray in Afghanistan?
Smartphone brands’ current strategies also makes no sense. Low recycling rates, built-in obsolescence and poor repairability only serve to compound the underlying risks. As Yonts warns: “The clean-up is welcome, and supply chains will adjust, but over the past six years manufacturers have been lulled into a false sense of security. That is all about to change.” So why the blindspot?
We live in an “era of bigness” and in times of bigness, we look at big and obvious things – like iron and steel – basically millions and millions of tonnes. We ignore the small but critical materials that are the lynchpin to almost all modern & smart technology. While everyone is focused on who can/ should build the biggest, the hugest and best (the likes of which the world has never seen), China’s forming an “iron-fist” grip on the Jenga piece that could bring down the entire tower.
There is a dangerous feeling of immateriality. Beware, it matters. Don’t get blindsided … here are “5 bewares”:
1. The interactive core is toxic & dirty
Of the 70+ elements that are likely found in an average smartphone – at least 14 of them are key to the interactive core enabling touch, sound, feel and vision. Nine of these 14 are rare earths but almost all are considered critical by the EU Commission because risks of their supply shortage & their impacts are higher.
There is no doubt, the mining and processing of rare earths are highly polluting. But so is the mining of other non-ferrous metals like indium and antimony (must-haves for the touchscreen), as well as tungsten (necessary for the vibration motor). Pollution incidents in China have been known to halt production locally and disrupt prices globally.
1 kg of rare earths can produce 1-1.4kg of radioactive waste (see graphic below). Each smartphone, like the iPhone 6 can include up to 16 of the 17 rare earth elements, which makes Apple as well as other leading brands complicit to the pollution plus the global black market. Reputational risks are abound especially since there is currently no responsible sourcing platform and traceability systems in place for these minerals. See how brands are faring here.
With no responsible sourcing platform …
…brands are brands complicit to the toxic pollution & black market trade
Please click on graphic to expand
2. China controls the core with no/few substitute materials
According to a study by a team of researchers from Yale, Graedel et al found that of the 62 metals studied, not one had exemplary substitutes. Also for a dozen metals, the potential substitutes for their major uses are either inadequate or appear not to exist at all! On top of this, some CRMs are clearly overwhelmingly sourced from China as shown in the chart below:
“Largely irreplaceable China exposure at the heart of our swipe lifestyle”
Source: “Toxic Phones: China controls the core” Sep 2017
Please click on graphic to expand
3. China is running out and needs more
Although China will likely require 140,000-168,000 tonnes of rare earths by 2020, China’s 13FYP on National Mining Resources released in November 2016 has capped rare earth production at 140,000 tonnes by 2020. Who will supply the rest of the world? The chart below sets out the looming demand and supply gap:
It’s not just rare earths, tungsten also faces a production cap in the 13FYP. Does this matter? Yes, China produces >80% of global tungsten. Already we have seen a marked increase in tungsten prices recently.
Moreover, low proven reserves-to-production ratios in China means there are directives in the 13FYP to look for more domestically and abroad. Proven reserves are also tight globally. The report highlights that reserves-to-production ratios can be as low as 11 years for antimony, tin (17yrs), indium (16 yrs) and tungsten (36 yrs). Naturally exploration entails upfront capex with unclear returns.
The uncertainty and economics of non-ferrous metals production are further exacerbated by co-production issues. Plus there are now clean production costs to contend with – more on this later.
4. Odd trends: China imports going up but so is reliance on China exports
BTW, since the rare earth scare in 2010, China exports have risen, but so has China imports of rare earths. Over the last 5 years, the report found that the imports grew 11.6x. Basically, China has been sucking up the supply from the rest of the world. At the same time, reliance on China exports by its largest trading partners has also risen. US imports of rare earths from China have increased 3.3x since 2012. So much for weaning off China reliance and looking for other sources … or perhaps the US is stockpiling?
China imports has risen 11.6x in past 5 years …
… US reliance on China rare earth exports up 3.3x
In addition to Mountain Pass, China has moved to acquire mines /strategic stakes /guaranteed 100% offtake across Vietnam, Greenland and Australia in the last year or so. In case you are wondering if China considers rare earths strategic, they not only made the national strategic list, but rare earths had its first-ever dedicated 13FYP. The rare earth 13FYP focuses on consolidation, tackling pollution, remediation, black market, implementing a national traceability system and expansion abroad.
With China’s clampdown in the black market, the report also cautions a further squeeze on export supply, putting the high tech futures of Japan, US, Germany and South Korea (China’s largest rare earth trading partners) at risk.
5. China’s pollution red line: pollution economics makes no sense
Just like Brexit means Brexit. China’s Three Red Lines means Red Lines: they are not supposed to be crossed. Not only is the public suffering from pollution in widespread documented cases of cancer villages, almost 20% of China’s farmland is polluted. Concerns over safeguarding drinking water sources are real and enforcement is up over the last few years. The bottom line is that pollution economics no longer makes any sense for China.
China’s rare earth industry is operating at a loss …
… yet report estimates clean production will likely see costs double
Over the past 5 years, China rare earth exports have risen, but the total value of the export market has shrunk drastically. These divergent trends mean that China’s rare earth industry is currently operating at a loss. The report estimates that shifting to clean production could see current production costs double, widening the current operating loss.
On top of the operating loss, China has to also shoulder the costs of cleaning up. Remediation costs in Ganzhou alone could be USD29/kg but the average price of China’s rare earth exports is only USD7/kg.
The numbers clearly make no sense. China will swipe left on pollution and carrying such costs.
Plus there are remediation costs at USD29/kg…
China’s exports are only worth USD7/kg
We covered the impact of rare earths on China;s rivers extensively in our rare earth report last year. But it is important to note that most of China’s indium, tungsten and antimony are mined in the Yangtze River Economic Belt (YREB) where there are significant heavy metal emissions.
Local pollution issues at a provincial level can therefore impact global CRM prices. So watch out for water-nomics driven policy trade-offs in the YREB.
Indeed, the prices of various critical raw materials have seen large increases recently as China clamps down on mining pollution. Since the writing of this report with CLSA, financial press from Bloomberg to Caixin has reported:
- The price of praseodymium-neodymium oxide has almost doubled in 2017 – “Rare earth metals electrified by China’s Illegal Mining clean-up”, Bloomberg
- Tungsten prices have jumped 50% in the last two months alone – “China sends one of the west most critical materials soaring” Bloomberg
- Cobalt prices have more than doubled over the last 12 months to a current level of about USD60/kg (versus USD25/kg a year ago). – “Spiking cobalt prices set to drain high-tech battery-makers”, Caixin. Here, we recommend you get hold of CLSA’s “China energy storage – The heart of darkness” for everything cobalt.
It’s happening. The looming apocalypse is likely still lurking and it is not just rare earths, but other CRMs. It’s time to look into the nitty-gritty. There are 20 CRMs; China has outstanding WTO disputes for 2 out of 3 of these with the EU, US, Japan & Mexico.
“Brands need to wake up to the new reality of resource scarcity”
Debra Tan, China Water Risk
These trends are not warm and fuzzy and the current no-sense strategies adopted by brands only serve to compound these risks. Brands need to wake up to the new reality of resource scarcity. Electronics and smartphone brands are not just competing amongst themselves, but with other industries from healthcare, energy savings, renewables, robotics, AI, electric vehicles to defence.
Apple’s vision to “stop mining the earth” and make devices entirely from recycled materials is a good start towards a clean and circular economy. The problem is we don’t know how yet; even Apple has admitted it hasn’t completely figured out how. It’s never too late to innovate but in this case, the sooner the better.
Note that the report is accessible to professional investors only. Please contact CLSA for the full report.
Charles Yonts, Head of Sustainable Research
- Electronic Brands: Sustainable Or Not? - The new CLSA U® report cautions that current brand strategies only focus on short-term profits despite looming risks. Is this sustainable? China Water Risk’s Woody Chan looks at what leaders like Apple & Samsung are doing across greening supply chains, recycling and more
- Apple & Rare Earth Recycling - Although Apple is leading smartphone giants in green commitments, its transparency and traceability of rare earth supply can be improved. Plus, what lies ahead for rare earth recycling? Researcher Hongqiao Liu expands
- At A Glance: Water Risk Dashboard - Need to gauge water risks across your operations, suppliers or investees at a glance? China Water Risk’s Hubert Thieriot expands on a new dashboard for exactly that – check it out!
- 2017 World Water Week: Key Takeaways - The theme for World Water Week 2017 was ‘Water and Waste: Reduce & Reuse’ and perhaps unsurprisingly textiles was a key focus area along with circularity. China Water Risk’s Dawn McGregor shares both water and textile takeaways from Stockholm
- GPC: Smart Subsidies For Renewables - China’s current subsidy system for renewable energy is overburdened. However, China Water Risk’s Yuanchao Xu sees positive change ahead with the recent initiation of Green Power Certificate trading
- Dug-Up In China: The World’s Critical Raw Materials - China is the largest global supplier of many critical raw materials but growing domestic demand could mean it becomes a net importer. How will other countries secure these materials that are key to a low carbon future? China Water Risk’s Hongqiao Liu explores China’s direction in the 13FYP
- Can We Build A Clean & Smart Future On Toxic Rare Earths? - Almost all smart, green & clean tech need rare earths to work, but mining & processing these are highly polluting. Lead author Liu of China Water Risk’s new report: “Rare Earths: Shades Of Grey” explores this paradox. It is time to rethink our clean & smart future
- Rare Earth Black Market: An Open Dirty Secret – The black market exacerbates environmental pollution from rare earth mining in China. With low prices, depleted reserves and contaminated drinking water, find out if your smartphone, tablet or electric car is party to this. Hongqiao Liu expands
- E-Waste: Downside to the Tech Revolution – China is one of the largest producers of e-waste globally. Faced with mountains of toxic e-waste, Green Initiatives launched the [WE] Project in Shanghai. Co-founder, Nitin Dani on this easy, safe & scalable way to recycle phones, home appliances & more