If this is actually happening, all the good news, I would say.
This gives users of these rare earth metals price certainty.
This talk of these markets is all about the international political economy and nothing to do with theoretical price discovery.
I think it's going to be very, very difficult for the US to meaningfully create greater independence from the Chinese rare earths ecosystem.
It will create just another market through which a ballooning amount of American money will be able to circulate.
And that's about it.
I think the Chinese side should take a serious look at this and investigate the viability of establishing a futures market.
But overall, I would imagine that China still be dominant.
China commands rare earth production.
The U.S. is targeting the next battlefield.
Who sets the benchmark?
Welcome to the chat lounge.
I'm Tiyun.
Joining me for a chat on the US plan to launch rare earth futures Professor Andy Mock of Beijing Foreign Studies University, who's also a senior research fellow at the Center for China and Globalization.
Professor Warwick Powell, Adjunct Professor, Queensland University of Technology, Australia.
And Professor John Ghosn, Professor of Economics at the University of International Business and Economics in Beijing.
A warm welcome to you all, gentlemen.
So let me begin with John.
Chicago-based financial services company CME Group is reportedly working on a plan to launch the world's first rare earth futures contract.
From a Chinese perspective, what was your initial reaction to the news?
Well, I found it very interesting.
My understanding is that usually for those kind of matters, the spot market is the futures market, and the futures market is usually conducted on an exchange.
Now my initial reaction is that wow, the real earth.
In terms of different materials within the real earth category, my understanding is that the market's not very large.
So apparently, I mean if the market's not very large, usually it's kind of difficult to have a futures market because the trading volume will not be very big.
Nevertheless, it looks like this market is expanding.
And apparently the people who are sponsoring this are planning for this understandably think that there's a market for it.
So I would assume that now the market's large enough to support a futures market.
So it's an interesting development.
I think it analyzed the importance of this category of materials for the new economy, for things related to new energy development, for example, finding more and more applications for these materials in modern economy.
Indeed, the market is growing, but still the US is not, I can say, a big shareholder in this sector.
I remember my first response was that Isn't it like people without flour mills deciding the price of weed?
So, Warwick, how accurate is the analogy?
Yeah, I think it's a good analogy because, at the end of the day, when the fundamental substrate, the real economy, the actual materials themselves firstly, are being traded within a number of spot markets two main spot markets in China and which are subject to 85 to 90 plus percent control through Chinese supply chains, it's kind of ridiculous that there is this, what is, in effect, a derivatives market built on top of it, that has no real connection.
And so right now, from what I've seen, the design in terms of specifications, settlement terms, et cetera, et cetera, has not yet been finalized for the futures contract.
But the idea is to link it via an index, which then derives a price off the spot markets.
But the price remains entirely anchored by Chinese spot processes, right?
We're talking, as I said, up to 91% of global separation and refining.
So it's hard to imagine what this particular initiative is other than an expression of the ongoing deep and expansive financialization of the american political economic culture, where it sees solutions to its real economy problems in entirely financialized and fictitious capital terms, And I doubt that this market will do much for addressing the real concerns.
But what it will do potentially, is create a whole range of arbitrage opportunities that traders will benefit from and which the market operator will benefit from.
Let's not forget market operators love volume.
And what they'll be looking for is to generate a lot of speculative volume around this particular product so as to generate fees.
It doesn't, however, solve the deep fundamental material problems of supply chain constraints.
Right.
We will discuss to what extent this kind of mechanism can help the US or the Western world solve or ease their concern.
But to Andy, how detached from industrial reality is this financial engineering?
Can you really claim pricing power without controlling supply?
Yeah, that's a great question, Yoon.
And I think we need to first understand what's going on here.
So to answer your question first, no.
But on the other hand, so I'm old enough to remember what CME actually stands for.
And it stands for Chicago Mercantile Exchange.
And its original purpose was to help American farmers, primarily in the Midwest hedge, against price fluctuations.
So if you're an American farmer growing corn raising pigs, your biggest risk was that you didn't know when you harvested the corn what the price you were going to get on the market right.
The spot price at some future date.
So what a future is?
It's really just a standardized contract to buy or sell a specific quantity of an asset at some decided price at some future date, right.
So the whole point of this is we can understand what the CME is doing here.
Is they're offering insurance right?
So you're paying something basically, you're getting certainty, right?
And you're paying something for it.
So I think that's the first point to make.
So I think this is incredibly valuable.
It's very, very important.
Because if we think about what is the purpose of price discovery in any market, whether you're talking about stocks, orange juice futures, whatever a price is just the distillation of distributed information, right?
So I think in this sense, this is very valuable.
And I think Warwick's point is correct.
Why is the CME group doing this now?
Is that there's enough demand, meaning that it doesn't necessarily, I think, have to be enormous volume like wheat, right?
But it has to be enough where people will trade, meaning there's people that need price certainty.
There's also people that are willing to bet or speculate on what price fluctuations will be of these futures.
So it really has nothing to do with supply, but it still provides an incredibly vital function in that it allows price discovery.
And if and this is a big if, if they can guarantee settlement or delivery.
What this does is this gives users of these rare earth metals price certainty.
And we know that no one.
Whether you're a farmer, whether you're a merchant, whether you're a factory owner, if you don't have price certainty, it's pretty difficult to stay in business.
So I think this is a very, very useful development, but it has no impact on the actual production.
Right.
And apart from CME Group, there is another financial service provider, Intercontinental Exchange, which is known as ICE, the owner of the New York Stock Exchange.
It's also reportedly exploring rare earth futures, though its plans appear less advanced.
Clearly, this is not an accidental timing.
So Andy, why are US exchanges attempting to move into rare earth futures at this particular moment?
And obviously, thanks for that basic knowledge lesson.
Sure.
Basically, because there's a market need, right?
So we all know how important rare earth metals are as inputs into everything from Electric vehicle batteries computers, fighter jets, guided missiles, etc.
So what users you know, we can call them of these inputs need is not only supply certainty, but also price certainty as well.
So again, this big if, if whoever issues these contracts, these futures can deliver.
What these buyers can get then is price certainty.
So that's why the other, I think really important issue which Warwick touched on, is that the US, maybe even globally, is really moving towards this world where you can take a position, meaning bet on anything.
Right.
So there are now, you know, widely used prediction markets like how she that lets you bet on US political elections.
Obviously, a lot of it is sports betting tokenization, where we can take an apartment building and essentially sell shares in it very easily and cheaply.
So one way we can interpret this is this is the next stage of financial innovation.
From a more macro perspective,
And then the problem it solves, again, it gives price certainty to users of rareth metals.
And again it creates an opportunity for speculators to provide the market liquidity, meaning that if you're going to sell a futures contract, you want lots of people buying and selling it so you can get the price discovery.
And I think I would say that this is also important for Chinese entities as well, right?
Because again we think about, if we don't have accurate prices, it's very, very difficult to make rational economic decisions.
So I would say that this is not substitute production, but it can be a vital complement to actually make everybody allow everybody to make better decisions around rare earth metals.
Actually, China dominates mining, processing and exports of rare earths, and it also has a functioning spot market.
Then why hasn't China established a benchmark for rare earth futures of its own?
John?
Well, I think Andy touches upon an important point, that the entire reason for futures markets' existence is because of the price fluctuations in the spot market.
You know, fluctuation in demand, fluctuation in supply.
And this is the reason why the futures market is introduced in the first place.
And I think the reason why we haven't had a futures market in China.
My view is that you know, the prices are indeed going up and down, but not to the extent that you see this sort of a seasonal or sort of a recurring patterns of shocks that affect these prices.
I think you know this has a lot to do with the regulatory oversight.
It has to do with the government's policy.
So, you know, these are not very good reasons for the existence of the futures market.
And the second reason is probably, you know, we don't have a very strong futures market for commodities in the first place, right?
I mean CME, Chicago Board of Exchange.
I mean they have commodity markets for futures market for a lot of commodities for agricultural product.
And in China, I guess it's not that much developed.
And probably that's the reason why.
We haven't seen a futures market develop for rare earths here in China.
Then what's your interpretation, you know, from a third country's perspective?
But Australia is definitely not an outsider in terms of this.
Look, most of the pricing, as we know, is determined on Chinese spot markets, whether it's the Gunjo Rare Metals Exchange or the Balto Rare Earth Products Exchange.
And then it's reflected in a number of indices, right, that are generated through researches.
The point about all of this is not a theoretical idea about markets and price discovery.
The point is that the United States has come to a political economy view and its institutions are following behind that.
It needs to address a supply chain bottleneck in rare earths.
This emerged on the back of the events of 2025.
When, in response to President Trump's tariff wars against the world, China pushed back and ultimately held the rare earth blowtorch to America's soft underbelly, causing the United States to back off.
The United States has since announced a range of maneuvers seeking to find alternative pathways to securing their own rare earth supply chains into the future.
So this particular initiative doesn't happen in some theoretical context.
It happens in a very specific international political economy context.
The reason why there actually hasn't been a rare earths futures market is actually quite straightforward.
Firstly, the markets in China do what they need to do for the participants who are actively involved in the mining processing, sale and use of rare earth elements.
The second thing is is that there's actually a lack of standardization which creates real challenges in being able to trade uniform instruments.
As Andy said, the Chicago Exchange emerged in large part because of its ability, 150 160 years ago, to develop standardized ways of grading different grains.
So this is the point.
Standardization is critical.
That is actually not present within the rare earths element space.
The second thing is is volumes are actually relatively small.
So what this means is that we're likely to see a derivatives market the futures market being exposed to significant amounts of manipulation, and the arbitrage opportunities between the real market and the futures market opens up opportunities for all sorts of malfeasance including, by the way, malfeasance amongst those who understand what's going on in the real world and how they can exploit modest volumes to generate volatility in the derivatives market to generate cash or monetize profits.
The third thing to remember is that, unless you actually have clear visibility to the real production systems and the real use, you're literally generating price movements based on fumes, based on market noise, including rumor mongering, expectations that may or may not become true.
And again that opens up a relatively shallow derivatives market to a very high level of manipulation.
These markets, when I say manipulation, I don't necessarily mean it's a good thing or a bad thing.
My point is, is that manipulated markets are not really price discovery markets.
They're mechanisms by which insider information can be utilized to monetize profits.
Okay.
So that's the first thing I think to remember.
This talk of these markets is all about the international political economy and nothing to do with theoretical price discovery.
The second thing to remember is that, in theory, this is supposed to somehow assist the West in addressing its supply chain problems.
How it thinks it's going to do that is beyond me.
The absence of any material relationship between the systems of exchange.
Exploration mining, processing and a futures instrument other than through the potential risks of shallow market manipulation really means that this is a reflection of a financialized mentality that really could do with a serious dose of metallurgy and chemistry to bring it back down to earth.
So I'm very skeptical that this has any capacity to deliver on its stated objectives, other than it will create just another market through which a ballooning amount of American money will be able to circulate.
And that's about it.
The chat lounge.
The chat lounge unpacks views and opinions on hot issues in a more casual way.
Seems that Warwick already has some judgment on that, but...
Back to this possible futures market in China.
Actually back in 2021.
There are reports suggesting the Shanghai Futures Exchange was studying rare earth contracts, but nothing has materialized.
So Andy, from your perspective, was it strategic patience or some bottlenecks mentioned by Warwick just now, or like a regulatory caution there?
Yeah, you know, so I think we could plausibly say suggest all of these reasons, Yoon.
But I think the fundamental reason is just frankly, the US is more advanced when it comes to financial market innovation.
And there's a simple reason for this.
We have to remember that China started out as a command economy, right?
And even though we're what, 40 years into reform and opening, it's widely recognized, I think, by the Chinese government.
You know, investors all around the world, that China's financial infrastructure whether we're talking about stock markets, derivative markets, like futures markets really has to be built out some more.
And, you know, maybe we could even say modernized and made more efficient.
So I would look at it maybe one as a comparative advantage example.
So China, of course, leads the world in manufacturing and a lot of technological innovation.
Look at EVs.
But I think that it's still.
There's a gap between what is the leading edge of financial market innovation and where China is today.
That being said, we also have to recognize there are enormous risks to imprudent financial innovation, as we've seen with the financial crisis that started in the US, etc.
So I think it's both.
That one, this is a gap that China has not closed yet, but is, of course, making a priority, because without functioning financial markets, including futures markets, right.
Because again, if you're a miner a Chinese miner of rare earth metals, you have the exact same problem that an American corn farmer has, is that you know your rare earths are not going to hit the market.
I don't know what the number is, right?
Three months, six months from now.
And you don't know what the price is going to be.
And price certainty is very, very valuable.
So I think that you know one way to look at this is it happened in the US?
First, because there's a much greater, I would say, risk tolerance for bad things happening with financial innovation in the United States.
And, at the same time, I think you know, China has been very deliberate, making advances in all areas of financial innovation, whether we're talking about stock markets, whether we're talking about central bank digital currencies but it's doing it at a very measured and careful pace.
Right.
We've talked a lot about the technical issues, but I
Let's move on to some potential impacts, though some of you have already touched upon that.
The first is the impact on upper stream or downstream industries.
If the US goes ahead with a rare earth futures contract, which increasingly seems likely, how would it alter the landscape for miners and end-use industries?
John?
Well, first of all, I'm actually a have some reservation about the prospect of this futures market actually going into place, in consideration of the very complicating factors like is there a large enough market?
Can the products be standardized into a contract?
Whether they have the ability to force a physical delivery in the United States, for example.
This is the backing of the futures contract, I guess.
And all these things are still uncertainties, in my view.
So, you know, we're not sure whether this is indeed going to be going into place.
Now, in terms of the impact on the market, I think you know the function of a futures market in general would contribute to a more stable spot market, will incentivize more producers to produce, because they have locked in the price, I guess, and they you know, under that price they can make a profit.
You know the production can go on, they won't be able to go bankrupt.
These are usually good news for the uh people, who actually the companies who are actually doing this while producing these materials.
So uh, you know, if this is actually happening, all the good news, i would say.
But you know, the real issue is the production of uh, real stuff in the united states.
Uh, would it be able to sustain the competition from China?
I think the entire reason for the United States government to essentially subsidize this industry.
By the way, this industry has gone bankrupt before.
Now we're talking about its revival, right?
And the most important company in this business is Mountain Pass.
Mountain Pass had a history of bankruptcy in Nevada.
Now they're coming back again.
So it's premised upon a price level that can make these companies better. still make a profit.
Wow, I mean, that's a quite interesting assumption.
And I would expect in the future, once these things are coming back online with the volume needed for the US market, I would imagine that Chinese companies would be responding to this and there'll be more competition on the international market.
And Andy, you have confidence in the U.S. capacity in reviving its... rare earth industry?
Well, I think these are two completely separate issues, right?
So can the US build a manufacturing supply chain from mining to extraction, to refining, to component manufacturing that can to some degree substitute or replace China's?
I think that's one question, which I personally am very skeptical of.
But this other question of setting up a futures market is, again, completely separate.
And I agree with John, you know, the devil's in the details.
But the model or the analogy I would use are oil future markets.
Right.
So we look at a lot of oil comes from the Middle East.
So.
Traders, whether you're in the US or in London, that are buying and selling these futures, including again users of oil really don't need any control of the manufacturing or the supply right.
Because again, the main point here is more of an economic, not a production function, meaning that if you know what your prices will be six months from now, a year from now, that's incredibly important information.
And I think this is, you know, again, what is being addressed here.
I'm not so sure this is part of the US's strategic prioritization of again substituting for China's rare earth supply chain.
I see this maybe more as again, private sector actors, you know, in this case CME seeing a business opportunity right.
There are people, companies that need greater price certainty around rare earth metals.
And then where there's Demand, where there's a pain point, there may be an opportunity to make money.
So I would see this as completely separate.
And I agree that, you know, can these details be solved?
Like, you know, how will you actually deliver?
Right.
But again, if we look at the oil market as an example, it prices in geopolitical risk.
Right.
So there is going to be Iran is going to close the Straits of Hormuz and oil flow stops there. that's priced in to oil futures.
So I see a parallel here.
And again, whether it actually will work or not in terms of there's enough liquidity, et cetera, et cetera, remains to be seen.
But to me again, I see this as an inevitable development and, if properly executed, a very positive one for everyone.
Right.
You're saying it's quite vital to have a transparent pricing system that's Agreed.
But do you think it's fair to you know for someone who's not the owner of some assets to let me borrow the word from Warwick manipulate the prices of that asset?
Your take, Andy?
Well, that's a pretty profound question, Yun, right?
And I think that basically, if you're going to say that right, that only the owner of A certain asset should have the right to set the price,
Then what you're saying then?
Is that so if Apple issue shares right, it trades on a public market only.
It should be able to set the price right.
If oil produced by I don't know what Iran, Saudi Arabia, the UAE a barrel of oil they produced should only be set by them.
You know, again we get into a very profound question here, but I think that this would basically destroy the foundation of global trade right.
Under this rare earth futures market system, if China were to tighten export controls, could a Western pricing benchmark alter the balance of power in any practical way?
Well, I think it could, right?
So, and again, you know, if we look at, again, look at OPEC, for example, right?
So they can lower production, perhaps, you know, at least theoretically stop production.
And that would cause prices to skyrocket, oil prices to skyrocket.
And if prices go up, that creates more incentive for the OPEC producers to then start selling oil right.
Because whatever their reasons are, political, geostrategic, economics do matter.
And then the other point I would make too is that you know, if you're a Chinese miner say, and you can sell, you know, whatever You pull out of the ground, or if you refine rare earth, you sell that to someone right, a third party.
It's really hard to imagine you saying, well, I'm going to sell it to you.
You can't sell it to someone else.
Of course, this does happen in sort of narrow, typically national security exceptions.
But again, you know, I think fundamentally, you know you're saying that this would change the entire foundation of how global trade, or even markets in general, work.
You've been listening to the chat lounge.
When we come back, check out whether China's dominance in price setting will be diluted.
Stay tuned.
Sideline Story brings you all things sports related.
The hottest topics, latest events, juiciest stories, all with a very personal take.
Subscribe to Sideline Story Podcast for heated sports discussions covering events that are happening in China and around the world.
Welcome back to the chat lounge.
We continue our chat on the U.S. plan to launch rare earth futures.
Actually, to counter China's dominance in rare earths, the US has launched a forum on resource geostrategic engagement, or FORGE, bringing together 55 countries.
And US Vice President J.D.
Vance has stated, quote unquote we will establish reference prices for critical minerals at each stage of production.
And for members of the preferential zone.
These reference prices will operate as a floor maintained through adjustable tariffs to uphold pricing integrity.
So Warwick, if my memory serves me correctly, Australia is also one of the 55 countries, right?
Is such a pricing scheme achievable?
Well, you can achieve these pricing schemes, but they also generate unintended consequences.
One of the interesting things to be thinking about is how such pricing schemes, regulated floors basically will interact with things like these futures markets and how it is that participants within these markets can exploit information arbitrage to their benefit.
So, again I come back to the fact that attempts to manage the various dimensions of these complex systems, meaning the physical supply chains themselves, on the one hand, together with what are, in effect, pricing flaws on the other, plus these claims that relate to the future of production and demand, efforts to design markets around all of this, ultimately tend to create side effects or unintended consequences.
And I'm not convinced that the reactions to the rare earth elements situation from the West has involved actually a great deal of thought.
Almost all of this seems to be entirely reactive at a political policy level.
And I think Andy's right.
I think the market operators have also sniffed A very straightforward commercial opportunity, which is to create a market for a financial instrument that can be traded till the cows come home.
And there may be sufficient interest there to be volume in that market, even though it will be a shallow market for traders to exploit.
This is not necessarily a recipe for the West to address its rare earth element challenges, if it sees them as challenges.
It's likely to, I think, give rise to a whole range of unintended consequences including, I might add, creating what economists would call Dutch disease effects, as emphasis on these particular sectors draw resources away from other sectors.
So we're starting to see shortages in a whole range of material supply chains, and attempts to boost The rare earth elements supply chains will require the West to train up people and draw them away from other activities leading to downstream implications.
The best approach actually would be to contribute to the building of stable global institutions where these supply chains can be effectively managed, taking into account the interests of the different countries involved.
But of course, that's not going to happen for the time being.
And, as I said, I think the US, it's responding in a very politically reactive way on the one hand, and commercially it's responding in many regards in the only way that it knows, which is to spin out another financial derivative instrument.
Can you elaborate a little bit further on this side effects or unintended consequences you mentioned?
Yeah, so what happens is is that the West, broadly speaking, has come to a view that it has a whole range of material supply chain bottlenecks and exposures, particularly to Chinese supply chains.
And it's seeking to alleviate those by creating alternatives.
So that's the basic theory.
The challenge the West has is the challenge of both time and the availability of resources.
So if it seeks to address what is essentially a 50 to 80 year problem in the space of five to six years, it's likely to spread resources incredibly thin and achieve nothing.
If it seeks to concentrate its efforts, such as in rare earths and there is some supply chain sense to that because of its role in the upstreams of different industries, it will in all likelihood cause, it will function as a magnet, pardon the pun and draw resources away from other activities.
And as it draws resources away from other activities, it will create scarcity in other sectors and that will create price increases as a result.
So there are swings and roundabouts as economic structures are fundamentally altered, because it changes the relative relationships between productive capacities across a complex system.
And the minute you do that, think of it as like a balloon, you know, a blown up balloon.
If you squeeze a balloon, other parts, And these are the sorts of effects that happen in complex systems with feedback loop effects.
This is not a straightforward activity at all.
And I would anticipate that, as the West in a sense seeks to solve one problem, it will actually give rise to a whole raft of other problems downstream.
You can't solve problems that took 80 years to become problems in the space of a few years.
Right.
Andy, do you share similar views?
And how likely do you think it is, a political alliance can override the structural realities of industrial supply chains?
Yeah.
So I think, you know, I think it's going to be very, very difficult for the US to meaningfully create greater independence, I think, from the Chinese rare earths ecosystem.
So, you know, if we look at Japan, they tried to do this a decade ago and they are, I think, structurally much better equipped to do something like that.
And still they were only able.
You know, they claim to reduce dependence on Chinese rare earths from like 90 to 60.
But in certain key ones, it's still, you know, maybe closer to 90%.
So if you look at the US, of course it faces, I think, two broadly speaking structural challenges right.
Domestically it's very, very difficult to sustain any political initiative across uh, presidential administrations and there's other structural reasons that make it difficult.
And then internationally, they really have to manage an alliance.
And then, if we think of it, maybe to again just to jump into a little bit into economic theory, you know, if you think of it as a kind of a cartel or you know even a buyer's club um, the incentive to chisel or to cut side deals for each country, you know, is very very, very powerful.
That's very powerful incentive.
And then you look at the US'.
's treatment of its so-called allies.
This is further undermining, I think, the trust, the credibility of the United States.
And, as we see in Europe recently, the willingness well, not only to sacrifice for the US, but even to work with the US.
So I think for these two reasons, it's going to be quite difficult.
Right.
And that's on the U.S. or the Western side.
On China's side, though you've already mentioned that there will be a lot of challenges for the US to tackle before a really functioning rare earth futures market could be established.
But if it's successfully established in the West, to what extent could it dilute China's dominance in price setting Andy?
Yeah, so that's a great question.
You know.
So, first of all, I think one way we can understand this right is that the CME is basically, in a way we could say, setting up a casino right to bet on the price direction of Chinese rare earths.
Right.
So in this sense, you know it doesn't have any direct price setting power.
You know that the manufacturer does.
But at the same time you know again this big if, if you know whoever's writing these futures contracts can actually deliver, then of course this provides enormous value to users all around the world, because now they have price stability or a price, they have a price prediction right.
So they know what the price is going to be at some point in the future.
And I think it's an interesting question, right?
This intersection of you know, China can exert both pricing power and, you know, I guess, supply power as well, which of course affects prices.
And how does that, play out in a market like a futures market.
And again, I would use the oil futures markets as an example.
Oil production is a very, very political decision for some countries and it does have enormous, widespread economic implications.
But we still have most people would say valuable That provide this price discovery.
That includes geopolitical and delivery risk as well.
Right.
What would you have anything to share?
Look.
I think it's important to remember that China's domestic demand represents a very substantial portion of global rare earth demand, because it is the most significant downstream user of the process product.
So this is a vertically integrated system, obviously with different enterprises involved in doing different parts.
But the idea that there has not been price discovery to date clearly isn't true.
And I say that because market prices have fluctuated.
And because they fluctuate, one could actually make the argument that that is a clear function of price discovery taking place.
The other point to remember is that much of this price discovery process doesn't happen in isolation.
It doesn't happen in isolation from costs of production.
It doesn't happen in isolation from regulatory controls in terms of licensing.
And it certainly doesn't happen in isolation from downstream markets and what those downstream markets are able to sell final products for.
So all of these factors ultimately condition the parameters in which actual prices are tolerable so that the system itself can reproduce itself itself, continues to have pricing parameters that are dictated by ultimately, its own need to be sustainable over the medium term.
The idea that new players can suddenly enter the market because there's been a short-term change in pricing is nonsensical.
These are complex processes that require substantial know-hows, substantial fixed capital investments to actually make possible.
If it was so easy for these processes to be substituted or created in response to price signals, you can bet your bottom dollar that the united states and others in the west would have already done so.
There is a reason that they haven't And it's because there are substantial cost barriers to get there.
There are substantial risks that firms would need to undertake to even enter into the mining, let alone the downstream processing systems.
To achieve the levels of quality that is being achieved by downstream processes is a substantial undertaking.
I'm not saying that it's something that only Chinese firms could do.
But it's something that isn't repeatable through the click of the fingers.
It's something that people who run capital markets are actually usually clueless about, because they approach the world thinking that factors of production are infinitely mobile and are fungible, meaning that they can replace one with another.
These systems prove that the real world of engineering, the real world of material sciences and the real world of chemical transformation is not as easy as the creation of capital market instruments.
And so China's response and I'll pick up on a couple of things from Andy very quickly is to sensibly progress its financial markets in a methodical, systematic manner, as Andy suggested, but also to continue focusing on improving the capacity of enterprises to mine, process and ultimately refine the materials to levels that are usable by industry at lower cost.
And ultimately that's where Chinese firms and supply chains and ecosystems competitive advantage lies.
But never forget that Chinese downstream users actually make up the majority of downstream users in the world for these materials.
Right.
It seems that Huawei has every confidence on the Chinese side.
Well, my confidence, Yin my confidence, is actually based on the fact that material sciences and chemical sciences are actually complicated processes.
These aren't things that you can reproduce with the mere click of the fingers to create a financial instrument.
It's not that they can't be done.
It's as I said before the West's challenge is the pressures of time and the breadth of its ambition.
It wants to do so much in such a short amount of time that it runs the risk of either spreading itself too thin and accomplishing nothing, or concentrating its efforts on small parts of their problem set, creating a whole range of other problems elsewhere.
These are holistic, integrated systems that can only be dealt with a holistic view.
You can't just meddle in individual parts and think that you're not going to create problems elsewhere.
So it's a cautionary note to both the people in the West who think that they can solve their problems this way.
But it's also a cautionary note to Chinese regulators and Chinese enterprises that they need to nurture and take care of the entire ecosystem at the same time.
The chat lounge.
The chat lounge unpacks views and opinions on hot issues in a more casual way.
All you mentioned just now, Warwick, makes great sense.
But in China there is also a saying which goes prepare for a rainy day or take precautions in advance.
Though China's got a lot of advantages in rare earth, be it processing or producing, so on and so forth.
Right. we still got some preparations to make, right?
If the West has got this intention to establish, to set up such a futures market.
In that case, how might China respond?
I think you mentioned that we can focus on the upper stream, focusing on refining?
I would look at it this way.
Yes, obviously.
Chinese enterprises have over many decades developed world-leading expertise in mining processing refining, to create end products at a quality level that very sophisticated downstream users can use.
So we have a complete ecosystem environment.
What makes all of that work is continual research and development in the material sciences themselves, nonstop development in the chemical sciences and ultimately, because all of this is underpinned by the efficiency of the electricity system.
Delivering into this entire supply chain is the effort to bring electricity costs down for industries, not only for processing, but also for transportation.
So these are the key things that chinese enterprises and regulators can focus upon.
As for the futures market, if i was in a position to have significant intelligence on what short term and medium term productive capacity and downstream demand is going to look like well, I would be in the market, taking advantage of that knowledge.
And in that case it would be quite understandable for individuals and organizations with significant market intelligence asymmetric market intelligence to actually trade these futures to the benefit of the real participants themselves.
They have an advantage that no other trader does have.
And in a small market where most of the players know each other right and where information about things is understood by market insiders, you'd hate to be a market outsider trading against them.
Right.
And John Warwick just mentioned how China should continue to sharpen its weapon, probably in maintaining its advantage in the sector.
So how do you think China would respond or might or should respond?
I have a couple of points regarding this question.
First of all, I would anticipate a competition on market in the future, as America and some other countries are ramping up production of these materials.
So there will be probably more intensified competition.
So I think it's vitally important for Chinese companies to increase their competitiveness to produce these products better and cheaper, so as to continue to hold their fair share in the global market.
Now, another thing I want to mention is that the commodity exchange, the futures market, is actually quite important.
It indeed drives a lot of activities in the spot market.
Particularly, it has to do with the pricing power.
And you look at the oil market, for example, it is a very good analogy.
In Shanghai there's actually an oil futures market not very well known worldwide, but nevertheless it exists.
And it's also trading oil contracts in RMB instead of the dollar or British pounds.
I think this is actually vitally important.
It attributes tremendous pricing power to the side that is actually running this exchange.
And the country that's hosting this exchange.
So I think this issue about futures markets shouldn't be sort of shrugged away.
I think the Chinese side should take a serious look at this and investigate the viability of establishing a futures market, just as this oil futures market has been established in Shanghai.
These are important things.
I think at the end of the day, China is the largest producer of rare earth and it's also the largest consumer of rare earth.
There's one question that you actually in the list that you didn't ask about why the NPDR product is considered the first product to be considered for the futures market.
And this is actually an important question because that material is the most important material goes into making a new dynamium magnet, which is the most important material used for running an electric motor for the electric car.
And also for every mobile handset.
There's a vibration device that uses that material, the neodymium magnets.
The reason I know this is that I used to be an expert witness for the world's most important company in that space by the name of Hitachi Metal.
They own 600-some patents.
It's a de facto standard of making these things.
This is an antitrust lawsuit involved for this licensing of these patents.
So I know this is actually a very important material.
And this material is one of the most important materials in the rare earths category.
And you look at how many cars electric cars being made in China worldwide, how many mobile phones being made worldwide in China.
So that's why I'm saying that China is the largest consumer of these rare earths materials.
So China takes a fair share of the demand side as well as the supply side.
And I think, for that reason, We need to establish a futures market to continue to hopefully maintain the pricing power and the value chain associated with this material to be still located in China.
Yeah, that's also why the U.S. or the West wouldn't give up this sector or this industry entirely.
All in all, it will be a very fierce battle, and the next two to three years are widely seen as a decisive window.
So, John, do you see we are heading toward intensified confrontation or a new equilibrium?
Well, I wouldn't characterize it as confrontation.
I would characterize it as more of a competition.
And competition is actually not necessarily a bad thing.
I would expect that, with the US government's blessing and assistance, the real earth industry I mean sort of the entire value chain would be gradually developed over time in a couple of years in the United States.
But when we talk about the concept of real earth, it encompasses a lot of things, right?
I mean, there are a couple of materials in that category.
I don't think it's easy for the United States and its allies to develop their capabilities in all these materials.
I think, probably maybe in a few of these things that are for strategic importance, that are for defense and military usages, the United States will be investing heavily in developing these capabilities.
But overall, I would imagine that China will still be dominant.
And the ultimate reason is because Chinese companies are very competent and extremely competitive.
In terms of You know, delivering good products, driving costs down, and make customers happy.
So I think China will continue to maintain a vulnerable position in this area.
And you used the word equilibrium and I would say that's a pretty good word that eventually, over a period of three, four years, there will be a market equilibrium where you know China's share will be stabilized and America and its allies will still have some kind of a smaller share.
I think both sides would be pretty happy with the market equilibrium eventually.
Warwick, in the longer term, could we see a bifurcated system?
You know the US and its allies, including Australia, building alternative supply chains for light rare earths.
Because, you know, They are already catching up in this field, right?
While China remains dominant in heavy rare earths and downstream processing.
My sense is that we are in for a rough period.
We are not on the cusp of a new equilibrium yet where there is a detente that is understood up and down the political system and the economic system.
There is likely to be intensive competition in all sorts of arenas, including this particular one.
There is legitimate concern and fear that the world is heading towards a bifurcated one.
One of the interesting things about this question though, is exactly what it is that the United States is seeking to bifurcate the supply chains for.
And by and large, it's for its defense industrial complex.
The principal concerns that have animated Washington around rare earth elements have got to do with the defense sector.
And it's all about the American military system.
The American economy, broadly speaking, does not use that much rare earth elements, certainly compared to China.
Again I reemphasize the point that across the globe the greatest single user of rare earth elements are companies in China.
So enterprises elsewhere, whether they're in North America or in Europe in particular, that make use of these materials are proportionately relatively small.
And in the case of the United States, mainly to be found in the defense contractor environment.
So even a bifurcation is mainly going to focus on addressing what the United States sees as problems within its military industrial complex supply chain system.
Will this help others?
Well, if the United States is willing to pay over the odds and it's talking about things like price flaws then there will be some attractiveness for companies to invest in the equipment and the know-how and the systems that they would need to do to achieve the kind of levels that the US will be looking for.
But bear in mind this, these aren't single enterprise activities.
These are ecosystems.
These are complex supply chain networks that are not things that can be materialized out of thin air.
And yes, there will be intense competition, without a skerrick of a doubt, as the United States seeks to ensure that its defence system is not exposed to third-party supply risks.
But what does this mean for civilian uses?
Does this mean that civilian systems in countries that are allied to the United States would be denied access to lower-cost, high-quality Chinese products?
I think that that's a future that many of these other countries will find very, very difficult to accept.
And that's because the competitiveness of their own industries depends upon their ability to access the best products at globally lowest prices.
We'll keep that in mind.
And on that note, we conclude this session.
Many thanks to Professor Warwick Powell, adjunct professor at Queensland University of Technology, Professor John Ghosn, a professor of economics at the University of International Business and Economics, and Professor Andy Mock of Beijing Foreign Studies University for your time and insights.
Drop us a line anytime at radio at cgtn.com.
Tell us what you think.
I'm Tian Yun.
Join us for more chat at the chat lounge next week.
Till then, take care.
I cannot marry you while your mother regards me as Stepping to the world of timeless elegance with Mrs Spring Fragrance, a captivating audiobook by Edith Eaton, read by Man Ling.
Because...
The green leaf still clings to the bough.
Experience the lively yet complex lives in Chinese American communities at the turn of the 20th century, as Edith Eaton's delicate prose weaves together themes of tradition change, love and identity.
Forget all that belongs to the joy of life.
Follow the journey of Mrs Spring Fragrance and witness the struggles and fights of those living on a rapidly changing exotic land, while holding on to their cultural traditions or, more importantly, to their identities.
You could hardly believe that his daughter was seriously opposed to becoming the wife of such a good-looking, prosperous young merchant as Wang Ling.
Join Books and Beyond for Mrs. Spring Fragrance.
Let the stories come to life in your imagination.
Subscribe to Books and Beyond for free on your favorite podcast platforms or log on to radiocgtncom for more.
