Speculation that China could use its dominance in rare earth minerals as a weapon in the trade war intensified after a Chinese official warned that products made from the materials should not be used against China's development.
The comment, reported by CCTV, was taken as a veiled threat aimed at the U.S. and its technology companies that are dependent on the materials. Last week, Chinese President Xi Jinping visited rare earth mining and processing facilities, adding to speculation that China could make the minerals more expensive or unavailable if the trade war continues to expand.
"You suggested that rare earths could become one of China's countermeasures against the U.S.'s unwarranted suppression...What can I tell you is that if anyone were to use products that are made with the rare earths that we export to curb the development of China, then the people of [south Jiangxi province where rare earths are mined] as well as all the rest of the Chinese people would be unhappy," said the Chinese official, in an interview. The speaker was described as a "relevant official" from the National Development and Reform Commission.
Rare earth imports are a relatively small part of the $420 billion U.S. goods deficit with China, but their worth far outstrips their dollar value. The materials are critical in the creation of such things as iPhones, electric vehicles and advanced precision weapons.
The Chinese tabloid Global Times also reported Tuesday that China is "seriously considering" limiting rare earth exports to the United States. "Based on what I know, China is seriously considering restricting rare earth exports to the U.S. China may also take other countermeasures in the future," Hu Xijin, editor-in-chief, wrote on his Twitter account. The editor's account is followed by traders.
"This is still not official. The U.S. only imported about 4,000 tons of rare earths, worth about $175 million. The problem is most of the rare earths we import are embedded already in the technology. If we buy a computer, they are already in it. That makes it harder for China to cut us off," said Marc Chandler, global market strategist at Bannockburn Global Forex.
Chandler said the official's comment was not an official threat from the Chinese government. "The reason the market latches on to this is they think China will retaliate, they just don't know how," said Chandler. "Once they think it through they will realize this will not be today or tomorrow. In order for China to do it comes at a big cost to them. It makes it too severe."
The trade war has become increasingly focused on technology, with U.S. action barring American companies from selling components to China's Huawei and the U.S. protesting China's goal of becoming dominant in key high-tech industries.
In the U.S., the minerals are used in oil refineries, and U.S. imports from China are less than 4% of China's exports of the metals. U.S. companies, however, use the materials in many products produced outside the United States.
"With the rare earths headline, I think investors are realizing that this is more than just about a trade war," said Michael Katz, partner at Seven Points Capital.
There are about 110 million metric tons of rare earth oxide, with the deposits located in China, Brazil, Russia, the U.S., India and Australia.
Bank of America Merrill Lynch strategists, in a note, point out that the U.S. Department of Defense has termed China's domination of the rare earth market as potentially dangerous, given the offshoring of manufacturing and vulnerabilities in America's manufacturing and defense industrial base.
China produced about 78% of rare earths in 2018, and owns about 40% of global resources. Bank of America strategists noted the dominance of China is due to the fact that its government classified them as a strategic resource and has emphasized exploration and extraction of the raw materials for about 100 years.
The analysts said China made the materials available at a low cost in the 1990s, hurting competitors and limiting expansion of rival producers. There are 17 rare earth elements, which are not actually rare but refining them from ore is costly and results in pollution.
— With reporting by CNBC's Eunice Yoon and Fred Imbert.