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Blackwater USA – Daily Brief 5/29/19

China & Strategic Minerals

  • The Chinese Communist Party’s People’s Daily printed an editorial that used some apparently very heavy language (if you speak Chinese) to make the least-veiled threat yet to cut off rare earth supplies to the U.S.
  • Per Bloomberg: “The newspaper’s commentary included a rare Chinese phrase that means “don’t say I didn’t warn you.” The specific wording was used by the paper in 1962 before China went to war with India, and “those familiar with Chinese diplomatic language know the weight of this phrase,” the Global Times, a newspaper affiliated with the Communist Party, said in an article last April. It was also used before conflict broke out between China and Vietnam in 1979.”
  • (Full Bloomberg article pasted below).
  • Rare earth companies’ share prices have jumped ~10% because of this and recent threats like it.
  • Separately, the IEA released its 2019 Global EV Outlook, which included updated estimates for growth in electric vehicles. Almost half of all EVs ever sold were sold last year, and the IEA said EV sales could reach 43 million in 2030—in the most aggressive case. However, new batteries are using less cobalt than their predecessors. The Highlights section is pasted below, and you can read the whole thing here.

Mexico

  • A Mexican judge issued an arrest warrant for former Pemex CEO (and close confidante of former Pres. Enrique Pena Nieto) Emilio Lozoya, who would be the highest-profile target of AMLO’s anti-corruption efforts yet.
  • AMLO’s political opponents say that by going after senior officials in prior administrations, he’s making the anti-corruption drive more political than it would be if he just rooted out corruption in his own administration; his supporters say he’s just trying to make sure prior offenders don’t escape the law.

Venezuela

  • The Central Bank of Venezuela released economic data for the first time since 2015, showing huge contractions in the first three quarters of 2018. The retail sector was down 34.1%, and the overall economy contracted 19.2% vs. the same period in 2017.
  • The CBV also  estimated (full-year) 2018 inflation of 130,060%–by far the highest in the world, but still short of the IMF estimate of 1,000,000% inflation in 2018.
  • One reason the CBV may have decided to publish data again is that the U.S. Treasury sanctioned it—and its director—last month, accusing them of being patsies for Pres. Maduro.

Syria

  • Our contacts say that Assad’s army has faced a harder time in Hama than we hear in the news, losing around 30 officers and 50 (mostly Alawite) soldiers in the last 48 hours alone.
  • Assad continues to bring in reinforcements, though, and probably expects that—with Russian help—he can crush resistance in Hama before pushing into southern Idlib.
  • The UN says that three million civilians are caught in the crossfire, and UOSSM—a medical charity—says 229 of them died due to fighting there last month.

Afghanistan

  • The UN says there was a three-fold rise in attacks on Afghan schools in 2018, to 192. Over 1,000 schools remain closed due to security threats.
  • A former senior advisor to Pres. Ghani told a TV interviewer that members of Ghani’s government had given women government posts in exchange for sexual favors like peep shows, but spokesmen and officials are calling the accusation “baseless.” Gives a whole new meaning to the business jargon of “opening the kimono.”

Nigeria

  • The UNHCR estimates that 20,000 Nigerians have fled to Niger since April, as security deteriorated in NW Nigeria. However, these clashes aren’t related to Boko Haram: the latest fighting is reportedly due to inter-ethnic violence and a recent spate of kidnappings for money, rather than jihadism.

Azerbaijan

  • It looks like Azerbaijan’s effort to brush its human rights violations under the rug by hosting the Europa League final today have mostly backfired, and led to football fans wondering why the game needed to be held in a country so problematic that Armenian Arsenal midfielder Henrikh Mkhitaryan skipped it, and the UK Foreign Office issued a terror warning around it.
  • Azerbaijan’s sports minister jokingly offered to send a private jet with F16 fighter escort to guarantee Mkhitaryan’s safety, while his counterparts in the defense and foreign ministries continued to drum up the same sort of hate against Armenians that caused threats on Mkhitaryan’s life in the first place.

North Korea

  • North Korea called U.S. NSA Bolton a “warmonger,” which is true, in response to Bolton saying that recent North Korean missile tests violated UN resolutions, which is also true (though Pres. Trump undercut Bolton by erroneously saying it isn’t).

Iran

  • In episode 2 of Trump vs. Bolton, Trump said he was not seeking “regime change” in Iran. Iran’s new IRGC chief then claimed premature victory, saying that Iran’s “absolute power” in the region helped to “empty the enemy’s capacity for war.”

Censorship

  • Facebook recently deleted a CrossFit nutrition group that somehow triggered its censors, and CrossFit quit Facebook in response, complaining that its censorship had gone too far: “Facebook’s news feeds are censored and crafted to reflect the political leanings of Facebook’s utopian socialists while remaining vulnerable to misinformation campaigns designed to stir up violence and prejudice.”

Other News

  • A viral photo of climbers waiting to summit Mount Everest showed a scene that Outside’s editor described as “something that looks like people are waiting in line for concert tickets to a sold-out show, only instead of trying to get in to see their favorite artist, they’re trying to reach the top of the world and are running into traffic”…and experts blame that traffic at 25,000 feet for 11 recent climbing deaths. Nepal denied that crowding caused the fatalities, and blamed weather conditions instead.
  • 55 inmates were killed—some in front of visiting family members—in a series of prison riots spanning four different facilities in western Brazil. Authorities say the clashes started as disagreements between rival factions of the Family of the North drug gang. The fact that the riots seemed somewhat coordinated suggests that gang members are still easily able to spread messages between prisons.

China Gears Up to Weaponize Rare Earths in Trade War (Bloomberg)

-Chinese media use pointed phrasing to make rare earths threat

-President Xi visited rare earths facility earlier this month

Beijing is gearing up to use its dominance of rare earths as a counter in its trade battle with Washington, according to a salvo of media reports in China that included hints from the state planning agency. Stocks of producers surged.

The U.S. shouldn’t underestimate China’s ability to fight the trade war, the People’s Daily, a flagship newspaper of the ruling Communist Party, said in an editorial Wednesday that used some historically significant language on the weight of China’s intent.

The newspaper’s commentary included a rare Chinese phrase that means “don’t say I didn’t warn you.” The specific wording was used by the paper in 1962 before China went to war with India, and “those familiar with Chinese diplomatic language know the weight of this phrase,” the Global Times, a newspaper affiliated with the Communist Party, said in an article last April. It was also used before conflict broke out between China and Vietnam in 1979.

On rare earths specifically, the People’s Daily said it isn’t hard to answer the question whether China will use the elements as retaliation in the trade war.

China is “seriously” considering restricting rare earth exports to the U.S. and may also implement other countermeasures, the editor-in-chief of the Global Times, said in a tweet. An official at the National Development & Reform Commission told CCTV that people in the country won’t be happy to see products made with exported rare earths being used to suppress China’s development.

What our analysts are saying:

The U.S. will continue to rely on importing rare-earth minerals from China, the materials used in key components for a wide variety of products including electronics, hybrid vehicles and energy-storage systems. Importing from China is cheaper than producing domestically in the U.S.

— Yi Zhu, Bloomberg Intelligence senior analyst in May 21 report

The nation’s producers have rallied hard in recent weeks on the view that rare earths could be an ace in the trade war. President Xi Jinping visited a plant earlier this month, accompanied by his chief trade negotiator with the U.S., fueling speculation that the strategic materials could be weaponized in China’s tit-for-tat with the U.S.

Rare earths have already featured in the trade dispute. The Asian country raised tariffs to 25% from 10% on imports from America’s sole producer, while the U.S. excluded the elements from its own list of prospective tariffs on roughly $300 billion worth of Chinese goods to be targeted in its next wave of measures.

The U.S. relies on China, the leading global supplier, for about 80% of its rare earths, which are used in a host of applications from smartphones to electric vehicles to military gear. Rare earths, which include elements such as neodymium, used in magnets, and ytrrium for electronics, are relatively abundant in the earth’s crust, but mine-able concentrations are less common than other ores.

China’s rare earth market is dominated by a handful of producers including China Northern Rare Earth Group, Minmetals Rare Earth Co., Xiamen Tungsten Co. and Chinalco Rare Earth & Metals Co. The nation has form in using the elements to make a political point. It blocked exports to Japan after a maritime dispute in 2010, although the consequent spike in prices saw a flurry of activity to secure supplies elsewhere, which would be the risk again if Beijing follows through with its threat of retaliation.

China Northern rose as much as 7.7% in Shanghai, while Lynas Corp., the biggest producer of rare earth products outside China, added as much as 12% in Sydney. Both stocks are up by about a third this month. Hong Kong-listed China Rare Earth Holdings Ltd. spiked as much as 41% and has doubled in value in May.

China’s stranglehold is so strong that the U.S. joined with other nations earlier this decade in a World Trade Organization case to force the nation to export more amid a global shortage. The WTO ruled in favor of America, while prices eventually slumped as manufacturers turned to alternatives.

In December 2017, U.S. President Donald Trump signed an executive order to reduce the country’s dependence on external sources of critical minerals, including rare earths, which was aimed at reducing U.S. vulnerability to supply disruptions.