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Blackwater USA – Daily Brief 6/17/19

Coming Up This Week

  • Pres. Trump officially launches his 2020 reelection campaign tomorrow, though the WSJ says his 2016 campaign “never really ended.”
  • The U.S. Federal Reserve is expected to leave rates unchanged in its meeting June 18-19, but it faces some pressure from Pres. Trump to cut them.
  • The UN High Commissioner for Human Rights, Michelle Bachelet, is visiting Venezuela June 18-19, and will meet with Presidents Maduro and Guaido. Her trip probably won’t change anything, though.
  • DRC hosts its annual Mining Week in Lubumbashi June 19-21. Word on the street is that it’s a lot less useful—and a lot more corrupt—than South Africa’s Indaba…all sponsors “win” prestigious awards that come with the delightful privilege of being asked for bribes.
  • Chinese Pres. Xi Jinping will travel to Pyongyang on June 20-21 for the first visit by a Chinese leader to North Korea in 14 years.
  • Mauritania’s presidential election is June 22. It’s a relatively mundane one: the six older, male candidates—all vying to replace a president voluntarily stepping down at the end of his term limit—all have pretty similar platforms, and there doesn’t seem to be a clear or chosen leader.

China

  • Protesters are still demonstrating in Hong Kong, and their list of demands has grown from abandoning the proposed extradition law (done, for now) to demanding chief executive Carrie Lam’s resignation and rejecting her apology over the extradition fiasco.
  • Organizers estimated that two million people—over a quarter of the population—came out to yesterday’s protests. That’s a bad sign for Lam, the pro-China legislature, and Beijing; all of whom probably thought that the extradition concession and subsequent apology would solve everything.
  • Separately, the UN’s Counterterrorism Office visited Xinjiang last week, and China angrily lashed out at the West about it: “people will realize how precious the Xinjiang experience is if they compare the region to Chechnya, Afghanistan and Syria… While the West plays word games and a political game of ‘go’ on the Xinjiang question, the region’s governments at all levels are pursuing peace, stability and prosperity for all people living there. Time will prove the achievements of China’s governance in Xinjiang.”

Strategic Minerals

  • China’s Global Times—a subsidiary of the state-run People’s Daily—poked at the Pentagon with a report that U.S. defense companies “are likely to face restrictions” on their supplies of rare earths.
  • The Economist points out (in an article pasted below) that it would be really hard for China to restrict DoD’s supply—“a single suitcase,” per industry jokes—without hurting Chinese businesses linked with non-defense companies in the U.S.

South America Blackout

  • A massive blackout that started in Argentina proceeded to wipe out power in all of mainland Argentina and Uruguay—and parts of Brazil, Chile and Paraguay—around 7 am local time yesterday, affecting 50 million+ people.
  • It’s not clear what caused it: state utilities blamed heavy rainfall, but a rumored cyberattack might be a more likely culprit. (They’ll publicize results from an investigation into the cause in 10-15 days).
  • Power was restored very quickly: 98% of Argentina was already back online by the end of the day yesterday.
  • The bigger vulnerability seems to be the grid’s failure to contain the problem, and the whole episode is already leading to a lot of finger-pointing and stress over international electricity arrangements.

Iran

  • A spokesman for the Atomic Energy Organization of Iran revealed / threatened that Iran will exceed its JCPOA (nuclear deal) limit on enriched uranium stockpiling within 10 days.
  • The JCPOA limits Iran to <300 kg of uranium enriched to over 3.67% purity, but Iran’s Bushehr Nuclear Power Plant needs uranium of 5% purity (of course, they shouldn’t need to stockpile to meet running demand, so that’s not really a valid excuse).
  • U.S. officials are probably more concerned that the spokesman also tried to justify the buildup by saying that the Tehran Research Reactor (a gift from the U.S. in 1967) needs 20% pure uranium—20% pure uranium is pretty easy to enrich into the 90% pure uranium required of nuclear weapons.
  • The announcement is likely another provocation that Iran is using to test what happens if it violates the JCPOA.

Libya

  • GNA PM Fayez al Serraj gave a press conference aimed at attracting international support for himself against his LNA rival, Khalifa Haftar.
  • Media reports seem confused about what his actual message was in the presser, though. Some say he refused to sit down to further unproductive negotiations, and some say he called for elections for a “Libyan congress” this year to peacefully resolve the dispute…both are true by the transcript, so the main point is that the rivalry is unlikely to be resolved any time soon.

Pakistan

  • The government of Pakistan’s Khyber Pakhtunkhwa province accidentally added a cat filter (cat nose, whiskers, and ears on humans in the video) to its Facebook Live stream of a serious press event, and hilarity ensued. One viewer proposed that “all parliamentary proceedings around the world to be recorded with Cat Filters,” which would make C-SPAN a lot more fun to watch.

DPRK

  • Reuters says that Chinese police have been cracking down on the “underground railroad” that North Korean defectors follow into China by raiding safe houses far away from the border. Middlemen interviewed in the article said that was highly unusual.
  • The apprehensions could be a friendly gesture China is making to DPRK ahead of Pres. Xi’s trip to Pyongyang this week, or it could just be a result of deteriorating economic conditions in North Korea that have led to more people fleeing into China.

Middle East

  • Israel announced a new settlement in the disputed Golan Heights territory that it plans to name after Pres. Trump, who recognized Israel’s sovereignty there in March (over Syria’s competing claims): Trump Heights.

Rare earths give China leverage in the trade war, at a cost (Economist)

If China cuts off exports, it would hurt America but also undermine its own long-term economic goals

It looks at first like a classic Chinese painting: water-soaked paddies nestled against endless green hills. But then the brown begins. Abandoned brown pits on the hilltops. Brown gashes down their sides. Brown sludge in the streams. Ganzhou, until a few years ago, was southern China’s mining country. The damage done in the name of economic growth involves an industry that has given China leverage in its trade war with America. The rocks extracted are rich in rare-earth minerals, used in everything from planes to smartphones. It is a dirty business that China dominates.

Rare earths, covering 17 elements on the periodic table, are in fact common. But China holds two-fifths of global reserves. In 1992 Deng Xiaoping quipped that “the Middle East has oil, China has rare earths.” The chemicals used to extract them from the ore create toxic run-off, and for years China was more willing to bear that cost than other countries. By the early 2000s it accounted for almost all the world’s production. “There were no laws back then and everyone here was digging up the ground,” says Xie Yizhen, a local who worked in mining for 18 years.

Crucially, China has translated its control of the raw materials into dominance of the valuable next steps: turning oxides into metals and metals into products. To extend Mr Deng’s comparison, it is as if the Middle East not only sat on most of the world’s oil but also, almost exclusively, refined it and then made products out of it.

This is why rare earths now figure in the trade war. America can hobble Chinese tech giants by stopping American firms from selling them components such as semiconductors. But China could, in return, cut off their supplies of rare-earth products. The most important of these are specialised magnets for motors in electric vehicles, generators in wind turbines and missile-guidance systems. China produces more than 90% of the world’s output, according to Citigroup, a bank. Even the Pentagon, through its suppliers, is a client.

China’s rare-earth power is not a new worry. In 2010 it restricted exports—in order, it said, to protect its environment. The World Trade Organisation ruled against the restrictions after America and others challenged them. But since then many countries have fretted about relying on China.

So it is no surprise that in the past few weeks China has brandished rare earths as a possible weapon. State media have played up the threat. “China gears up to use rare-earth advantage” ran a headline in Global Times, a nationalist tabloid, on June 9th.

But doing so is not so simple. After the scare in 2010 Japan lent money to Lynas, an Australian mining company with a refinery in Malaysia. Today, it can meet nearly a third of Japanese demand for rare earths. The Mountain Pass mine in California, which once supplied most of the world’s rare earths but which shut in the early 2000s, has reopened. And on June 11th America said it would help other countries to develop their reserves. China’s share of global rare-earth production fell from more than 95% in 2010 to 70% last year, and is likely to dip lower (see chart).

A rare gift

China has much more leverage in downstream products. America last year bought about $250m of rare-earth magnets from China, and there are no easy alternative sources. “These magnets are the farthest thing from a commodity that we can imagine,” says Ryan Castilloux, of Adamas Intelligence, a rare-earths consultancy. They are made to exact specifications. And, says Mr Castilloux, the industry is small enough for China to be able to spot any American attempts to skirt a Chinese ban by importing magnets through other countries.

The Pentagon would probably be able to cope. An industry joke has it that it can carry its annual supply of heavy rare earths (the kind used in its missiles) in a single suitcase. Businesses would find it harder. David Merriman of Roskill, a metals research firm, says it would disrupt the supply chain enough to put American car companies “at a competitive disadvantage”.

But it is far from certain that China will block exports to America. Doing so would also hurt Chinese companies, which are often the ones that build the motors and batteries for American customers using rare-earth magnets. Longer term, a ban would encourage the same process that happened in mining. Foreign firms, perhaps with government support, will invest in facilities to make finished products.

That would set back China’s grand strategy for rare earths, seen in the hills around Ganzhou. Over the past few years it has shut scores of unlicensed mines. At a huge cost, it is trying to clean up local rivers. The big state-owned mining firm in the area has started filling in some of its pits with grass and shrubs. China is still excavating plenty of rare-earth elements, especially in the north, but it has decided that it can buy much of what it needs abroad, and spare its own environment. Last year, it became a net importer of rare-earth concentrate.

Instead, China has shifted its focus to rare-earth products, to increase its downstream advantage. In an industrial park on the edge of Ganzhou, the government is ploughing money into factories that make rare-earth magnets and alloys. This manufacturing is much cleaner than the mining, and captures more value. Tellingly, when Xi Jinping, China’s president, visited the city last month, news reports showed him at jl mag, a magnet company, not a mine.

At another company in Ganzhou, a manager shows off several of its products: little disc magnets, each containing about 30% rare earths. When the magnets are smaller than a fingernail, it is hard to pull them apart. When they are slightly bigger, just wider than a thumb, it is impossible to do so. That is a good metaphor for what China ultimately wants from rare earths, and for its economy more generally: to reach a size where no country, not even America, can pull away. Cutting America off now would undercut that ambition. ◼