How a Chinese restriction on "rare earths" could threaten Apple

While trade tensions persist, a potential weapon in the Chinese arsenal has emerged: access to rare earth metals, essential component of many technological products.

China is the main source of rare earth for manufacturers around the world. And this week, the Chinese press speculated that the Chinese authorities were evaluating the notion of restrictions on rare earth exports, in the event that US-China relations deteriorate further. Unwanted drive effects for other trading partners are likely a deterrent, but nonetheless, restrictions on rare earth exports could be bad news for Apple (AAPL – Get Report) and other companies manufacturers, such as car manufacturers and other manufacturers, who use it. metals in their products.

Apple's shares closed down 0.38% on Friday's Nasdaq at $ 178.97. They have risen by 15.7% so far this year.

What are rare earths?

Rare earths are a class of 17 elements found in the earth's crust, which have a unique set of properties that can make products more durable and more effective. This has made them essential ingredients in a wide range of modern technologies – electronic devices, batteries, lighting devices, lasers, and so on. For example, an iPhone contains several components using rare earths: cameras, speakers, tape engines and receivers.

China's leverage on rare earths

China is the world's largest supplier of rare earths and accounts for 95 percent of the world's production of rare earth minerals in the world, according to the US Geological Survey. Adamas Intelligence, a research firm that monitors metals and minerals, said in a report that China's rare earth exports increased by 91.7 percent between 2014 and 2018. Similarly, the demand for rare earths was growing along with the growing demand for electric car batteries, according to the Roskill minerals consulting firm.

Rare earths are being mined in other parts of the world, but for a variety of reasons – including abundant natural supplies in China, production quotas imposed by the Chinese government over time, relations with the chain of commerce, and more. supply and other factors – all this has resulted in a virtual monopoly over rare earth production.

How much does Apple count on rare earths?

Apple uses rare earths in different components, but unlike some other materials, rare earths are used in such small quantities that recycled forms are not widely available, Apple said. This means that they must ultimately be mined.

Apple has made efforts in recent years to stand out from the mining sector – which, in addition to potential commercial war risks, is fraught with challenges related to ethical and environmental issues. In Apple's annual report on the impact on the environment, Apple has reiterated its goal to end its dependence on mining, but for now, these efforts are essentially limited to recycling and reuse a limited set of materials, such as aluminum. cobalt and tin.

Apple has a disassembly robot capable of recovering components containing rare earth metals – but can not extract the minerals itself. The technology just does not exist yet, wrote Apple in its latest environmental report. It seems that for the moment, Apple is still far from ending its reliance on rare earth metals.

What can a restriction for Apple mean?

At the moment, it is difficult to specify the exact consequences for Apple if China imposes restrictions on rare earth exports. However, given the very complex entanglement of Apple's supply chain in China, it is likely that Apple investors will feel some difficulties, even if the precise financial implications are not fully understood .

Throughout the end of 2018 and the first quarter, trade tensions were not favorable for Apple's shares, as shares fell by nearly 40% between early October 2018 and the beginning of this year. . During this period, the deterioration of trade relations between the United States and China occurred in at least two ways: first, by uncertainty as to whether tariffs would be imposed on Apple products or bring new costs into the supply chain; and secondly, a negative impact on Chinese spending that has affected iPhone sales. If rare earths become a new victim of the trade war, investors from Apple and other US technology companies may face new concerns.

While Apple plans to launch a new line of iPhones for fall, any threat of disruption to its production process could be particularly risky, suggested analysts Goldman Sachs in a note published this week.