Geopolitical tensions a reminder for the West to seek greater rare earths independence from China – by Alessandro Bruno (Investor – March 11, 2014)

There are two geopolitical disputes that could have significant effects on the prices of strategic commodities. The first is in Crimea, involving Russia, the Ukraine and NATO; the second is in the Sea of Japan (also known as East China Sea) and it involves China, Japan and not so indirectly the United States. A mathematician might reduce the two issues to one geopolitical equation: Russia and China vs. the West (that is the USA, the European Union and Japan). The Crimean crisis will likely cause grain and other agricultural prices to increase, which will in turn strengthen mineral fertilizer prices.

The Sino-Japanese crisis over control of the Senkaku/Diaoyu islands, which intensified in 2012, when Japan decided to formally annex the territory, meanwhile has grown deeper and will inevitably affect Japan’s access to much needed rare earth products from China. China’s minister of foreign affairs stated, last week, that “there is no room for compromise” with Japan over the Islands.

He added that China would maintain a decisive stance in matter of territorial integrity and sovereignty and that it would defend “every inch of the territory that belongs to us”. China is also at odds with other Asian neighbors, triggered by spats over territorial control in the South China Sea. In the latter case, the triggers are both natural resources in the disputed sea areas and the control of important waterways.

These issues are not new; however, tensions have exacerbated since China recently established an air defense zone in the East China Sea. Any non-Chinese passenger and military aircraft must identify themselves and follow the instructions of the Chinese Air Force when flying over the area.

The Crimean crisis has added more spice. China has demanded the United States respect the territorial claims and China’s core interests while noting that relations between China and Russia are “in the best phase of their history”. China’s state and party chief Xi Jinping and Russia’s President Vladimir Putin have developed a “deep friendship”.

The first conclusion is that any threat of US or western led sanctions presented before the UN Security Council would be totally rejected by China. As the crisis intensifies between Russia and the West, therefore, tensions with China will also rise. In the strategic resource context, this means that the US Defense department will become more concerned about where critical materials are sourced.

Indeed, in the past few years, a Pentagon investigation has found that the F-35 latest generation fighter jet uses components made in China. A deeper inquest uncovered more Chinese made components in the B1 bomber and F-16 fighters. The components include manufactured ones and raw materials, such as the titanium found in Raytheon’s Standard-Missile-3 (designed in cooperation with Japan).

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