Did China Overplay Rare Earth Hand?

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Did China Overplay Rare Earth Hand?

An alleged halt in rare earth element exports to Japan put world governments on notice. Did China push too hard, too fast?

Up until a recent territorial spat between Japan and China, most people probably knew little, if anything, about the 17 elements known collectively as rare earth metals. But news that China had halted exports of these metals to Japan at the height of a row over the detention of a Chinese fishing captain—and Japan’s subsequent capitulation over the issue—have underscored just how economically vital they are.

China has officially denied suspending exports to Japan, blaming instead stricter controls and overzealous Chinese suppliers. However, export quotas this year were 24,280 tons, down from 31,310 tons in 2009. And some reports have said there are more cuts to come, with officials suggesting that the need to check environmental degradation and a possible price collapse mean an additional 30 percent cut is necessary next year.

So why all the fuss? The problem is that China has gradually acquired more than a 90 percent share of the exports of these metals, which have proved to be a critical ingredient for green energy and high-tech products ranging from wind turbines and hybrid vehicles to mobile phones and guided missiles. Their importance stems in large part from the fact that in many industries, there’s currently no viable substitute.

Ironically, many of the rare earth metals—divided into rare earth elements (LREE) such as cerium and neodymium, and heavy rare earth elements (HREE) such as terbium, dysprosium and yttrium—aren’t actually all that rare. There are also significant rare earth deposits in Australia, India, Mongolia, Namibia, Thailand and the United States. The problem is that there’s little profit in rare earth mining unless it’s combined with downstream processes such as alloy processing.

And this is where China has stepped in. Lax environmental controls, unorganized labour, subsidies and a lack of oversight have allowed China to secure about 95 percent of global exports, despite the country holding only about 37 percent of the world’s deposits.

In many respects this shouldn’t have come as such a surprise. After all, Deng Xiaoping set the agenda almost 20 years ago when he stated that rare earths will be for China what oil was for Saudi Arabia. Soon after these remarks, China began to flood North American markets with cheap rare earth oxides both light and heavy. By 2002, Mountain Pass in the United States—which only a decade prior had stood as the world’s largest producer of rare earths—was shut down.

Today, a single mine at Bayan Obo in Inner Mongolia produces about 50 percent of the world’s rare earths, mostly LREE. The rare earths produced here are a by-product and are therefore particularly cost effective by industry standards. Most of the world’s HREE, meanwhile, come from lateritic ion adsorption clays located in Southern China.These clay-based deposits don’t require the cracking of the complex mineralogy that characterizes bedrock deposits found in other parts of the world.

But China’s cornering of the market has come at a heavy price. For a start, rare earth mining has led to severe environmental degradation in an industry currently valued at only between $1 billion and $2 billion. The problem has been compounded by the fact that much of the mining that has gone on is illegal, meaning illicit rare earth exports account for between 20 percent and 30 percent of the total.

In response, China’s Ministry of Industry and Information Technology last year published a draft report entitled ‘Rare Earths Industry Development Plan 2009-2015’ which outlined plans to further tighten control of the supply of rare earth oxides and their downstream products. Indeed, the draft report is said to have included a plan to ban outright the export of dysprosium, terbium and ytterbium.

As Chinese analyst Shen Dingli of Fudan University noted last year: ‘China has not realized the precious value from a strategic perspective. Strategic metals match strategic industries. We own the dominant reserves of rare-earth in the world, but we didn’t protect them well.’

But although China’s current grip on exports means suppliers of rare earths can jack up prices without really disturbing final product demand, their real value comes not so much from pricing, but from developing the industries that use them.

The global financial meltdown convinced China that it could no longer rely on cheap retail exports for its blistering growth. Instead, policymakers believe the future lays in plugging into the manufacturing of various components of green technologies, the demand for which are expected to soar in the future. As a result, China is now trying to move into clean technology industries that utilize rare earths to gain an edge over their Western and Japanese competitors. For example, China has set a target to produce 133 GWe of wind power capacity in the next decade. Little wonder, then, that it’s cutting back on exports of neodymium, which is used in wind turbines.

In addition, China also hopes to use rare earths as a means of getting clean technology manufacturers to re-locate to the country. Export quotas refer only to raw rare earths and not to any refined, semi-finished or finished products, meaning there’s no bar on any company exporting these from Chinese soil.

With the world on the cusp of large-scale commercialization of a number of green technologies, China looks set to cash in. The dispute with Japan, then, only clarified a global strategy that has been unfolding for some time.

Still,China’s drawing down of export quotas affects Japan more than any other country—it depends on Chinese exports for 90 percent of its rare earth sourcing. Japan, meanwhile, accounts for 65 percent of all of China’s rare earth exports.

This fact hasn’t gone unnoticed among Japanese policymakers, who are now moving to reduce the country’s dependency on a neighbour with which it has awkward ties even at the best of times. Already, Japan has sounded out 31 rare earth using companies on crafting a national strategy that bypasses China. The Japanese government has stated it hopes to reduce import dependency on China to 70 percent, a figure that with current tensions is likely to be revised even further downward. Indeed, it’s not just the government that has been moving to cut dependency. Japanese firms such as Toyota and Mitsubishi have already been scouring the globe for alternative sources to try and de-link rare earth supplies from politics. Mines in Mongolia, Vietnam and India are also being investigated as possible sources.

But the earliest new supply of rare earths for Japan could end up being India. Toyota Tsusho Corp. is reportedly set to start building a refining plant in India’s eastern state of Orissa, possibly as soon as the end of this year. The refinery is expected to go online next autumn with an annual capacity of 3000 to 4000 tons of mineral ores for export to Japan. Such a deal sits well with the pledge by Indian Prime Minister Manmohan Singh on his just concluded trip to Japan, during which he agreed to co-operate with Japan ‘in the development, re-cycling and re-use of rare earths and metals in research and development of their substitutes.’

Indiafor its part has an active government-controlled rare earth sector that’s operated mostly for strategic purposes. Indo-Japanese cooperation on rare earths would therefore take the Indian rare earth sector into new areas and it seems likely the Japanese model of encouraging private players to operate as vertically-integrated entities in the sector may also find favour in India. In return, India could likely benefit from Japanese technology that would, for example, prove invaluable in extracting rare earths from monazite sand along  India’s coastline.

Japan isn’t the only country that has grown concerned about China’s dominance over metals that are not just vital for industry, but also in many cases for national security. South Korea has indicated that it intends to cut its dependency on China and will be co-coordinating with Japan to look at other countries with rare earth deposits; it’s likely that India will emerge here too as a prime candidate.

So, did China show its rare earth hand too early? Actually, for anyone paying any attention, China’s gradual cornering of the market could have been seen coming from a mile away, and so it’s curious that so many analysts—including in national security communities—have only just latched on to the issue.

Interestingly, though, China might actually welcome moves by other countries to either start or restart mining of rare earth metals. After all, China doesn’t have a monopoly on supplies of all rare earths, and with its push into clean technology sectors it’s conceivable that China itself may at some point need to import certain rare earths. (China has already invested in two Australian rare earth mining companies and may be looking for an equity stake in more).

In the meantime, though, research is also continuing to find alternatives to rare earths for the automobile and glass processing sectors. In fact, both South Korea and Japan actually hope to import less rare earths this year compared with 2009, partly due to the use of substitutes.

Yet finding substitutes, bringing new sources online (or back online—the US is eyeing reopening Mountain Pass), and diversification will take anywhere between two and five years, giving China a window of opportunity within which to flex its rare earth muscle.

One of the problems in all this is of perceptions. The kind of economic protectionism that China is accused of indulging in sits awkwardly with free market proponents like the United States, which has said it may consider referring China’s exports to the WTO over the issue.

But while the US believes China should maintain access, the Chinese see little difference between rare earths and other natural resources like oil that are exploited by other nations. China sees rare earths as offering a reasonable, competitive advantage and notes that other nations were happy to benefit from cheap Chinese exports to fuel the IT boom of the 1990s at massive cost to China’s environment.

The big question now is: how long can China’s advantage last?


Saurav Jha is the author of ‘The Upside Down Book Of Nuclear Power” (HarperCollins India 2010). He researches global energy and security issues and writes regularly for World Politics Review, Deccan Herald and Geopolitics. He can be reached at: [email protected].