China’s Rare Earths Advantage

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China’s Rare Earths Advantage

An adverse WTO ruling will do little to upset the dominance China enjoys in this critical sector.

China’s Rare Earths Advantage
Credit: REUTERS/David Gray

In late March, a dispute settlement panel of the World Trade Organization (WTO) found China’s rare earth element (REE) export regulations to be in violation of trade rules and deemed them to be an attempt to “secure preferential use” for domestic firms and to attract foreign investment. The ruling, which China is likely to challenge by May, has already been dismissed as “irrelevant” by the Chinese REE industry, perhaps reflecting the fact that China is the world’s largest consumer of REEs in addition to being the largest producer.

In fact, China’s holds key techno-economic advantages across the REE value chain that has actually led to emerging foreign mines becoming dependent on it for growth, especially at a time when REE prices have fallen dramatically from their 2011 highs. At the moment it is difficult for any single country to challenge China’s advantage in this sphere and the lack of forward movement in India-Japan cooperation hasn’t helped matters.

The WTO investigation launched in 2012 in response to a case filed by the United States and subsequently supported by the European Union and Japan has concluded that “China’s export quotas were designed to achieve industrial policy goals” rather than to limit environmental damage as Beijing had argued in support of its use of export taxes, quotas, and the right to choose as to which companies get to export. The EU trade commissioner, Karel De Gucht, naturally pleased with the ruling, has said that “China cannot use export restrictions to protect its own industries or give them a helping hand on the global market at the expense of foreign competitors.” While the EU’s enthusiasm for the ruling is understandable, given that it has staked the revival of its manufacturing sector on “clean” high-tech products that nevertheless use dirty-to-mine REEs for which it has no domestic source; within the Chinese REE industry itself the ruling has ruffled few feathers.

The Chinese REE sector in the last two years has become so inward looking that it hasn’t actually even met the restrictive export quotas put in place by the Chinese government. Just after the announcement of export curbs by the Chinese in 2010, many foreign users resorted to stockpiling rare earths (often through smuggled imports from China). But by 2011 itself, relatively high stockpiles in foreign countries coupled with the global economic slowdown served to dampen foreign demand for Chinese REEs.

This happened even as China’s Ministry of Industry and Information Technology (MIIT) moved to weed out illegal mining while consolidating the domestic REE sector, which alongside Baotou Steel Rare-Earth Hi-Tech Co Ltd consists of a number of small firms scattered across the country. In any case, the crash in international prices post-2011 made REE smuggling out of China a far less lucrative proposition than before and competition within the domestic market remains fierce.

Now domestic REE volume demand in China itself has remained strong (although prices remain depressed) given that the country today is also a key player in REE using intermediate industries, besides producing 85 percent of the world’s REE supply and holding around half the world’s known reserves of same. For instance, China today is home to three-quarters of global production of neodymium-iron-boron permanent magnets. Beyond permanent magnets, China has a strong position in REE-using intermediate industries such as glass, phosphors, catalysts for oil refining, batteries and catalytic converters.

Chinese competitiveness in REE-based intermediates ultimately draws on its cost advantages in upstream processing. China is currently unmatched in cost terms in its ability to separate rare earth oxides (REOs) from concentrates as well as in being able to refine and fabricate REOs into usable metal and metallic alloys that feed intermediate industries. China’s advantage in the processing domain is so pronounced that one of the two big projects that came online after its move to curb exports in 2010, the re-started Mountain Pass mine in California owned by Molycorp, actually sends REE concentrates to China for processing. Moreover, Molycorp acquired NEO Material Technologies in 2012, which has most of its manufacturing units for permanent magnets in China operating as joint ventures with Chinese state-owned enterprises. Incidentally, state-owned China Non-Ferrous Metal Mining (Group) made a failed bid in 2009 to acquire Lynas, which operates the Mount Weld mine in Australia, the other non-Chinese major project in operation today.

All of which points to the significant advantage China holds in the REE domain: a competitive presence across the entire REE value chain in addition to very well surveyed and cost-effective mines. This integrated network means that China’s mines already have financing and offtake agreements in place, which provide them with a buffer as they look to build towards peak output. On the other hand, the current low prices for REEs across the world mean that very few new mines are being seen as investment worthy, especially in the absence of joint ventures with downstream players for processing and offtake arrangements.

In fact, even Molycorp and Lynas, which do have mines in operation, would look at the WTO ruling with some anxiety and would certainly not want to see any growth in Chinese REE exports. China’s Bayan Obo mine, which mostly produces the same light REEs (LREEs) that Mountain pass and Mount Weld can produce could easily put both projects out of business if it offered unrestricted exports to foreigners at the prices currently prevailing in China. But it is unlikely that Baotou Steel, which controls Bayan Obo and is building ten storage facilities for REE stockpiling, would do that that since the Chinese strategy is to draw down domestic production to reduce environmental costs, shore up prices and instead cultivate foreign sources to extend its international upstream reach in this industry.

Paradoxically, these low prices have also served to stunt the India-Japan REE partnership that was announced in November 2012 under the continuous Bilateral Strategic Dialogue Framework between the two countries. At the time, the Japanese were looking at an annual offtake agreement for 4,000 tons from a new $25 million concentrate processing facility being set up in the Indian state of Odisha. This arrangement would have taken care of almost 15 percent of Japan’s annual requirements by leveraging India’s lower labor costs as well as easy to access monazite based REE deposits. The partnership was also supposed to pave the way for joint India-Japan ventures in third countries such as Afghanistan, which are known to possess significant REE deposits. However, falling international REE prices led to the Japanese side offering commercial terms that would not have passed muster with India’s Comptroller and Auditor General at a time when the beleaguered Indian government was already reeling under a series of scams. As a consequence, the deal is in limbo. Japan has meanwhile sewed up supply arrangements with sources in Vietnam and Kazakhstan, besides arrangements with Molycorp and Lynas.

Japanese diversification efforts have not prevented Japanese REE-based intermediate manufacturers from moving operations to China. That, of course, reflects the fact that Japan has essentially managed to only secure sources outside China for LREEs such as neodymium, and not for heavy REEs (HREEs), which are far less abundant and can at the moment be economically mined only in the lateritic ion-adsorption clays of Southern China, which accounts for 90 percent of the world’s supply. A lack of access to HREE dysprosium, whose addition to a neodymium based magnet enables it to retain its magnetism under high temperature conditions, forced Hitachi Metals to relocate to China in 2011. More such instances are in the offing. The importance of HREE’s can be gauged from the fact that while they account for only 5 per cent of total demand by volume for all REEs, they represent almost 40 per cent of the total value of the market.

As such China seems to be leveraging its REE moment by further concentrating REE-using intermediate industries in its territory. But the larger play clearly is to integrate this value network for decisive advantage in mature REE-using products, such as wind turbines and consumer electronics, while neutralizing any innovation advantages others might possess in emerging areas such as hybrids and energy-efficient lighting by forcing manufacturers to share technology through joint ventures with Chinese companies.