Tag Archives: rare earths

China Consolidates Its Rare Earths Industry

IT IS DIFFICULT to underestimate the strategic importance of merging the three leading Chinese rare earths producers.

China Minmetals Rare Earth Co., which is part of state-owned China Minmetals Corp., Chinalco Rare Earth and Metals Co, part of state-owned Aluminium Corp. of China, and Ganzhou Rare Earth Group, which is also state-owned but whose production is suspended for environmental reasons, will form a new group under direct central government control.

The new entity, China Rare Earth Group, will control approaching three-quarters of the country’s rare earths output, which accounts for two-thirds of world output.

The consolidation will give Beijing strategic control of the industry and help it manage domestic competition, particularly pricing, to ensure stable and price-certain supplies to end-users throughout the supply chain. Beijing has used the same approach in consolidating rail transport and shipping lines.

China Rare Earth Group will likely at some point also acquire two of the three remaining rare earths producers, Xiamen Tungsten Co. and Guangdong Rare Earth Group Industry Group.

The 17 minerals that comprise the rare earths group are essential for producing components of high-tech goods from electric vehicles to defence systems. The permanent magnets needed to make electric vehicles and wind turbines account for 30% of the demand for rare earths, followed by catalysts (26%) and polishers (13%). Magnets made of rare earth alloys are stronger than those made of alternatives such as iron or aluminium nickel compounds.

Access to rare earths will become even more critical for manufacturing as the world electrifies in its transition to low-carbon economies. Global demand for rare earth elements is forecast to rise by more than 40% if the world gets anywhere near its climate change commitments.

Chinese producers are well placed to fill that additional demand as they are subject to government-set output quotas that have kept capacity utilisation to 50-60%.

The other geostrategic dimension is that while China currently accounts for two-thirds of global output, it has less than two-fifths of known rare earths reserves. The United States and other large importers of rare earths mined or refined in China want to reduce that dependency by turning to alternative suppliers.

Washington now views rare earths in national security terms. In the past, Beijing has threatened to cut off supplies of refined rare earth products to US aerospace firm Lockheed Martin for trading with Taiwan.

There are significant rare earths deposits in California and Australia, but they are more expensive to mine and refining capacity is limited (non-existant in the United States). Beijing has an interest in being able to sway world prices and thus the cost calculations on which mines to expand, reopen or develop.

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New Rare-Earths Trade Group Aimed At WTO Complaint

Beijing’s creation of an industry association for rare-earths producers is best seen as an bulwark against the WTO complaint brought jointly by the U.S., the EU and Japan. This holds that China’s export quotas and other controls on rare-earths mining are not, as they purport to be, for environmental and sustainability reasons, but a pretext for protectionism as they drive up prices and favor end users that buy rare earths inside China, a provision intended to anchor in China manufacturers that are heavy users of rare earths, including high-tech, defense and green-technology firms. Beijing rejects the charge.

The new 155-member strong Association of China Rare Earth Industry, reporting to the Ministry of Industry and Information Technology, is charged with setting reasonable prices and properly handling trade disputes, as well as promoting the sustainable use of the minerals and environmental controls. The first two seem directly targeted at the WTO complaint, as were suggestions that China plans to abandon large-scale mining of the minerals.

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China Says It Is To Abandon Large-Scale Mining Of Rare Earths

A machine selects raw materials with high content of rare earths at a mine in Bayan Obo, north China's Inner Mongolia Autonomous Region, Oct. 27, 2010. (Xinhua/Ren Junchuan)

China says it is to abandon the large-scale mining of rare earths. The announcement was made by Su Bo, vice-minister of industry and information technology at an industry conference in Xiamen. The rationale is the continued promotion of more sustainable production. Coming as it does shortly after a joint WTO complaint was filed against China by the U.S., the EU and Japan over Beijing’s rare-earths export restrictions, this Bystander’s first take is that there is a large slice of trade politics to the vice-minister’s words.

Last September, Chinese mining officials said that three of the eight leading rare earth producing counties would stop production by the end of the year, citing resource depletion and the environmentally despoiling nature of rare-earth mining. Two years ago, Beijing ceased issuing new licenses for rare-earth prospecting and mining, announced tougher environmental standards for rare-earth production, and started a crackdown on illegal mines. Production has been capped at  93,800 tonnes and exports at 30,184 tonnes. How far Su’s announcement goes beyond all this is unclear at this point.

China, which produces 90% of the world’s supply of rare earths, has rejected the WTO complaint. It has also dismissed claims by Western trade officials that Beijing is using environmental concerns to mask its true motive: to protect China’s industrial base by making Western and Japanese companies that use the minerals to manufacture high-tech, military and green technologies, need to be in China to gain access to uninterrupted and cheap supplies of them.

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Rare Earths Pas De Deux

The joint complaint the U.S., EU and Japan are bringing to the WTO against China over rare earths has been a case in waiting ever since the U.S. and the EU won over other Chinese industrial raw material export restrictions in January. Those set a precedent for the successful argument that export restrictions by commodity producers glut domestic markets and thus let raw materials to be bought cheaply to domestic manufacturers in a way that can be considered trade distorting.

In the case of rare earths, the group of minerals used by high-tech, military and green technology manufacturers of which China produces 90% of the world’s supply, Beijing says it is prudently managing a scarce resource plagued by illegal mining–though rare earths would be less of a scare resource if more mines in the U.S., Australia and South Africa driven out of production by an earlier glutting of international markets were to reopen. The Catch-22 is the more mines that reopen, the more international prices are pushed down making reopening of more uneconomic, and leaving Chinese producers with great sway over international supplies.

This is a delicate dance for both sides, and one with political sub-themes, too, with there being leadership elections in Beijing and Washington. The two sides have 60 days to work out a deal before the complainants can ask the WTO to rule, which is what this Bystander expects to happen. However, we still hold to our view that, recent precedent not withstanding, this is far from an open and shut case. Beijing’s tough enforcement of its environmental protections of rare earths makes the case that they are a mere pretext for protectionism more difficult to sustain  than was the case with the export restrictions on coke, zinc, bauxite and the six other raw materials that the WTO ruled in January did break world trade rules.

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WTO Natural Resouces Ruling Not Prelude For Rare Earths

China’s WTO loss over certain natural resource exports shouldn’t overly encourage anyone who would like the same approach to be taken towards Beijing’s export restrictions on rare earths. These were introduced in 2010 to prevent environmental damage and unsustainable depletion of the country’s rare earth reserves. Beijing’s tough enforcement of them makes the case that they are a mere pretext for protectionism more difficult to sustain. Indeed, Beijing make make use of the latest WTO ruling to enforce them more vigorously and to bear down on foot dragging enterprises and local officials. China is the world’s largest supplier of rare earths. Unlike coke, zinc, bauxite and the six other raw materials whose export quotas, licences and duties the WTO has decided break world trade rules, rare earths are of such strategic importance to China’s economy and its military’s development that Beijing is not going to leave itself vulnerable to any trade challenge.
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Beijing Looks To North Korea For Rare Earths

China has found a new source for rare earths, its own exports of which are snarled up in controversial international trade disputes. According to a report in the South Korean paper, JoongAng Ilbo, Beijing struck an agreement with North Korean leader, Kim Jong-il, when he visited China in May, to exchange free fertilizer and heavily discounted grain for access to North Korea’s newly discovered but abundant reserves of rare earths—17 elements critical to high-tech manufacturing of everything from consumer electronics to missiles.

The agreement reportedly covers 200,000 tons of fertilizer and 500,000 tons of corn; the former free and the latter at 50% of world prices. First shipments have already taken place, according to the report, which is based on sources in Beijing. The rare earths will come from  Musan in North Korea’s Hamgyong Province. China will have to supply mining equipment and build roads to the mine, but will get have the extracted rare earths for free and pay world prices for the other half.

North Korea is thought to have some 20 million tonnes of rare earths, perhaps more as the extent of the exploration that has been done is unknown. That would be about the same reserves as Russia has and 40% more than the U.S. China, which produces more than 95% of the world’s rare earths, has reserves estimated at 90 million tonnes.

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China To Continue To Trim Rare-Earth Export Quotas

China has set a preliminary rare-earths export quota of 14,446 tonnes for 2011, according to the Commerce ministry. The preliminary quota is a sighter for the industry covering roughly the first half of the year. State media announced that as an 11.4% year-on-year cut in comparison to the preliminary quota for 2010, but unofficial comparisons with last year’s numbers put the reduction at closer to 35%-39%.

The full year quota for this year is 30,300 tonnes, 40% down from 2009 as Beijing pursues a policy of cutting back rare-earth exports to husband its resources. That quota was exceeded by September, with exports in the first nine months of the year reaching 32,200 tonnes, despite supply interruptions reported in the second half of this year that sent manufacturers who depend on the minerals to produce an array of high-tech goods from consumer electronics to weapons into a flap over suspicions that Beijing was using its current market dominance for noncommercial purposes. China said in July that it would cut exports in the second half to supply its own electronics industry. Quotas were cut by 72% for the second half and prices surged.

Beijing is also to set up an industry association to conduct price negotiations with foreign buyers (and keep domestic miners, whose operations cause great environmental damage, under a tighter official thumb), much as happens in the steel industry. The new association will fall under the Ministry of Industry and Information Technology. (Update:  Caijing reports that new environmental protection standards and possibly new taxes are to be imposed on the industry in 2011.)

Meanwhile, as we noted before, the day is fast approaching when rare earths are rare no more. Production is being ramped up in North America, Australia, India, South Africa and Brazil as mines that once looked uneconomic get reopened or expanded. That China has an monopoly that cannot be defended for too much longer is a reason that it is likely to dodge a WTO challenge over its rare-earth exports.

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U.S. Defense Dept. Not Worried By China’s Rare-Earths Grip

Beijing’s promise not to use rare earths as a diplomatic weapon, made during the East Asia Summit in Hanoi, was an easy assurance to give. As we noted earlier, China’s current near monopoly on the supply of these metals that go into so many high tech products including weapons is most likely a passing one. Now, Bloomberg reports, the U.S. Defence Dept. has concluded that China’s grip on the market poses no threat to U.S. national security. America’s military needs account for less than 5% of the U.S.’s rare-earth consumption. The Pentagon has apparently decided that new sources of supply that will be coming on stream will be sufficient to meet its needs.

The Pentagon’s report has yet to be made public, but Bloomberg adds:

The study recommends, among other steps, an examination of how the Defense Department could aid companies such as Molycorp, which has applied to the Energy Department for $280 million in U.S. government loan guarantees to help finance restarting its open-pit, rare-earths mine in Mountain Pass, California, in the Mojave Desert. The mine once met almost all the world’s demand for rare- earth metals. It shut down in 2002 due to competition from cheaper Chinese supplies. Molycorp plans to resume production by the end of 2012.

That would potentially remove the issue from the realm of superpower security scares and put it back in the more familiar territory of a subsidies trade dispute.

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When Rare Earths Are Not As Rare

It was always thought that paper, particularly dollar-denominated securities, was the Doomsday device that Beijing could hold over the U.S. Turns out it is not paper but rare earths, 17 metals used in a vast range of high-tech products, including weapons. And it works not just on the U.S. but Europe and Japan, too. But even Doomsday weapons have half lives.

China controls 90% of the world’s current supply of rare earths. Japan has already said supplies were cut off to its companies during the recent dispute between Beijing and Tokyo over a Chinese trawler captain detained by Japanese coast guard in disputed waters in the East China Sea. (Beijing denies it stopped exports but admits patriotic companies might have shown their disapproval of Japan’s actions in this way.) Washington and Brussels have long been concerned something similar could happen to them, especially as Beijing has been saying since 2006 that it will scale back exports as it cuts production to protect the environment and lengthen the life of its rare-earth reserves, which are mainly in the mineral deposits of Inner Mongolia.

Now German companies, too, are saying supplies of rare earths are getting, well, rarer; government ministers say the economy is being severely affected. Similar sentiments are being aired in Brussels and Washington over what is euphemistically described as a supply crunch in an industry that America owned until a quarter of a century ago. The U.S. has launched an official investigation.

Deng Xiaoping once said, “Arabia has oil, China has rare earth.” Not a happy thought for non-Chinese who remember Opec’s quadrupling of the oil price overnight in 1973 by embargoing exports to the U.S and other western nations to protest, remember, the West’s support for Israel during the Yom Kippur War. Like all cartels, Opec’s political and economic clout waned under the pressure of its members’ internal interests. By definition, a monopolist is a far more cohesive beast.

Consequences of the oil crisis of the 1970s, beyond a devastating recession, were a marked improvement in energy efficiency, the development of alternative fuels, the creation of strategic stockpiles of oil in buying nations and the opening up of previously uneconomic oil and gas fields fields. The same is likely to happen with rare earths if China keeps the “supply crunch” on. Japan is already talking of creating a rare-earths stockpile and expanding recycling plants. China controls 90% of the trade in rare earths but barely half the reserves, so plans are being dusted down to reopen mines in North America, Australia, India, South Africa and Brazil that once looked uneconomic, but no more..

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