The term rare earths (RE) applies to a group of 17 chemically similar metal
elements that include scandium, yttrium and the 15 lanthanides. RE elements are
considered strategically important commodities - they are used to manufacture
defense and commercial high value-added applications, not least in this
environmentally conscious age, green technology.
Rare earths were traded freely and at a discounted price on the global market
before the mid-2000s. Since 2005, however, China - the world’s leading RE
producer - has gradually tightened export restrictions on rare earth oxide
(REO).
In late September, Chinese exports of REs to Japan were reportedly halted due
to a dispute over maritime boundaries in the
East China Sea, which underscored an unprecedented risk in the global RE supply
chain. Most consuming countries were caught unprepared by this RE supply
crisis. Indeed, China’s annual REO output at 129,405 tonnes in 2009 represents
97% of world total, and the technological complexity, resource availability and
capital intensity of RE separation and processing make the diversification of
supply away from China implausible in the near term.
Drivers underlying China's ascendance
China's dominance in the RE supply chain is directly related to Beijing's
consistent and long term planning, which dates back to as early as the 1950s.
Nevertheless, the Chinese RE industry did not take off until Xu Guangxian (also
known as the father of Chinese rare earths chemistry") developed the Theory of
Countercurrent Extraction - which is applicable for the separation of a mixture
with more than 10 components such as rare earths - in the 1970s.
Since then, China's REO output has increased rapidly from slightly over 1,000
tonnes in 1978 to 11,860 tonnes in 1986, which marks the year when a production
spike at the giant Bayan-obo mine first propelled China past the United States
as the world's leading producer of REO. Meanwhile, Beijing has continuously
invested heavily in technological innovations through key national R&D
programs, such as the 863 and 973 projects, in order to gain a decisive
advantage in the rare earth supply chain including mining, separation,
refining, forming and manufacturing [2].
Not coincidentally, after the late Chinese patriarch Deng Xiaoping famously
stated, "the Middle East has oil, and China has rare earths" in 1992, China has
not only remained the world's largest REO producer, but has also successfully
moved its manufacturers up the supply chain. Since 1990, domestic consumption
of REO for high value-added product manufacturing in China has increased at a
13% annual rate, reaching 73,000 tonnes in 2009 [3].
The significant cost advantage for Chinese producers, which has crushed almost
all overseas competitors, is not only driven by low labor costs, but also
unintentionally reinforced by Beijing's policy failures in regulating the
resource extraction sector as a whole, and the RE industry in particular.
To keep pace with its booming economy, Beijing promulgated the so-called "Let
Water Flow Rapidly" policy in 1981 to stimulate no holds-barred mining
developments to meet a rapid spike in resource demand without appropriate
considerations of environmental protection, safety and sector consolidation.
The lack of entrance standards and patent enforcement led to a proliferation of
small-scale and technologically backward mines and separation plants. By 2008,
more than 100 enterprises held 123 RE mining permits in China, and the
country's combined REO production capacity had exceeded 200 kilotonnes (kt) per
annum, which is significantly higher than the global demand at 134kt.
Widespread and chronic illegal mining operations further aggravated the
situation. In 2008, the reported REO output in the southern province of
Guangdong was only 2,553 tonnes, but an investigation by the Ministry of
Industry and Information Technology (MIIT) indicated that the actual output
level was 25 to 30kt [4]. While REO output was seriously underreported,
overcapacity in China was becoming a detrimental factor that eventually
destabilized the global RE market. Not surprisingly, hundreds of Chinese RE
exporters competed furiously with each other in the export market, leading to
more than a 60% drop on the average REO price between 1992 and 2006 [5].
The Chinese RE industry could not have attained its monopoly status without, in
part, the strategic miscalculation of the United States and the vulnerability
of Japan due to the latter's absence of upstream RE resource endowment. Through
the 1960s until the 1980s, the Mountain Pass mine in California was the world's
leading RE producer. Burdened with both the cutthroat price competition from
Chinese exporters and California's stringent environmental laws, Mountain Pass
ceased operations without state intervention in the early 2000s.
Moreover, since 1990, a significant portion of manufacturing operations
employing REs in the United States has been sent offshore to Asia. Not
surprisingly, the United States is losing its longstanding leadership in many
areas of RE technology [6]. In comparison, as the leading economy in use of REs
for advanced electronics and green techniques, Japan has bided its time by
building an unspecified amount of RE stockpiles. Nevertheless, Japan's absence
of domestic resources precluded supply diversification as a viable economic
option during the era of cheap Chinese RE exports.
Strategic considerations and implications
Relying on upstream RE resources to gain access to advanced techniques and
encourage high value-added downstream operations has been a national policy in
China that dates back to as early as the 1970s. After China gained decisive
advantage in the RE supply chain, Beijing's restrictions on REO production and
exports in recent years have been primarily motivated by the strong political
desire for resource conservation.
Though China's proven RE reserves of 52 megatons (one megaton - or Mt - is one
million tonnes) represents 45% of the world total, these valuable resource
endowments are not evenly distributed. The majority of China's proven RE
reserves, including Bayan-obo mine in Inner Mongolia (with proven reserves at
43.5 Mt), Liangshan mine in Sichuan (1.5 Mt) and Weishan mine in Shandong (4.0
Mt), contain only light REs. In comparison, while most of the global supply of
heavy REs (eg yttrium) originates in the "ion adsorption clay" ores of southern
China, the proven reserves of heavy REs in the seven southern Chinese provinces
are a mere 1.5 Mt [7].
Since heavy REs are considered more strategically valuable, significant efforts
have been made by Beijing in recent years to crack down on illegal mining in
southern China. Though the United States may regret the closure of Mountain
Pass in the early 2000s, the Chinese decision makers and academia actually
perceive the above event from a different angle: the United States holds
valuable resources as strategic stockpiles by taking advantage of cheap and
environmentally destructive REs from China.
Beijing has been wary of the stockpiling of REs outside China. Though a senior
Japanese official stated that Japan's stockpile of REs could dry up by next
March or April without fresh imports from China, a claim that has been widely
quoted by the Chinese media is that Japan actually only consumed one third of
its RE imports in the past and thus has built up strategic stockpiles which can
last the country for 20 to 50 years.
As Beijing well understands the negative impacts of overseas stockpiles on the
strength of its RE industry, it has sharply lowered its annual REO export quote
to 30,258 tonnes in 2010 from 65,609 tonnes in 2005 [8]. According to the
revised "2009 to 2015 Development Plan of the Rare Earth Industry" prepared by
the MIIT, the annual REO export level from China will be restricted below 35 kt
between 2009 and 2015. In addition, China will only produce 130 to 150 kt of
REO annually.
If the aforementioned targets can be strictly enforced, the existing stockpiles
outside China are expected to be exhausted over time, which will further
strengthen China's competitiveness.
Contrary to the backfiring theory claimed by some observers (see Reuters,
October 28 and China Economic Review, September 28), the lack of overseas RE
producers does not necessarily serve Beijing's strategic interests. Of all the
16 naturally occurring RE elements at a commercial scale (there are no stable
or long-lived isotopes of promethium), the cost competitiveness of the Chinese
RE industry is unlikely to be undermined by any potential competitor in the
near future.
According to data from Shanghai Metal Market online, prices of neodymium oxide
and dysprosium oxide have increased by 80% and 125% between January and
September 6. Nevertheless, chemist and academician Xu Guangxian still expressed
dissatisfaction with these terms. During an interview given to a
Chinese-magazine, Xu said, "production costs by overseas producers are 400%
higher than China's REO export prices. As a result, market prices of REO should
increase by at least 400%. Because of resource scarcity, price of dysprosium
oxide should show a 10-fold growth in the future."
Numerous large RE deposits exist outside China, and the long-term
sustainability of the Chinese monopoly is questionable at best. Nevertheless,
the global diversification of supply away from China may not improve the
current situation as expected.
Following the recent Chinese RE embargo, Japanese carmaker Toyota responded
quickly with a plan to team up with Tokyo-based Sojitz (whose numerous interest
include chemicals, mining and trade) and the Vietnamese government to mine REs
at Dong Pao (5 kt/annum).
Japanese trading house Sumitomo has struck a deal with Kazatomprom,
Kazakhstan's state nuclear power company, in a bid to secure supplies of RE
metals (3 kt/annum).
Moreover, Japan has reached an agreement with Mongolia to promote development
of RE projects. Similarly, RE development has been initiated by Molycorp at
Mountain Pass (10-20 kt/annum), Lynas at Mount Weld (10-20 kt/annum), Afrafura
Resources at Nolans (10 kt/annum), Avalon Rare Metals at Nechalacho (5
kt/annum), Great Western Minerals Group at Hoidas Lake (3-5 kt/annum), Rare
Element Resources at Bear Lodge (13.6 Mt of REO resources), Greenland Minerals
and Energy at Kvanefjeld (4.91 Mt of REO resources) and Neo and Mitsubishi at
Pitinga (xenotime concentrate from tin tailings) [9].
Yet few questioned whether consuming countries such as Japan or companies like
Toyota are willing to share such valuable resources with their economic
competitors. Moreover, some RE elements are just too scarce to be completely
subject to free trade. For instance, outputs of both metal dysprosium and
terbium in China are below 40 tonnes per year [10]. While Beijing has started
to guard such scarce resources carefully, any new entrant is likely to follow
suit.
As a result, even if sizable RE production capacity is materialized outside
China in the future, free trade of all REs without restriction is still
unlikely. To make the matter worse, given China's decisive cost advantage,
Beijing could easily exert control on RE pricing to squeeze out new competitors
in the future.
The dominance of the Chinese RE industry may seem formidable, but Beijing's
control of this industry is actually not as tight as many outside observers
believe. The Chinese adage applies: there are too many places in China where
"the mountains are high, and the emperor in Beijing is far away." Based on REO
supply and demand balances in China and the outside world, the author estimates
that about 20 to 40 kt of REO have been either smuggled outside China or held
at unknown stockpiles on an annual basis in recent years [11].
With spiking prices of REs in the international market, the economic incentives
of RE smuggling become even more difficult to resist for those with access to
RE resources within China. Finally, while Beijing plans to drastically
consolidate its RE industry and reduce the number of RE separation plants to 20
by 2015 from around 100 at present, local governments are battling furiously
for the control of their indigenous resources.
The ascendance of the Chinese RE supply chain is the outgrowth of Beijing's
long-term planning, the invisible hand of the free market and, as this paper
has shown, strategic miscalculation made by the US government. Though sizable
RE production capacity may be developed outside China, Beijing is expected to
remain the leading producer with the formidable power to squeeze out any new
competitor, thus China is able to continuously reserve the right to use REs as
a political bargaining chip in the years to come - in spite of what its leaders
claim.
Nevertheless, Beijing's present RE policy will not only face challenges from
the international community, but it will also need to overcome the autonomous
and often chaotic nature of the Chinese economy and the conflict of interests
between the central and local governments.
Even so, given the strategic importance of RE resources, new overseas entrants
may soon follow suit with behavior similar to China's. As a result, the era of
cheap Chinese rare earths may be forever gone.
Notes
1. USGS / Rare Earth Information (various issues) / Non-ferrous Mining and
Metallurgy, vol 1996(4) / Economic Analysis of Metallurgy, vol 1989(4) / and
etc.
2. Cindy Hurst, China's Rare Earth Elements Industry: What Can the West Learn?
IAGS: Fort Leavenworth (2010).
3. Song and Hong, Status and Forecast of the Chinese Rare Earth Industry. Rare
Earth Information, vol 2010(1) (2010); Industrial Source.
4. R. Li, Dilemma of Rare Earth Resource Consolidation. China Metal Bulletin,
vol 2010(8) (2010).
5. Price data from USGS.
6. Fifarek and et al., Offshoring Technology Innovation: A Case Study of
Rare-earth Technology. Journal of Operations Management, vol 2008(26) (2008).
7. Hutai United Securities, Summary on the Field Trip to Investigate the Rare
Earth Industry in Jiangxi (2010).
8. Source: Ministry of Commerce, Ministry of Land and Resources.
9. Rising Securities, Beauty of Rear Earths: Rationally Understand the Sector
Development (2010); Japan Today, October 3 and 23; www.ggg.gl and
www.rareelementresources.com.
10. Industrial source.
11. USGS / Rare Earth Information (various issues); and etc.
JianJun (Kevin) Tu (jjtu@mkja.ca) is a Vancouver-based senior energy and
environmental consultant, and a research associate of the Canadian Industrial
Energy End-Use Data and Analysis Centre.
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