Rare Earths: China Strikes Back

Rare earth minerals may continue to be potential weak links in the supply chain for many advanced energy technologies, including wind turbines, motors in electric vehicles, superconductors, and smart grid gear. China appears to be flexing its rare earth muscles in a marketplace that it currently dominates, supplying some 90% to 95% of the minerals such as yttrium (Y-39), neodymium (Nd-60), and cerium (Ce-58).

China has dominated the rare earths markets for several years, but that’s not because it has a chokehold on the resources. Rare earths are not that rare. While China has about 20% to 50% of known deposits, many other countries, including the United States and Canada, have extensive deposits of many or all of the 17 minerals classified as rare earths. But mining the minerals has environmental consequences that most other nations have chosen to avoid, closing existing mines and mills in the 1990s and not opening new facilities.

China, on the other hand, at the same time mounted a government effort to develop its natural resources, including its mineral estate, as a priority in the country’s push to pile up foreign currency. So China has taken advantage of a vulnerability and created a monopoly.

Recently, there were signs that market responses by other countries could at least partially undermine China’s dominance, including raising concerns about the country’s environmental record. The U.S. and other consumer countries also filed a complaint at the World Trade Organization (WTO) against China’s manipulation of the market. Rare earth prices began to decline a bit in the face of potential competition. The WTO in late July established a panel to examine the complaints by the consumer countries.

Consolidation on the Horizon

China now appears to have responded, in two ways. First, the country has announced it is taking the environmental complaints seriously. The government said it would close up to a third of its 23 mines and half of its 99 smelters in order to protect the environment. These are mostly smaller operations, which are notably more polluting than bigger and more modern operations, the Chinese government said.  The UPI wire service quoted Jia Jinsong, head of the government’s rare earth bureaucracy, as attributing the closures to a desire to protect the environment.

According to UPI, citing Jia, the move could cut China’s production of the minerals by “up to 20%.”

While the Chinese move may be positive for the environment, it could cause even greater tensions in the market by limiting supply further, raising prices. China.org, an official government website, quoted Lin Boqiang, head of the China Energy Economic Research Center at Xiamen University as saying, “China is the world’s largest rare earth producer and exporter, providing more than 90% of the global demand, so reducing the number of domestic rare earth companies is good for fixing prices.”

In related developments, China this year has been consolidating and strengthening its rare earth presence. In late July, China announced it is setting up a rare earth minerals trading platform in Baotou, Inner Mongolia, according to the official Xinhua news agency. China’s largest rare earths producer, Inner Mongolia Baotou Steel Rare Earth Hi-Tech Group, is leading the move, which will include nine other firms, with each shareholder investing about $1.6 million and holding a 10% stake in the minerals exchange.

According to Xinhua, “Previously, China’s rare earth market was largely opaque, as transactions are not made in public markets and always ran in small volumes. Only limited amounts of pricing and transaction data have been made available to the public.” It isn’t clear how the nascent exchange will impact prices or even how much of the commerce in rare earths will actually occur through it.

In August, Xinhua reported a move by the Bautou Steel group to create a minerals conglomerate that would eliminate internal competition in the country. Bautou Steel, the official news service reported, has asked the State Council, China’s cabinet, to approve its takeover of smaller rare earth producers, creating China North Rare Earths (Group) Hi-tech Co., or REHT. Xinhua said the move aims “to control environmental damage, stave off resource depletion and promote the sustainable development of the sector.”

Market Share 

Skeptics might note that the move also positions China to more easily defend its market share against external competition. In addition, the concentration of the industry could be a response to China’s weakening economy and fall in exports. The Associated Press recently reported that China’s slump “adds to the pain for struggling exporters, raising the threat of more job losses and unrest as the Communist Party tries to enforce calm ahead of a handover of power to younger leaders.”

Xinhua reported that for the first six months of the year, China’s rare earths output dropped 46%, to 40,000 metric tons. The news agency said, “Prices of major rare earth products in July remained twice as high as prices at the beginning of 2011, although down from the beginning of the year.”

A wildcard in the minerals game could be sitting on China’s border. Australian academic Leonid Petrov, a lecturer in Korean studies at the University of Sydney, wrote recently in the Korea Times that “North Korea is sitting on the goldmine. The northern side of the Korean Peninsula is well known for its rocky terrain with 85% of the country composed of mountains. It hosts sizeable deposits of more than 200 different minerals.”

Competition Heats Up

Petrov, who travels in both Koreas, said that South Korea “estimates the total value of the North’s mineral deposits at more than $6 trillion” and that Seoul is interested in partnering with its sibling rival Pyongyang in exploiting the rare earths. He added that the North began building a rare earth minerals plant in the 1990s, “but has been unable to put the plant into full operation due to power and supply bottlenecks.” Prosperous and sophisticated South Korea could provide major help in overcoming the barriers to development in North Korea.

India may also be getting into the rare earths business, which it abandoned in 2004 in the face of Chinese dominance. Last May, India’s state-owned Indian Rare Earth Ltd., an affiliate of India’s Atomic Energy Department, reached a deal with Toyota Tsusho Corp. to refurbish and complete a plant in the state of Orissa. The plant will extract the minerals from uranium tailings. Production is expected to start this fall. Full-scale production would amount to about 4,000 tons annually, or about 14% of Japanese consumption.

Japan Oil, Gas and Minerals National Corp. estimates that India has 1.1 million tons of rare earths, the fifth-largest reserves in the world. But current annual production is below 2,700 tons.

Japan is one of the countries, along with the U.S. and the European Union, that is challenging China’s rare earth market monopoly at the WTO.

—Kennedy Maize (@kennedymaize) is MANAGING POWER’s executive editor