Energy & Resources, Talking Point

A worrying monopoly?

Japan discovers the dangers of China’s control over rare earth metals

A worrying monopoly?

Throughout its history, China has enjoyed virtual monopolies over many highly sought-after goods and commodities.

First off, its emperors kept a tight hold on sericulture, so as to ensure that they could dominate the manufacture and trading of silk. Eventually silk’s secrets spread to Korea, India and the rest of the world – breaking China’s hold on the silk worm and the mulberry leaf.

Next, China’s rulers established imperial kilns in Jingde to make blue and white porcelain. It became a highly-desired ware in European courts and a product so associated with its origins that the word for porcelain in English became ‘China’. The secret of its perfect glazing eluded Europeans until 1710 when the Germans started manufacturing Meissen porcelain in Dresden. Another monopoly gone.

Then there was tea, whose manufacture was also a closely guarded secret. From 1660 onwards the British developed a strong taste for the stuff; by the 1800s more of China’s tea was being consumed in Britain than beer.

But as author Sarah Rose points out: “It was galling [to the British] to be so reliant on an often churlish and disobliging nation.” As she chronicles in her book For All the Tea in China (see WiC57), the solution was to send a British botanist to the country’s inland plantations to steal seeds and learn the manufacturing process; then transplant them to India. Rose calls its one of the greatest intellectual property thefts in modern history.

Fast forward to the present day, and discussion is once again rife about how to break China’s hold over another export, a set of commodities collectively called rare earths. But unlike silk, porcelain and tea, rare earths present a more serious proposition, not least that they are a mined resource rather than a manufactured one. That makes it a lot harder for outsiders to beg, borrow or steal production.

It also gives the Chinese a lot more leverage as far as control of rare earth supply is concerned. And as Japan has discovered in recent weeks – after it fell into dispute with China over a series of islands – they have already been employed as an ‘economic weapon’ that Beijing can use to hold the world’s manufacturing nations to ransom.

What are rare earths?

Well, there are 17 of them and they include scandium, yttrium and promethium. It is estimated that one in every six new inventions rely on the use of rare earth metals, which have excellent physical properties, and can blend with other products to enhance their quality. Steel, aluminium and titanium alloys all see performance improvements when blended with certain rare earth metals.

Most consumers are unaware, but rare earths are also used for the making of many everyday products: glass, batteries, compact fluorescent bulbs and laptops, to take a few examples. And they are becoming increasingly more important as the world moves towards newer, greener technologies. According to research firm, Global Strategies: “Take for instance lanthanum, 10 pounds of which are used in the battery of every Toyota Prius and is also a key component to high powered wind turbines. Then there is indium which powers the most cutting edge solar panels. The fact is, our economy is likely to be defined by rare earth metals over the long term as miniature computers and alternative energies take centre stage.”

Their use in military applications is likewise vital. For example, the Patriot missile’s guidance system uses samarium and neodymium. The composite metal body of an F-22 requires rare earth materials too.

It’s clear then that they matter. Indeed, in perhaps the most oft-quoted remark about the metals, former Chinese paramount leader Deng Xiaoping once said: “The Middle East has oil, while China has rare earths.” While most politicians exaggerate, Deng was perhaps understating the case: the Chinese account for 96% of the world’s production. China could be a one-nation OPEC where rare earths are concerned. Indeed, that’s precisely the fear.

Why are they in the news?

The fraying of relations with Japan put them squarely in the spotlight. As documented in recent issues (see WiC78, 80), the detention of a Chinese trawler captain by Japanese Coast Guard turned into a major diplomatic issue – at stake, the question of sovereignty over a series of islands the Chinese call the Diaoyus and the Japanese name the Senkakus.

The Japanese eventually backed down a fortnight ago and released the captain. Many in the Tokyo press thought a major reason for the capitulation was China’s stranglehold over rare earths. Japan gets all of these metals from China and it was reported that – as a retaliatory measure – Beijing had ordered exports to be halted. Nikkei ran with the headline: “China using rare earths as diplomatic weapon”.

Even after the release, tensions between the two nations remained high, as both sought apologies for the incident. Media outlets gave conflicting information as to whether the ‘rare earth embargo’ by China had ended – with Beijing denying it had even existed.

In the fog of ‘economic war’, clarity is often lacking. But on Tuesday Japanese trade minister, Ohata Akihiro made his case. He told local journalists that his ministry had surveyed major companies last week and 31 had reported “having difficulty in terms of rare earth exports from China”. Problems clearing customs had persisted since September 21. One firm told the ministry its shipment had been blocked by customs officials because the materials were deemed to be priced “too low”.

Ohata added: “We have been calling on Beijing through diplomatic channels to improve the situation. We should speak up and prevent any hindrance to economic activities.”

With China and Japan’s prime ministers having met in Brussels this week, there are signs that relations will start to normalise, and that the embargo will cease. However, the Nikkei sees longer-term problems. One of China’s aims, it reports, is to use rare earths as a means to siphon technology from Japanese manufacturers. “Without rare earths it would make it difficult for Japanese firms in a wide array of industries to continue manufacturing at their domestic factories,” it wrote. Whether a coincidence or not, it cited the fact that Sumitomo Electric had this summer moved some manufacturing operations to China, where rare earth supplies could be guaranteed.

The leading business paper also quoted an anonymous Japanese executive who confessed to a recent negotiation with Chinese government officials in which they had insisted that, in return, a new R&D centre be set up in China. “In order words,” concludes Nikkei, “this means they demanded that technology be passed over from the Japanese partner.”

The US is worried too?

Particularly the military, it seems.

Bloomberg published a major article last week which pointed out that the US capacity to wage war is brought into question (it can’t drop bombs on Afghanistan if it doesn’t have access to neodymium from China, for example). After dozens of interviews with industry executives, congressional leaders and policy experts, the report concluded that it had become plain the US had “handed its main economic rival power to dictate access to these building blocks of modern weapons by ceding control of prices and supply.”

“The Pentagon has been incredibly negligent,” warned former Defence Department adviser, Peter Leitner. “There are plenty of early warning signs that China will use its leverage over these materials as a weapon.”

The US didn’t used to be so reliant on China for supply. For example, a plant in Valparaiso, Indiana used to supply the rare earth magnets for US smart bombs. But it shifted production to China in 2003. Molycorp was the biggest supplier of rare earths in the last century; however, in 2000 its mine in the Mojave Desert was shut due to a mixture of competitive pressure with cheaper Chinese mines and regulatory scrutiny over its wastewater spills.

So serious has the situation become that this week the House of Representatives passed the Rare Earths and Critical Materials Revitalisation Act to support America’s search for alternative sources.

Even before the Japan embargo there were concerns?

Yes, red lights began flashing in July when Beijing cut rare earth export quotas by 72% – citing a need to use them domestically. That led to a surge in global prices for the metals. The Wall Street Journal cited one of the beneficiaries: an Australian miner which owns rare earth reserves. It was reporting that prices had quadrupled since the restrictions were announced.

But the current problem didn’t sprout overnight. Regular readers of WiC would have noted as far back as issue 13 (April 30, 2009) that the Chinese government was mulling an overhaul of the industry. Back then Zhou Hongyu, a member of the National People’s Congress, submitted a proposal for the “strict control of the production and export of rare earth”. His concern was that indiscriminate mining was plundering national reserves of the metals – with Chinese mines turning out twice global demand and pushing down prices. He proposed export volumes be brought down to 30,000 tonnes (annually), which Zhou said would “bring high profits and allow the sustainable development of China’s rare earth resources; and ensure China retains a long term grasp over rare earth pricing power.”

He also proposed the highly fragmented industry be consolidated, with large state firms taking the lead. In fact, Beijing has pretty much acted on all his ideas.

China’s strategy…

China’s fraught negotiations with the world’s big three iron ore miners (BHP, Rio and Vale) has taught it a few lessons – not least of which is that it makes sense to consolidate an industry of 200 rare earth miners to a handful. That way you can better control prices and the terms of trade.

The Ministry of Industry and Information Technology has named three firms to lead the integration drive: Baotou Rare Earth, China Minmetals and Jiangxi Copper.

There is a geographic logic to this. The city of Baotou controls more than 90% of northern China’s rare earth resources. The Economic Observer reckons that puts Baotou Rare Earth in an “indestructible” position in the north.

In the south, big deposits are concentrated in Jiangxi province’s Ganzhou, where Jiangxi Copper has a natural geographic advantage (additionally it has invested in Sichuan, a province with reserves of the metals second only to Inner Mongolia’s).

Minmetals meanwhile enjoys advantages as a Beijing-controlled state-owned firm, and is also active in Jiangxi. “We hope to become a national leader in the field of rare earths,” the company claims.

The fourth major player to enter the ring is Chinalco, which has announced it will spend $1.5 billion buying smaller miners. It is also a centrally-owned firm, meaning it too enjoys political heft.

The four heavyweights…

Big oil produced its four majors, and iron ore produced a big three. Could these four firms become China’s rare earths equivalent – the household names of the next decade?

It’s exactly that situation that has led other countries to seek alternatives sources where they can. The Wall Street Journal reports that Japan is looking to support rare earth projects in Mongolia, for instance. (In the shorter term, Toyota Metal has begun recycling hybrid batteries for their rare earths, reports the Shanghai Scrap blog).

And in the US, Molycorp raised $379 million in July to reopen its Californian mines. But the earliest it can get rare earths out of the ground will be 2012. That means the world’s dependence on China is set to last a while yet…

Keeping track: Over the past two months, China’s “control” of rare earths has often been in the headlines (see WiC81). During recent tensions with Japan, there have also been accusations of China withholding rare earth exports as a means of pressuring Tokyo over a disputed chain of islands. This week China’s Ministry of Commerce offered data to challenge that view. It stated that in the first nine months of the year, 16,000 tonnes of rare earths had been exported to Japan; the equivalent of 49.8% of its total exports of the metals, and a 167% year-on-year rise. In releasing the data the Chinese are clearly trying to alleviate fears that rare earths are being used as a diplomatic and economic weapon.(19 November 2010)

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