Energy & Resources, Talking Point

Export more, please

Why a dispute over Chinese rare earths exports has gone to the WTO

Export more, please

This is what they are fighting about: a rare earths mine in Jiangxi province

Last Friday something rather unusual happened. A farmer in Sichuan was bitten by a wild panda. “I am fortunate to have been bitten by China’s national treasure,” joked Liu Yunkang, before adding more seriously, “I used to think pandas were docile”.

The image of a biting panda will resonate with policymakers around the world, not least because the iconic bear is so closely associated with China itself. After all, foreign officials are becoming increasingly concerned about some fairly aggressive Chinese tactics – most especially in trade-related matters.

The latest trade issue to worry the US, Japan and Europe is China’s near monopoly of rare earth metals and its decision to restrict their export. Last week, they finally took action by filing a complaint with the WTO.

Why the dispute?

China accounts for a huge share of rare earth production (97% is the figure often mentioned). There are 17 of these metals, with names like scandium, yttrium and promethium, and they are used in the manufacture of everything from iPads to fighter jets.

That means that their price and their availability has become a concern for industrialists around the world.

In fact, the row over rare earths supply often takes on a deeper, political undertone. For example, when Japan and China were in dispute over the sovereignty of a series of islands in 2010, Beijing’s point of leverage was to impose an embargo on the sale of rare earths.

It worked. Japanese industry was horrified and Tokyo eventually backed down, releasing the Chinese trawler captain who had sparked the diplomatic incident (see WiC80).

But it wasn’t just Japan that suffered as a result. Also a major concern for the US and the Europeans was that Beijing used the crisis to reduce the total amount of rare earths that could be sold abroad. This was viewed by China’s critics as serving two purposes. First it would give Chinese manufacturers preferential access to supply. Second, it would drive up the prices of the metals that were sold overseas, to the benefit of Chinese miners.

Did that happen? Pricing data can be hard to pin down because the earths are mined in small quantities and sales are usually private.

But according to newspaper The Australian, rare earths miner Lynas estimates that prices for lanthanum oxide, which is used for applications like polishing glass, reached more than $110 a kilogram in the second half of 2011, from an average of $4.88 in 2009.

Similarly, the cost of dysprosium, a material used in smartphones, also shot up dramatically. By last July, export restrictions had seen its international price rise tenfold on a year earlier. The US Defence Department has published a series of longer term estimates too, suggesting that rare earths have surged between four and 49 times in US dollar terms since 2001.

So why act now?

China’s export quota for rare earths was set last year at 30,184 tonnes. Rather than raising it this year in a nod to international partners, policymakers (somewhat defiantly) have left it unchanged.

The timing of the new WTO case seems to have been spurred by the outcome of another complaint to the trading dispute body. In late January, the US, the EU and Mexico won a landmark verdict against China, which was then instructed to drop its export restrictions on raw materials like bauxite, magnesium and zinc.

According to Reuters, the Chinese government has said it “deeply regrets” the ruling but will abide by it (China had appealed against an earlier verdict, but lost).

That precedent opened the way to launch a similar case on rare earth restrictions, with US president Barack Obama saying export limits on the metals need to be lifted.

In a statement to reporters at the White House, Obama added: “American manufacturers need to have access to rare earth materials which China supplies. Now if China would simply let the market work on its own, we’d have no objections.”

Of course, this is an election year in the US, and the president has much to gain from being seen to tough it out with the Chinese (Obama warned that he will not allow other countries to get away with “skirting the rules”).

“China is always a hot topic during US presidential elections,” comments the Oriental Morning Post. “Various trade measures taken against China have a direct link with this year’s election.”

Earlier this month Congress also passed measures allowing the Commerce Department to slap higher duties on Chinese goods deemed to benefit from unfair subsidies.

And this week, tariffs were also imposed on the import of Chinese solar panels said to be receiving subsidies. Last year the US spent $3.1 billion buying solar panels made in China.

Back to rare earths, and China’s case for the defence…

The riposte from Chinese officials was that their rare earths policy is “in line with WTO rules”, reported the Beijing Times. The newspaper cited Chinese Ministry of Commerce spokesperson, Shen Danyang, who said that China had no intention of curtailing free trade or protecting domestic industries.

Instead the aim was to “protect the environment”, and ensure that Chinese resources were mined sustainably.

The minister of industry and information, Miao Wei, then told Xinhua that in the past China’s mining of rare earths had been “out of control”. Not only had the environment been damaged, the previous rate of exploitation had threatened to exhaust reserves within 30 years.

As WiC has reported before (see WiC115), other countries have rare earths too but have been reluctant to mine them.

Indeed, one reason China accounts for such a huge proportion of global supply is that California closed down its own mines when environmental regulations made them uneconomic.

“Compared to countries also rich in rare earth resources, but refusing to mine them, China is now providing 31% of its reserves for more than 90% of the world’s supply of rare earths, making great contributions to the supply and stability of the world’s rare earth market,” Chen Deming, the minister of commerce, insisted.

You read it first in WiC…

Our first mention of rare earths and China’s change of strategy on exports was in issue 13. At the time, the topic was largely ignored by Western media but we cited plans by National People’s Congress delegate Zhou Hongyu to revolutionise the industry.

Zhou explained why China needed a a change in industrial policy, saying explicitly that rare earths exports should be reduced to 30,000 tonnes annually (which is actually the quota this year).

His plan was also to consolidate the hundreds of small players into three or so heavyweight miners to “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.”

The implementation of Zhou’s plan is ongoing but much work has already been done in weeding out the smaller miners. The big players that have emerged – akin in rare earth terms to BHP, Rio and Vale in iron ore – are Baotou of Inner Mongolia, Jiangxi Copper, China Minmetals and Chinalco (see WiC81). Industry insiders says a little longer is needed for the consolidation process.

So what’s going to happen?

Not much, that is, in the short term. The 60-day process for the two sides to reach an agreement is now underway. If there is no resolution, the WTO will establish a panel to reach a decision, which may take as long as two years. But for Chuck Schumer, a US senator and long time critic of China’s trade and currency policies, this is too long to wait. He is suggesting “faster ways” to assert leverage than relying on the WTO, including blocking financing for Chinese mining projects through the World Bank and even halting Chinese-funded mining projects inside the US.

In the meantime, China will continue to control supply, and try to use that power to keep prices high. As mentioned earlier, the current export quota is unchanged, which will do little to appease China’s frustrated trading partners.

And the outcome? As with the earlier case involving bauxite, China could lose. But by then its Big Four miners may well have gained such a large share of the rare earths market that the loss of export controls becomes less of an issue. The companies themselves would be able to dictate their output – much as OPEC does in oil.

Besides, Gong Baihua, a legal professor at Fudan University, says the latest WTO case may not go against China. He says that under the WTO’s so-called ‘exception clauses’, rare earth exports can be restricted on the grounds of environmental protection.

But Gong may be missing the point. This dispute is probably going to be less about the legal niceties and more about the political backdrop…

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