Back in April 2009 we wrote an article about a proposal being made by Zhou Hongyu, a member of China’s parliament, the National People’s Congress. He was not a high-profile politician in the mould of Bo Xilai, but his initiative was set to have a global impact. He called for the “strict control on the production and export of rare earths” telling local media that the current structure created “an absolute waste of resources”.
Zhou said that indiscriminate mining was leading to China selling off its rare earth resources at cheap prices, benefiting foreign industry rather than the nation. At the current pace of extraction, he warned, “China will have more or less no rare earths left in two to three decades, and we will have to spend huge amounts to import them from abroad.” He proposed that the industry be consolidated by a few large state players, and that export volumes should be reduced to 30,000 tonnes annually. Zhou predicted his policy would lead to “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.”
When we reported on Zhou’s scheme in WiC13, the subject of China’s rare earth resources – used to make everything from smartphones to F-22 fighter jets – was not high in the international media’s attention. So little known were these 17 metals, that our article actually stated: “What, you might ask, is, or are rare earths?”
It was an early example of how our monitoring of local media could alert readers to a big trend. That’s because the Chinese government pushed ahead with Zhou’s scheme and suddenly industrialists around the world found prices of rare earths rising as Beijing sought to rationalise and OPEC-ise this critical industry (recall that when Zhou made his proposal, China’s mines were turning out 180,000 tonnes of the metals a year, when global demand was just 80,000 tonnes).
Not surprisingly, rare earth production was a topic we kept a close eye on in subsequent issues. America’s military quickly saw it as a national security issue and looked to reopen the nation’s own mines in California (see WiC57). It also became part of a rancorous dispute between Beijing and Tokyo over the latter’s detention of a Chinese trawler captain. Japan accused China of restricting the export of its rare earths in retaliation – using them as a tool to undermine Japanese industry (see WiC81).
The issue of Chinese export quotas became so contentious that a case was eventually brought before the World Trade Organisation. Last August that body ruled that the export quotas were a violation of its rules, and last week China’s government seemed to acknowledge that verdict as it eliminated them. It has said this is part of a wider move to market-based pricing of commodities.
The broader question is did Zhou’s policy work? Not exactly. For one thing, it encouraged rare earths to be mined elsewhere leading to China’s share of global output falling from 93% to 86%. The Wall Street Journal also pointed out that exports were around 25,000 tonnes in the first eleven months of last year, well below the 30,000 tonnes cap.
The Hong Kong Commercial Daily comments that China still “struggles to convert its rare earth resources into a rare earth advantage”. But National Business Daily believes the government remains intent on change. The State Council last month mandated that six state-owned firms will consolidate the industry. It is not the first time it has made such a statement but if it occurs at a rapid clip this time – which will require overcoming a host of vested interests – one objective will be met. The larger, better-capitalised firm will be able to employ costlier technologies to mine in a less environmentally destructive fashion. Ironically, it has been the smaller privately-owned mines that have caused the worst of the wreckage when mining China’s rare earths.
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.