China’s Rare Earth Metal Monopoly
Background In June 2010, China lowered its quotas on the export of rare earth metals by 72 percent, and in December of the same year, continued this policy by slicing them down further to around 35 percent. This series of moves by Beijing has raised serious questions across the globe, especially in Japan and the U.S., which are the largest importers of rare earth elements (REE). In 2010, Japan, the European Union, and the Americans decided to petition to the W.T.O., claiming that China was in violation of the rules set up by the trade organization. China had become a member of the W.T.O. in the year 2000, and thus was under its mandates. The Europeans, for one, called the quota “highly disappoint[ing],” with the W.T.O. warning that China’s reluctance to share its rare earth supplies broke global trade rules. However, Beijing still kept its rare earth supplies under tight fist and claimed that the new quota would satisfy the world market demand. It also claimed its quota was to protect the environment from the mining of the metals and to help growing domestic demand.
Introduction
What are the rare earth elements? They are a group of 17 metallic elements with similar properties and structures that are essential in the manufacturing of a diverse and expanding array of high-technology applications. The periodic table of the elements below shows the elements generally included among the rare earth elements. Lanthanum, for example, is used in hybrid cars’ batteries because they can be packed into a small space, but still deliver plenty of power—being “twice as efficient as the standard lead-acid car battery” (Koerth-Baker). Toyota, the largest car company not only in Japan but the world, has used this element in their Prius hybrid lines—8 percent of their total manufacturing. Rare earths are used in the creation of many high tech goods, which are essential to America’s and Japan’s economies. Erbium is used in the creation of lasers and fiber optic cables, as well as military equipment like night vision goggles and weapons. Many others contain special magnetic properties which make things like cell phones, hard drives, DVDs, CDs, wind turbines, and deep sea drills possible. Koerth-Baker quotes Daniel Cordier in her article in Popular Mechanics, with the mineral commodity specialist saying, “Rare earths have really unique chemical and physical properties that allow them to interact with other elements and get results that neither element could get on its own.”
Distribution around the world
Despite their name, rare earth elements are relatively common within the Earth’s crust, but because of their geochemical properties, they are not often found in economically exploitable concentrations. According to the table below, based on data from the respective countries, China has the largest amount of reserves in the world, sitting at around 37 percent. The U.S. constitutes the second largest segment, with 13 percent of the world’s reserves which are mainly distributed in California. The Mountain Pass mine in the Golden State produced rare earth elements until it closed down in 2002. In the U.S., REE deposits are found in Colorado, Florida, Georgia, Idaho, Illinois, Missouri, Nebraska, New Mexico, New York, and both Carolinas.
Sources :( U.S Geological Survey, 2011) History of rare earth production
Prior to the 1990s, the U.S. was the global leader in REE production. However, when China began its economic reform in 1978, which was headed by then president Deng Xiaoping, it began the process of expanding its rare earth industry. In 1992, Deng Xiaoping said “there is oil in the Middle east; there is rare earths in China.” The Chinese government encouraged the rare earth industry to grow rapidly by loaning to the mining corporations at a low rate. This was accomplished by using government-controlled banks and subsidizing mining corporations to export. Because most of the mining corporations are state-owned and supported by the government, they can get licenses easily, regardless of the environment destruction issues and inferior working conditions. China’s low commodity prices were also supported by cheap and plentiful labor.
The price of rare earth exports from China was much lower than the prices of producers in other countries, like in the Mountain Pass deposit in the U.S., which had to face increasing labor costs and environmental protections. With profits continuing to decline, the company which owned the mine decided to shut down in 2002. Since 2000, Chinese production has continued to increase dramatically, and by 2009, Chinese production increased 77 percent to 129,000 tons from 73,000 tons in 2000, while world production only increased 45 percent to about 132,000 tons from 91,000 tons in 2000. On the other hand, production from other countries decreased to about 3,000 tons in 2009. The volume of China’s rare earth output as a percentage of total world output increased to more than 95 percent in 2008, cornering the market and nearing a monopoly. This paved the way for the showdowns which the world is witnessing today.
Despite Chinese production expanded rapidly, China’s rare earth producers reportedly have struggled to maintain profitability. Throughout the 1990s and 2000s, the government and rare earth producers had met and discussed ways to control production and exports as a means of conserving the country’s mineral resources and protecting the environment, but nevertheless, competition among local governments and enterprises resulted in sustained high levels of production. Local governments depended upon rare earth producers to provide employment and revenue for local economic development and did not always follow the national government’s guidelines on rare earths. As a result, the country’s actual output of rare earth continued to exceed the government’s production target (China State Council, 2006).
Because of these continued issues, China’s main goal in recent years was to consolidate the various companies so that they could be more tightly controlled. According to the record, the number of rare earth producers fell from 59 in 2006 to 31 in 2011. Most of the REE producers are state-owned, so central and local government have more power to regulate the production and supervise the working condition and environmental protection. Second, the Chinese government has encouraged the export of high-value downstream products and discouraged the export of raw material. The Chinese enterprises do not have the high technology to refine the material, so most of exports are raw material which are shipped to Japan and are refined by Japanese companies, and then resold to China. Beijing has encouraged the firms that have the technology to refine the raw material in Chinese factories, which will not only enforce the application in China, but also bring up the employment rate and the national income. Third, the China cut quota to 30,000 tons per year in 2010 and 2011 from 5000 tons in 2009.
Table.1 China's rare-earth production, consumption, and export quotas for 2000 through 2011. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Production MIIT 119,500 110,700 89,200 N/A Quota MLR 55,000 N/A N/A N/A N/A N/A 86,620 87,020 90,180 87,620 89,200 N/A Prodction (est.) 73,000 81,000 88,000 92,000 98,000 119,000 133,000 12,000 125,000 129,000 12,000 N/A Consumption (est.) 19,000 20,000 22,000 30,000 34,000 52,000 63,000 73,000 67,700 73,000 77,000 N/A Export quota Domestic producers and traders 47,000 45,000 N/A 40,000 45,000 48,010 45,000 43,574 34,156 31,310 22,512 14,446 Sino-foreign joint ventures N/A N/A N/A N/A N/A 17,570 16,070 16,069 15,834 16,845 7,746 15,738 Sources: China Ministry of Commerce (2006, 2008a, b, 2009, 2010a, b, c) According to the table above, between the 2005 and 2007, Beijing allocated a quota of 60,000 tons; however, they began to cut the quota after 2007. Until 2010 the quota was 30,258 tons, which was a reduction of 39.5 percent from 2009. In 2011, the quota was 30,184, reduced by 74 tons (0.2 percent) from 2010. Last year, the world’s rare earth market was worth about $2 billion. China currently controls 95 percent of the world’s rare earths, producing about 120,000 tons in 2010. Based on the international economics theory, the production of rare earths will be changed in the short run, so the supply curve is inelastic. When China exports a large amount of rare earth, it causes the price to fall, but after Beijing cut the quota and because of the inability of competitors to raise the production immediately, the price of the rare earth metal in the international market will rise rapidly in the short run. When China lowered the quota of rare earth, the price of rare earth skyrocketed in 2010 and the first two quarters in 2010 because of their control of the supply. According to the table above, the FOB China price of REO in 2009 was 10.23 per kilogram, and increased to 31.35. In Q2 2011, the price went up to 173.20 and increased 16 times from 2009. The value of export of rare earth from China increased by 930 percent in the first half of year 2011, mainly because the price went up so rapidly.
Table 2: FOB China Prices Rare Earth Oxide 2008 2009 2010 Q2 2011 Q3 2011 28/11/11 Lanthanum Oxide 8.71 4.88 22.40 135.02 117.68 65.00 Cerium Oxide 4.56 3.88 21.60 138.29 118.65 55.00 Neodymium Oxide 31.90 19.12 49.50 256.15 338.85 240.00 Praseodymium Oxide 29.48 18.03 48.00 220.08 244.73 210.00 Samarium Oxide 5.20 3.40 14.40 125.60 129.45 90.00 Dysprosium Oxide 118.49 115.67 231.60 921.20 2262.31 1970.00 Europium Oxide 481.92 492.92 559.80 1830.00 4900.00 3800.00 Teribium Oxide 720.77 361.67 557.80 1659.20 3761.54 2820.00 Av. Mt Weld Composition 14.87 10.32 31.35 173.20 193.21 122.39 Source: Metal Pages Who gains and who loses? The Chinese government will gain from the quota if the prices continue to remain high. Beijing has placed a tariff on exports which is a percentage of the price. Because of this, if the price goes up so does the tariff. In recent years, the country has been trying to compete in the international market. By forcing foreign firms to work with state-controlled ones because of the freedom it gives from quotas, China can hope to learn and mimic some of these advanced technologies, and having such ready access to the deposits also allows China’s goods to become more attractive to foreigners because they have “privileged access” to green technology. Politically, China may be given more leverage in international disputes if they can halt the trade of REE to the offending country. This actually happened in September, 2010, when China ceased the sale of REE to Japan during the boating dispute in the Pacific Ocean where a Chinese man was detained. On top of these reasons, there are also the stated government benefits of reducing harm to the environment and helping domestic demand.
However, private Chinese companies will lose and many have already been driven out of the industry in the past three years because of newly required licenses which will be discussed later in the paper. Producers of rare earth in other countries can expect to gain from continuing high prices though. Because of the shortage of rare earth on the market and the inflated price for which they are selling, mining for REE will become increasingly attractive as long as the additional product cost is less than the marginal revenue. That is why the price of stock for Molycorp has increased three times over in 2010 and ‘11. Like usual, consumers lose. As the prices of the REE go up, the cost of products which rely on REE will rise as well, and the consumer surplus will decrease.
What will the impact be on the United States? The value of refined rare earth imported by the United States in 2010 was $161 million, an increase from $113 million imported in 2009. Is that a big number? Let us look at some numbers:
· In 2010, the total imported REE by the United States was $2,337,604 million. · In 2010, the total imported REE by the United States from China was $364,943.9 million. · In 2010, the total imported crude oil by the United States was $252,161 million. (U.S. Census Bureau, 2011) So, in 2010, the value of rare earth imported by the United States was 0.0068 percent of total imports, 0.041 percent of the imports from China, and 0.064 percent of the imports of crude oil. The increased price of rare earths recently would not have the same impact as the increased price of oil by the OPAC in ‘70s and ‘80s because the value of the industry is trivial compared to the value of the oil industry. Therefore, the increased price of rare earth does not have much impact on the imports of the United States and the whole of American society.
Environmental concerns and substitutes
The mining of rare earth metals has been destructive on China’s land and people. Keith Bradsher reported in the New York Times of the havoc it has waged on the environment. In one example of the small village of Guyan, the devastation the mining caused on the local community is indeed terrible. Where bamboo, banana trees, and rice once grew, now there is only red clay dead zones which have to be washed away by the workers using acid—acid that pollutes rice paddies, fish farms, and water supplies after rain storms. REE deposits also often contain radioactive material, like uranium and thorium, which have to be separated from the other metal to be used. This is obviously dangerous to the people involved, both the mining employees but also the surrounding farmers and villagers. In Southern China, miners often report growing ill, with the ‘heavier’ rare earths being the hardest on the local environment. On top of the ill effects on the country’s ecological well-being, many of the deposits are run illegally by dangerous Chinese gangs from the cities. After the ore is brought to the surface it is sold to traders, who then bring it to processing centers, leaving the origin anonymous.
All of this is somewhat ironic given what much of the metal is used for—wind turbines and other ‘green’ technologies. One wonders of the hypocrisy of elitists in Western countries who preach of their ‘green’ cars, and wind and solar energy. Often the materials which go into these products are obtained in ways that are a net negative on the Earth’s environment. As long as they cannot see the ‘deadly’ carbon fumes leaving their exhaust pipes, they can live in ignorance of the activities going on in countries like China. However, Pugel’s International Economics reminds the reader that often the cost associated with pollution regulation is not enough to force companies to move to countries with more lax laws—indeed, other factors such as “comparative cost advantage, transport costs, and external scale economies, are usually more important” (Pugel 284). There is evidence also to support that the Chinese are increasingly becoming more aware of their local environment, with Beijing claiming to the W.T.O. that the rationing of REE is to do with the ecological cost to the country.
Despite the name, most rare earth metals are not hard to find, but the environmental price of bringing them from the earth has led many developed economies to export the pollution elsewhere. However, with the threat of China’s continued monopoly of the trade and rising prices at the beginning of 2011, many REE mines around the world are looking at reopening, with developers in Canada, Greenland, South Africa, the U.S., and Australia examining the possibility. The largest mine in America is located in San Bernardino County, California, and has a history of being the biggest producer of REE in the world until 1984. Mountain Pass, the name of the deposit, has reserves of over 30,000,000 tons of ore. This supply would be able to meet current U.S. demand for at least 150 years but take several years to start up, with some economists warning of a time span of up to 5 to 10 years. The deposit is owned by the American corporation, Molycorp. In November 2011, Molycorp’s reported record sales of $138.1 million, a 39 percent increase over the previous quarter in 2011. Sumitomo and Mitsubishi Corp., two Japanese firms who have both shown interest in diversifying away from Chinese ore, signed agreements in late 2010 to be supplied by the Mountain Pass deposit and the American firm, W.R. Grace & Co. (a catalyst manufacturer) has also decided to participate. This mine can only produce “light” rare metals, lanthanum and samarium, but if other known U.S. sights opened up which contain “hard” deposits, America would be able to self supply completely.
Another mine in Australia owned by the Lynas Corporation is also rearing to relaunch and a massive deposit was recently discovered by Japan in a Pacific sea bed; however, most other companies lack the knowledge or the means to do so. This can give China the advantage in the short run, but not in the long run because Beijing will lose control of the prices. This is similar to ‘dumping’, where one country will unload products with cheap prices on another to drive out competition, and then raise the prices later. Dumping is hard to do because once the prices are raised, other companies will move in and take back market share. This is what is going on now—China will not be able to hold onto its monopoly if others start producing and selling for cheaper prices.
Foreign mining competition is not the only threat China might have if it continues its predatory pricing—companies, both in the West and Japan, have been trying to find alternatives to rare earth metals or, at the very least, use less of them in their manufactured, high-tech goods. In 2009, the U.S. Congress ordered the Department of Defense to review the military’s dependence on the foreign REE and yet another bill introduced called for the stockpiling of the metals for national security if China started halting the trade entirely, which it was threatening to do in 2012. Toyota of Japan and Siemens of Germany have also been working to reduce their purchases of the metals, as are many other companies around the world. Other options presented to countries that use REE extensively include recycling rare earth metals from landfills and dumps. High tech items, such as motors, televisions and cell phones, could be used in new gadgets if there is enough salvage value left in the materials, and there has been other research indicating that pyrate (or “fool’s gold”) may be “able to replace Rare Earths in many applications” (Blankenhorn).
The present and future At the end of 2011, the price of rare earth metals dropped at an average of 20 percent, with Chinese exports of lanthanum declining 60.4 percent and cerium 92.3 percent. This was a result of falling demand because of the higher prices. China reacted by consolidating REE companies across the nation, cutting mining entirely in mid-October, and devising a system of ‘special invoices’ to more tightly regulate the industry and weed out illegal businesses. The new ‘invoices’ will require producers to have special permits to sell their material to the market. However, this action may actually cause the price to drop even further because some smaller firms may decide to exit the market, liquidating their reserves and flushing the marketplace with more metals. Because of this, buyers may halt purchases because of anticipated lower future prices, creating a multiplier effect—the price will continue to fall even quicker. With threats like these, China’s position is deteriorating. If Beijing is going to take advantage of their monopoly they will have to move quickly.
For an investor, volatile commodity markets can be a great area to place money because there is much to be made both on the upside and downside. In the short run, we predict that REE prices will become increasingly volatile yet show a general upward trend. This is in line with how other commodities, such as gold, copper, and oil, are currently performing. In the long run, however, prices may be driven down to sustainable levels, preventing a bubble from bursting. This could be a long time in the future, so there is still plenty of money to be made. In 10 years, China will have lost complete control of their monopoly with the threat of substitutes like pyrate, recycling, and new mines killing it by a thousand cuts. In the interim, they may use their control to leverage their position against America if there is an economic or militaristic showdown. China is increasingly allying itself with regimes like Iran and Russia, and tension is increasing in the South China Sea with a heavier American presence and countries like Vietnam, Thailand, and the Philippines growing increasingly anxious with China’s growing prominence.
Citations:
Blankenhorn, Dana. "Don't Worry About Rare Earths." Renewable Energy World. 19 January 2011. Web. 4 Dec. 2011.
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