Rare Earths: The Dragon's Pearl

By Edith Lai

Most people are familiar with the periodic table from secondary school, though few have ever paid much attention to the elements in the top row of the separate box on the bottom left. These 15 lanthanides, plus scandium and yttrium, are known as the rare earth elements (REE). They are vital to a broad range of technologies, from mobile phones and LCD monitors to hybrid car batteries and missile guidance systems. Like the dragon's pearl that allowed the dragon to ascend to heaven in ancient Chinese mythology, REE are crucial for China's economic rise.

China accounts for 97 per cent of the global REE supply. According to a Congressional Research Service (CRS) Report, China mined 130,000 tonnes of REE in 2010, compared to the 2,700 tonnes mined by India, the second largest supplier. The demand for REE had been rising, driven by the needs of modern technology. The CRS Report estimates the 2010 global demand was 136,100 tonnes, and the Chinese Rare Earth Industry Association estimates 2015 demand at 210,000 tonnes.

Meanwhile, China has been reducing its export quota on REE. The quota in 2006 was around 61,5 tonnes; by 2011, this has halved. The squeeze on global supply has caused prices to skyrocket. The quantity of exports to the US decreased by 42,6 per cent between 2005 and 2010, but the value of the exports increased by 207,1 per cent, according to the CRS Report.

China has not always had a near-monopoly on REE; it was a result of great foresight. China has been consistently involved in R&D of REE for over 50 years. Between 1978 and 1989, annual production in China increased by 40 per cent. “There is oil in the Middle East; there is rare earth in China", remarked Deng Xiaoping in 1992.

In contrast, the US was the leader in rare earth research in the 1960s and 70s, but funding was slashed in the 1980s, and environmental regulation is increasingly stringent. The Mountain Pass mine in California, previously the world's biggest rare earth mine, has been dormant since 2002 when mining became economically unviable.

Rare earths are often found together with radioactive elements. Separation requires lots of water, producing large amounts of radioactive waste which is difficult and expensive to process. For this reason, many countries prefer to import from China rather than mine their own. At present, there is no real supply chain outside China; its lax environmental and labour standards mean costs are low. China claims the reason for decreasing export quotas is environmental protection. However, there is the bigger reason.

China is the largest REE consumer, yet a third of its reserves have already been used up. The Ministry of Commerce estimates that the remainder will only last for another 15 to 20 years, so China has been building strategic stockpiles.

Many see the export restrictions as China’s attempt to force foreign buyers to process their raw materials within China, thus drawing production from the US and Europe. The EU Trade Commissioner reported that European companies have had to pay twice as much as their Chinese competitors for rare earths. The Economist argues that the Chinese policy is an effort to move Chinese industries up the supply chain from producers of cheap raw material to manufacturers of the valuable finished product.

The dependency on Chinese exports leaves these countries exposed to significant supply risk. Therefore, some countries are taking steps to diversify their supply lines. Last October, Angela Merkel flew to Mongolia to sign a commodity agreement securing Mongolian REE in exchange for German processing technology. EU member states have also begun engaging in more recycling of rare earth as part of its Innovation Partnership on Raw Materials which was launched last month. Molycorp, which operates the Mountain Pass mine, claims it has found a cleaner way of dealing with waste, while keeping costs down. The expected production costs per kilogramme are around half of the Chinese costs. Molycorp aims to resume mining this year.

Japan accounts for a third of the global demand and receives 82 percent of its REE from China. Thus, it is particularly sensitive to any reduction in China's REE export quota. Despite Wen Jiabao’s reassurance that REE would not be used as a diplomatic tool, China temporarily imposed a de facto export ban to Japan after the 2010 Diaoyutai/Senkaku maritime incident, hastening Japanese efforts to secure REE elsewhere. Japanese companies have formed partnerships with companies in Vietnam, India and Australia to mine in those countries. Japan has also been actively engaged in “urban mining” - the recycling of end products such as mobile phones to recover REE materials. Moreover, it aims to slash domestic consumption of REE by 30 per cent in the next two years.

Attempts to create a supply chain outside China seek to lessen the blow of the export restriction without tackling it directly. The obvious option would be to bring a case to the WTO to force China into lifting the restrictions. Such a move is not without precedent. In 2009, the US, EU and Mexico filed a case against Chinese export restrictions on nine raw materials. China responded by claiming the general exception under Article XX of GATT that trade restrictions can be imposed for the purpose of natural resource conservation and the protection of public health, but the WTO Panel rejected China’s defence.

China appealed but the ruling was upheld in January. Buoyant on the fresh victory, the US, the EU and Japan launched another WTO case against China on rare earths in March. However, Dudley Kingsnorth of consultancy IMCOA argues that going to the WTO does not address the real problem: China will always put its supply needs first. Moreover, victory might not come as easily this time for the West as the environmental argument for rare earths is stronger, an angle China has increasingly used.

The export restriction has caused much economic and political tension between China and other major REE consumer states. Most importantly, it is not a long-term solution to the fundamental problem of the exhaustion of China’s reserves in the foreseeable future in the face of growing domestic demand. If China loses this new WTO case, it will have to lift the restrictions, and its attempts to obtain REE from elsewhere has not always been successful. The question of how to secure enough rare earth for China's future will be one of the greatest tests for the new Chinese leaders.


Edith Lai holds an MA in International Studies and Diplomacy from the School of Oriental and African Studies, University of London, having graduated with a BA in Philosophy from the University of Cambridge. Her research interests include East Asian politics and diplomacy, with a focus on China and Hong Kong.


2 April 2012