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China Punches Back in Rare Earths Row, Claims Rising Scarcity Justifies Export Curbs

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A serious simmering dispute involves China versus the rest of the world on rare earths. As most readers know, rare earths are essential to the manufacture of many high tech, defense, and “green energy” products, such as smartphones, lasers, and hybrid batteries. Even though rare earths are not rare, their extraction is an environmentally nasty business, and China, which has less than 30% of world reserves, now accounts for over 90% of global production. That is a stranglehold that China has decided to exploit. Per Wikipedia:

On September 1, 2009, China announced plans to reduce its export quota to 35,000 tons per year in 2010–2015, ostensibly to conserve scarce resources and protect the environment.[21] On October 19, 2010 China Daily, citing an unnamed Ministry of Commerce official, reported that China will “further reduce quotas for rare earth exports by 30 percent at most next year to protect the precious metals from over-exploitation”.[22] At the end of 2010 China announced that the first round of export quotas in 2011 for rare earths would be 14,446 tons which was a 35% decrease from the previous first round of quotas in 2010.[23] China announced further export quotas on 14 July 2011 for the second half of the year with total allocation at 30,184 tons with total production capped at 93,800 tonnes.[24] In September 2011 China announced the halt in production of three of its eight major rare earth mines, responsible for almost 40% of China’s total rare earth production.

We’ve followed this story because it is a colossal example of short-sightedness of military planners and corporate executives. I recall in my youth (the 1970s) concern about the vulnerability of the US military to the fact that certain strategic materials had limited supplies outside Rhodesia (now Zimbabwe) which even then looked pretty unstable (note that outside meddlers seemed to have trouble figuring which horse to back. For instance, Lonhro started backing black nationalist parties in Rhodesia before international businesses abandoned the National Party in neighboring South Africa). One assumes that (at a minimum) military planners are aware of these vulnerabilities and do what they can to reduce their impact (e.g., stockpiling, developing alternative technologies to minimize or end their use, recycling).

By contrast, letting China gain control of rare earths production was a self inflicted wound. And China was unusually aggressive in letting its customers know it held the whip hand. It implemented an unannounced export embargo in 2010 which targeted Japan above all others. Our reaction when China lifted the ban after consternation ensued:

There are two different ways to read this little contretemps, and readers can no doubt come up with other interpretations:

1. This was a successful shot across the bow of the US (the initial Japan freeze was in many ways directed as the US as welll because the US consumes far more of Chinese rare earths via Japanese intermediate and end products than via direct purchases from China, even if the immediate impact on Japan was more pronounced). The Treasury has backed off its pressure on China to have the renminbi appreciate more quickllyand is now supporting the idea of China coming up with longer term goals to rein in its trade surplus

2. This was a shot across the bow that failed. China only banned raw materials exports; it wanted to force encourage its trade partners to buy products manufactured in China with rare earths content. But instead, Japan immediately started to focus on recycling rare earths and redesigning products to use less of them; the Eurozone similarly started to consider accelerated development of alternative sources, rather than buying higher value added goods from China. This seems consistent with the fact that Secretary Clinton was set to make remarks about the ban; it was dropped literally hours before her speech, but the State Department has not gotten confirmation.

Note these readings may not be inconsistent. China may be preoccupied with gaining short-term advantage (particularly given continuing trade tensions; the hermit kingdom made it clear in 2010 it wanted a quid pro quo for restoring supplies) and may be willing to risk getting more competition down the road. Put it another way: what good is being a monopolist if you can’t abuse your power?

The US, the EU, and Japan jointly filed a WTO case in 2012 against China over its export curbs, China looks more and more likely to gain from pressing its advantage. The US and other countries can’t ramp up production quickly, particularly given the environmental hazards involved. China is using its chokehold on supplies to reward companies that locate more higher-value-added manufacturing in China, allowing them to move up the skill chain.

The latest salvo took place today, apparently in response to the March WTO lawsuit. The parties have met in late April as part of a formal dispute resolution process. If no agreement is reached within 60 days, the case will then go to a panel for a ruling. Given the timing, this move appears to signal that the negotiations are at an impasse (quelle surprise!) and China is taking its case public in case the talks fail. China is now claiming that its supplies are falling (peak rare earths, or at least in China). From the BBC:

China has warned that the decline in its rare earth reserves in major mining areas is “accelerating”, as most of the original resources are depleted.

In a policy paper, China’s cabinet blamed excessive exploitation and illegal mining for the decline…

“After more than 50 years of excessive mining, China’s rare earth reserves have kept declining and the years of guaranteed rare earth supply have been reducing,” China’s cabinet said in the paper on the rare earth industry published by the official Xinhua news agency.

China is also talking up the environmental damage associated with rare earths production. Since China has been remarkably unconcerned about this issue on numerous other fronts, this sort of talk seems a bit disingenuous. From the Associated Press:

China on Wednesday defended its export curbs on rare earths used in high-tech products as an environmental measure and rejected a World Trade Organization challenge by the United States, Europe and Japan.

A Cabinet official rejected complaints Beijing is using the environment as an excuse to support fledgling Chinese producers of lightweight magnets and other rare earths products by limiting supplies to foreign rivals in violation of its free-trade pledges.

“The protection of the environment is never a pretext for gaining advantage or increasing economic returns,” said Su Bo, a deputy industry minister, at a news conference.

This is not a great argument to push, since it works far more to the advantage of Western countries than China. It has been a sore point that China’s price advantages are based in part on environmental degradation. This sort of “we need to think of the planet” talk would also argue for importers to impose tariffs or import restrictions against countries with low environmental standards (note that idea does not fit well within the WTO framework; environmental and consumer protections are often characterized as restraints on trade, but rules change as prevailing concerns change).

Bottom line: this row does not look like it will be resolved soon and it will take years for litigation to play out. And China will win even it it loses if it gets enough manufacturers to relocate in the meantime. Nicely played.

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34 comments

  1. George Phillies

    As you correctly note, there are large sources of rare earths outside China, and there are companies (disclaimer: I read your last article and invested in several of them) at various stages of exploiting them. At least one is in production now. These companies however, have the challenge that their business plans can be disrupted whenever the Chinese decide to start selling the product for cheap again.

    1. MRW

      Rare earth production is a highly complicated affair. You don’t just “go into production.” It’s a four-stage process, and no company does all stages. The US, through incredible short-sightedness in the 80s and 90s gave up its leadership in the field, and closed down one of the major mines because the anti-govt and anti-regulatory crowd thought it unnecessary for the US govt to subsidize the resource. Big mistake.

      The US can’t just ‘go into production’ now. Producing rare earths at the fourth stage in the process is as much as art as a science, and we’ve lost that ability. This is all part of what I had against the tea-partiers (read: we don’t want no no stinkin’ black man in the white house) in February 2009. While the no-nothings were sewing teabags onto their hats and combing Walmart for lawn chairs, and screaming about the economy, the Chinese were in South America and Africa buying up rare earth mines and generally locking us out of the business.

      The other stupid group then–and now–were the environmentalists clamoring for green energy, and thinking we could have it without (1) knowing how it’s done, (2) knowing where the resources were, and (3) understanding the absolute environmental devastation (radiation waste) that creating rare earths can produce. These are the same class of idiots who think it’s OK to inject 1,000,000 tons/year of sulphur into the air at 60,000 ft at a cost of billions annually to reduce CO2.
      http://agriculturedefensecoalition.org/sites/default/files/file/pdfs/jet_trails/25_1_2010_University_of_Calgary_Geoengineering_Cost_Analysis_Using_Jets_October_30_2010_Aurora_Flight_Sciences_Final_Report_Keith.pdf

      Read more and weep:
      http://agriculturedefensecoalition.org/geoengineering

      The pollution we can create with green energy
      http://www.dailymail.co.uk/home/moslive/article-1350811/In-China-true-cost-Britains-clean-green-wind-power-experiment-Pollution-disastrous-scale.html

  2. rotter

    “Even though rare earths are not rare, their extraction is an environmentally nasty business,”

    Even though it dosent have to be. Thats a choice, based on wringing every single penny out the process and a few more that arent there, but can be imagined as credit. The system isnt broken, the system IS THE broken.

    1. Yves Smith Post author

      Please don’t give bumper sticker genearlizations, particularly when we linked to material that contradicts what you say (ie, there’s no excuse for you conveying misinformation).

      The facts is that separating out rare earths involves huge amounts of water (a scarce resource) and often, inevitably, contaminates it with thorium and uranium. This is a very costly process, environmentally, and there is no way around that.

      Some details:

      Several factors make purification of rare earths complicated. First, the 17 elements all tend to occur together in the same mineral deposits, and because they have similar properties, it’s difficult to separate them from one another. They also tend to occur in deposits with radioactive elements, particularly thorium and uranium. Those elements can become a threat if the “tailings,” the slushy waste product of the first step in separating rare earths from the rocks they’re found in, are not dealt with properly…

      Mountain Pass went into decline in the 1990s when Chinese producers began to undercut the mine on price at the same time as it had safety issues with tailings. When the Mountain Pass mine was operating at full capacity, it produced 850 gallons of waste saltwater containing these radioactive elements every hour, every day of the year. The tailings were transported down an 11-mile pipeline to evaporation ponds. In 1998, Mountain Pass, which was then owned by a subsidiary of oil company Unocal, had a problem with tailing leaks when the pipeline burst; four years later, the company’s permit for storing the tailings lapsed.

      http://www.technologyreview.com/energy/26655/?p1=A2

      Shorter: even when things work it’s costly, and sometimes they don’t work.

      1. rotter

        The System IS the broken? What ive learned here, is to never respond to a piece written by you. Im not sure why my opinion offended you more than any others added to the bottom of this page, except that you did the same thing to anohter comment reflecting another opinion i left at the bottom of another piece you wrote. I think its as simple as you cant stand being contradicted, even though my comments arent contradicting what you say just expressing my beliefs.

        1. MRW

          You have ZERO, and I mean ZEEEROW, understanding of how rare earths are produced. None. Zip. Nunque. I didn’t see Yves Smith’s reply before I wrote mine above. Look at the last link in my post and read.

    2. enouf

      I (personally) want to give you the benefit of the doubt, — atleast let you clarify what you’re trying to say..

      Just want to note that since we’re on environmental damage and radiation; Have you noted how dangerous and radioactive the Marcellus Shale layer is? They use its radioactive properties to define the boundaries/layers; it’s extremely loaded with Radium, which then decays into a gas known as Radon — Yes, that nasty odorless deadly gas seeping up through everyone’s basements, crawlspaces, cellars …

      Barring all the already well known detrimental Environmental impact/effects from extracting Natural Gas from the Hydraulic “Fracking” process;

      – allowing patents on the Toxic potions used, so BigOil and Gas don’t have to tell the Public what *exactly* their petro-/bio- toxic chemical concoctions consist of,

      – using massive amounts of Fresh Water in the process of their horizontal fracking, and the fact that less than 50% of their “poisonous potion” injected ever returns to the surface (and IIRC it’s even much lower; ~30% or so).

      – contamination and eventual annihilation of well-known Aquifers, the ones that feed thousands if not millions of farms (irrigation), homes/businesses (fresh water wells) etc

      Now add the “Radon” issue to all of the above.. allow me to explain a tad moreso;

      The natural gas used now here in the Northeast USA (NYC metro area) predominantly comes from the mid-upper Midwest, and because Radons half-life is approx 2 1/2 days, IIRC, the time the gas spends in the pipeline in transit from there to here allows for the levels of Radon to decrease somewhat .. Yet, if the Marcellus Shale is allowed to be tapped and fed directly into the NYC area, guess what? ..yep.. No half-life decay time — so basically everytime you turn on your stove/oven to cook (even just having a (older style oven/water-heater/furnace) pilot light going will do it too) you are dosed with a nice high amount of Radon!

      … enjoy your meal

      Love

      p.s. for more about it all, one great resource is;
      http://damascuscitizens.org/
      (whose director, is interviewed in a broadcast at below URL) http://prn.fm/2012/06/20/connect-dots-repeat-program-052312/

      p.s.s. Didn’t mean to rant on, nor sidetrack/hijack the thread — just wanted to toss that info/awareness out there.

  3. Curtis

    The answer for the US. Employ eminent domain to take over all of the rare earth deposits in the US, and then use the military to run the extraction facilities and swap out rare earths for bombs and munitions from the industrial complex. Ha!

    1. Susan the other

      Very informative presentation on thorium. A virtuous circle of clean energy and manufacturing. I can see why our entrenched oil economy has been putting this off. Everything will change. They cannot keep this technology down much longer. If China is aware of this potential, it actually doesn’t make sense that they would curb trade in rare earths. Nor justify it with environmental concerns. They might fear that after 50 years of extraction, they could run out and then the rest of the world will control those resources. This also makes me think we are now seeking control of the oil fields in the middle east for other purposes than fuel.

      1. S Brennan

        Thanks Susan,

        If people only knew the facts…they would call for this change…and it would change tha social fabric for the better in incalculable ways.

        I know no better way to cure so much of what ails us now.

        Thanks again!

      2. Christophe

        Susan,
        Don’t forget to take depleting deposits of usable uranium into account when reading the industry’s cheerleading for thorium. Anyone whose profits derive from nuclear energy is currently quite concerned about limits to any resource necessary for its production. Given the lead time and expense of building new reactors, they will stop being funded the moment that terminal limits to the industry can be credibly predicted. Thus, this over-hyped push for a new fuel source that’s easily obtained in unlimited quantities (crowd roars)! And since they are designing a miracle element to solve all their concerns, why not make it degrade into useful byproducts, reuse most of its own waste, and operate safely in smaller reactors?

        Were anything that universally superior,why would it not have been implemented sooner? With car-salesman smoothness, they have turned that criticism into a sales point — uranium ruthlessly monopolized the market because TPTB wanted to make weapons from its byproducts. If war mongers supported uranium, shouldn’t peace lovers support the unweaponizable underdog, thorium? Doesn’t this miracle cure seem a little too tailor-made to draw the anti-nuclear crowd into the tent?

        Lastly, regardless of whether any of thorium’s endless promises can be delivered, there is no doubt that a massive bubble can be inflated on those promises. The government, energy, and banking sectors are pretty desperate right now for another bubble to inflate as the shale gas bubble begins to look quite precarious with oil prices falling. Add to that the anti-nuclear fallout from Fukushima and a clean-nuclear medicine show is about due to roll into town.

        1. S Brennan

          “industry’s cheerleading for thorium”

          What an incredable lie, it is the nuclear industry that stopped Thorium Reactor development.

          On the off chance you are just ignorant and not a cypher, please take a moment to do a five minute Google search.

          The Developer of the orignal commercial reactor was the one that called for a halt in it’s implementation, in favor of a Thorium Reactor for safty reasons…he was fired.

          1. S Brennan

            Thanks F. Beard,

            It’s hard to get folks to look at the facts/benefits surrounding Liquid Salt Thoreum reators.

            Anytime I bring it up I am sure to recieve authoritive fact free personal speculation that avocating Thorium reators is an evil plot by [fill in the blank here]to destroy [fill in the blank here]. Which just goes to show ignorant folks are about it’s history, people who developed the first working reactor in the 60′s were shunned, then fired. The inexspensive, but sucessful program was shut down purely to promote the weapons based, Nuclear Industry friendly, breeder reator.

            The breeder reator program had to be shut down because they had repeated near misses…even it’s proponents thought too dangerous. Most think the Nuclear Power plants ceased being built because of public pressure…part of the story, but the bigger issue was, without breeder reators to create new fuel rods and no way to safely reprocess spent ones, conventional reactors didn’t make any sense.

            And once you make a “bipartison” mistake, you keep doubling down. So when you hear these wacko theories on the evils of Thorium…many of them were started by the players that brought us the failed breeder reactor program. It’s a pain to bring Thorium up in this country…my fellow citizens ignorance is so broad and deep and they are so willing to pontificate on the matter…more importantly, they are unwilling to spend 30 minutes learning.

            Thanks to all for watching those video above, particulaly those who lack technical acumen…it’s kinda boring, but important! Thank you.

          2. enouf

            @ S Brennan;

            So happy to see someone already brought up the LFTR (Liquid Fluoride Thorium Reactor) info and possibilities, ..and to the truth/lies behind who/what actually killed off pursuing that technology… so now i don’t have to do it ;-)

            Love

          3. F. Beard

            I was just reading about boil weevils and fire-ants and it occurred to me that whatever difficulties thorium (and any other non-living technology) may have, that once the problems are solved, they are solved PERMANENTLY whereas living pests can continually evolve.

          4. enouf

            Oh, and just to add; the ‘China/Rare Earth/Thorium’ interplay is touched upon here below – takeaway is; China is already onto it.

            http://www.youtube.com/watch?v=D3rL08J7fDA

            at from around the 3:30min -> 6:00min marks (at the least)

            I’m just watching the google techtalk presentation you (S Brennan) posted now (~ 36:00 mins long) ,.. I had originally watched a 1 1/2 – 2 hour presentation ((shot in a basement in canada?) when i was turned onto this information) which goes into great detail, but the one i posted seems to do so as well (though i haven’t watched it all yet, atleast the audio is crisp)

          5. S Brennan

            The key is to work around the media’s blackout of this subject.

            If enough people knew this technology existed and could be implemented in the short term [5-10 years...less than The Apollo Program] they would demand it..and it would happen. No it’s not “shovel ready” for some clueless President to be spoon fed, it requires a JFK moment, or a concerted effort by grass roots to force action. Demand a single action, that will do more than a thousand corporate welfare programs.

            But I think it’s fair to ask “why must those who serve our country die, or be mutilated in foreign lands…all for oil we don’t need, if we could just get Washington Pols to stop taking bribes long enough to get off their collective asses and employ inventive, capable Americans to solve the festering energy crisis that has brought this nation so much grief and heartache”

          6. F. Beard

            I like ole Kirk Sorensen. He reminds me of my favorite boss.

            This thorium thing is pretty exciting.

            So it appears this old world CAN be kept going so far as technology and resources are concerned. We’d best fix the money system, though.

  4. david porter

    Hi there Susan/Yves

    I am a very longstanding reader of your blog, and find it an invaluable sanity check in this bizarre world.

    I am a physician and not connected (other than through a profound interest) to the financial world, but find it intensely frustrating that the levers of power are pulled by people who seem truly sociopathic to me.

    A very deep thanks from here in NZ for your tireless work.

    I also read this bloke’s blog, and think you would very much agree with much of what he has to say.

    He is an independent filmmaker whose basic thrust is a profound unhappiness with the way the banks and their apologists have gotten away with what they have, how they are co-opting the machinery of state for their own ends, and how they are continually framing the debate in their own (false) terms.

    I wonder if you have come across him? I think he would be an excellent and worthy addition to your blogroll.

    http://www.golemxiv.co.uk/

    Thanks again for your blog, and regards

    David Porter

  5. stevelaudig

    Thought of the day: Africa is what China would look like if the Chinese hadn’t tossed out the foreigners.

  6. Timothy Gawne

    Indeed.

    I think that the Chinese are counting on our governing elites being corrupt.

    Sure, we could develop alternate supplies of rare earths. But the Chinese could destroy any nascent American mining and refining industries by flooding the market with cheap product at any time. So we would have to have a long-term plan and protect our domestic industries. Which our elites could care less about, because they can make so much money playing financial games that they don’t really care. Like the wealthy oligarchs of a banana republic, so what if all of their luxuries are imported and the average person is miserably poor, they’ve got theirs, right?

  7. Vincent Vecchione

    I have to nitpick. “Hermit Kingdom” usually refers to Korea, not China.

  8. Elenaor

    I was about to nitpick, but Vincent got there before I could. China is the Middle Kingdom, because it’s at the middle of everything.

    1. Larry Barber

      No, China is the Middle Kingdom because, at least according to the Chinese, it existed between heaven and the rest of the Earth.

  9. owenfinn

    “China is using its chokehold on supplies to reward companies that locate more higher-value-added manufacturing in China, allowing them to move up the skill chain.’

    ‘Bottom line: this row does not look like it will be resolved soon and it will take years for litigation to play out. And China will win even it it loses if it gets enough manufacturers to relocate in the meantime. Nicely played.”

    “China fund raises stakes in Japan firms”
    http://www.nst.com.my/latest/china-fund-raises-stakes-in-japan-firms-1.95427#

    Checkmate?

  10. Tantalizing

    Rare earths are thinly spread and require massive inputs of labor (or capital) and water to extract them.
    Environmental devastation is part of rare earth extraction.
    Before the Chinese government intervened, there were four Chinese rare earth extraction companies cutting each others’ throats and selling to, inter alia, the Japanese (who accumulated massive stockpiles) below cost.
    Premier Wen Jiabao, a rare earth geologist, got involved and rationalized the Chinese industry.
    It’s still a mess.
    Most developed countries don’t want to develop their abundant deposits, for environmental reasons.
    China’s reserves are finite.
    China anticipates needing massive quantities for its internal use (they invented a revolutionaty frictionless magnetic bearing for wind turbines, for example, which would consume 80% of current domestic production.
    This issue had been-like most things involving China-sensationalized and politicized by our wretched media.

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