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Challenging China’s Rare Earth Monopoly

July 19, 2012

There is oil in the Middle East; there are rare earths in China.
—Deng Xiaoping (1992)1

Recently, there has been some buzz about China’s stockpiling of Rare Earth Elements (REE). Interestingly, this debate originated within China, starting with a story published in a Chinese newspaper, which highlighted the June 2012 publication of China’s first ever White Paper on REE tilted "Situations and Policies of China's Rare Earth Industry"2 delineating the country’s national rare earth industry. The REE issue raises major concerns in various parts of the world for the simple reason that China presently controls almost 97 per cent of the world’s REE market.

The textbook definition of REEs is as follows:

…those elements that are part of the family of lanthanides on the periodic table with atomic numbers 57-71. Scandium (atomic number 21) and Yttrium (atomic number 39) are grouped with the lanthanide family because of their similar properties. Rare earth elements are separated into two categories, light rare earths and heavy rare earths. The light rare earth elements are Lanthanum, Cerium, Praseodymium, Neodymium, and Samarium (atomic numbers 57-62), and they are more abundant than heavy ones. The heavy rare earth elements (atomic numbers 64-71 plus yttrium, atomic number 39) are not as predominant as light rare earths and are generally used in high tech applications. For example: Erbium is used for fibre optics in communications. Europium and Terbium are used as phosphors. Gadolinium is used for in MRIs.3

REEs are an integral part of various modern technologies. Many such technologies have relevance in the areas of defence, energy, etc. In the electronics industry, for example, in computers and televisions, REEs are of much use. They are important for manufacturing small-sized products like cell phones and laptops. In the defence arena, they are important for the production of cruise missiles, precision guided munitions and reactive armours. They also are useful in making radar systems. Further, REEs are finding increasing utility in the production of various green technologies. Here, they are currently being used in contemporary wind turbines and plug-in hybrid vehicles. In oil refineries, REEs are used as a catalyst.

According to the White Paper, "China can produce over 400 varieties of rare earth products in more than 1,000 specifications. In 2011, China produced 96,900 tonnes of rare earth smelting products, accounting for 90 [per cent] of global output. The nation holds 23 [per cent] of the world's total rare earth reserves.”4 But disputing this, some analysts claim that China has only 36 per cent of REE reserves. Be that as it may, whether it is alumina or zinc, China is presently the leading producer of at least 38 minerals while South Africa and Russia are leading producers of six minerals each and the US five minerals.5

Interestingly, REEs are actually not as rare as the name suggests. They are found in various rock formations, although mostly in low concentrations. Hence, the major challenge is the economics of mining. China offers major support to its mining industry in the form of subsidies; the industry has, at its disposal, cheap labour as well. The Chinese have realized a complete monopoly in this field by manipulating the economics of business: they have made products available at very cheap rates in the international market, which has indirectly led to other countries losing interest in the business. Now, with the major market share in the hand, the Chinese can afford to control the market.

While the White Paper states that China’s REE industry is showing growth (market value $15.8 billion), however, some reports indicate that China’s REE exports quota has fallen dramatically between 2006 (61,560 metric tonnes) and 2011 (30,246 metric tonnes; for 2012, the current estimates are 31,438 metric tones.6 Japan has primarily been the major importer of China’s REE. The US was once self-sufficient in domestically produced REEs, but over the past 15 years has become 100 per cent dependent on imports, primarily from China because of lower-cost operations.7

Sensing its importance in the REE market, China had, in early 2012 announced new restrictions on rare earth exports to the US and other countries. (Earlier, in 2010, it had temporarily stopped shipments to Japan due to a territorial dispute over fishing rights.) As a result, the US, Japan and the European Union made an official complaint to the WTO about China’s restrictive export policies. They are of the opinion that China is using its near-monopoly “to subsidize domestic manufacturers and to force foreign manufacturers to move their operations there.”8 China appears to be intentionally choking-off global exports to derive benefits domestically. In early July 2012, China formally rejected the request by the US, Japan and the EU for a WTO panel to arbitrate (as per the rules, only one such blocking of a proposal is permitted). It is now expected that both parties would try to resolve the dispute amicably; otherwise the WTO's Dispute Settlement Body would take up the case.

Over the last few years, realizing the dangers of Chinese monopoly, countries like India, Japan and Vietnam have started collaborating in REEs. North America countries are also planning to increase their investments. It is expected that more than 15 per cent to 20 per cent of rare earth minerals could be mined outside of China by the end of this decade. Vietnam is known to have significant rare earth reserves and—by collaborating with Japan—is expected to make significant inroads in this field. India is also planning to increase its output three times over by 2017. In India’s case, rather than competing with China for a slice of the REE exports pie, it is important to remain self-sufficient to cater to the requirements of its domestic industry. Such materials have utility in various areas from space to shipbuilding to defence.

China has successfully controlled the global REE market for many years. However, it is only now that the Chinese have felt the need to bring out a White Paper on this subject. This clearly indicates that their monopoly is being challenged internationally. It is possible that China is using the White Paper to inform others that it has regulations in place and plans to improve existing legal structures further. The Chinese are also keen to cooperate internationally on export mechanisms and the development of new REE-related technologies. However, the REEs’ strategic relevance is far greater than their economic importance, and China’s core interests in this business cannot be commercial alone. It appears to have made investments in this business both for economic and strategic purposes.

India, too, understood the importance of REEs decades ago, and within a few years of independence, established the Indian Rare Earths Ltd. (1950). This organization has four production plants and is presently a profit-making organization.9 However, there is need to revisit the increasing requirements of REEs in the defence, space, energy and green technology sectors. The REE sector offers commercial, strategic and diplomatic advantages and India should exploit their potential to its benefit.