China puts noses out of joint with rare earths policy

Rare earth metals have emerged, suddenly and unexpectedly, as an economic, geopolitical and environmental battlefield in the hoped-for green-energy revolution.

China claims that rare earth export restrictions and quotas are required to preserve a dwindling resource. Reuters
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The waters of the reservoir at Shangmankeng village in the southern Chinese province of Guangdong used to be clear. Then, a local rare earth mine began dumping mud into the pond, killing all the fish and making the water unfit to drink.

Li, a local villager who took pictures of the damage and campaigned against the mining, was viciously beaten by government-hired thugs armed with metal pipes, according to reports by Radio Free Asia.

What could have been another obscure struggle over environmental violations in rural China emerged as an issue of global concern in September. A Chinese fishing trawler collided with two Japanese patrol boats near some disputed islands, and the trawler captain was arrested. In retaliation, the Chinese allegedly blocked shipments of rare earth metals to Japan, although this was officially denied. By October, rare earth metal prices had doubled.

Rare earth metals have emerged, suddenly and unexpectedly, as an economic, geopolitical and environmental battlefield in the hoped-for green-energy revolution. A group of 15 closely related elements, they are an essential in electric-car batteries, low-energy lighting, vehicle pollution reduction, and wind turbine generators. High-powered, lightweight electric motors such as those in Toyota's Prius hybrid car contain small quantities of terbium and dysprosium, two of the heavier rare earth metals.

In 1992, then leader Deng Xiaoping declared during his Southern Tour, when he restarted China's economic reform: "The Middle East has its oil; China has rare earths." Ironically, rare earth metals are not that rare. But the large, concentrated deposits easiest for mining are most common in China. In the face of fierce Chinese competition, the main US mine, Mountain Pass in California, closed in 2002.

Although it has only 37 per cent of proven reserves, China accounts for 97 per cent of production, making it far more dominant in rare earth metals than OPEC is in oil. Half the world's supply comes from a single mine near the smoky industrial city of Baotou in Inner Mongolia. Even more important, China has a complete monopoly on the heavy rare earth metals.

Many Chinese rare earth metal mines are illegal, and several have been linked to ecological violations such as that at Shangmankeng.

The official line from Beijing was that export restrictions and quotas were required to preserve a dwindling resource, and to reduce the environmental damage from mining.

But the real motivation was different. As The Economist notes: "It is all about moving Chinese manufacturers up the supply chain, so they can sell valuable finished goods to the world rather than lowly raw materials." At the same time, China can leverage its control of basic inputs to out-compete rivals such as Japan and South Korea in the clean-energy field.

This is, however, a clumsy and short-sighted move. The rare earth metals market amounts to about US$2 billion (Dh7.34bn) per year, but world oil sales are almost $8bn per day. It is simply not worth becoming the OPEC of rare earth metals. The World Trade Organisation has already spoken out against China's export controls. Rare earth metals are easily stored and form a small part of the final cost of production, so strategic stocks can be held to guard against renewed interruptions of supply.

Fears of shortages are inspiring a boom in new mining projects. Molycorp plans to reopen the Mountain Pass mine and be producing one sixth of global supply within two years. Mountain Pass produces mainly the lighter rare earth metals, but mines such as Hoidas Lake in Canada and South Africa's Zandkopsdrift have high contents of the heavier metals.

Meanwhile, Japan has started recycling rare earth metals from its stockpiles of old electronic products, which total 10 times China's exports.

"This crisis is literally on a countdown clock," says the rare earth metals expert Jack Lifton, the director of Technology Metals Research. "At one point the Chinese won't have leverage as other [countries] come into production." Light rare earth producers, in particular, may struggle in the near future as the market moves into oversupply.

So what has this episode taught us? Three main lessons emerge. The first is the power of free markets and the lure of profit to overcome supposedly insurmountable shortages of raw materials. High prices encourage more mining, more efficient use and a search for substitutes.

Second, because of this market power, trying to exert geopolitical leverage over scarce materials is an unwise tactic. Contradicting its own policy of a "peaceful rise", China has managed to further alienate several Asian neighbours, already concerned over its growing military power and territorial claims, in a squabble over a minuscule minerals market.

Third, the path to a green-energy future is unlikely to be smooth. Rapid expansion of alternative energy will suffer blockages of critical component supplies. As with polysilicon for solar panels and overblown fears of a uranium shortage in the past decade, so with rare earth metals today and, no doubt, with other materials in the future.

These shortages can all be overcome, or substitutes devised, but along the way, they will hamper growth, make unexpected millionaires of some lucky entrepreneurs and lead to more international disputes.

And, as the people of Shangmangkeng found out, green energy is not necessarily so clean. The world will understand Chinese moves to clean up rare earth metals mining. There will be less sympathy for its attempts to tighten control over the green-energy revolution.

Robin M Mills is a Dubai-based energy economist, and author of The Myth of the Oil Crisis and Capturing Carbon