Rare Earth Elements: China’s Geopolitical Power Play?

Modern life more than ever relies on technology, and it is likely to remain this way for the foreseeable future. An ever increasing number of people own smartphones, portable electronics, laptops and flat screen TV’s. To combat climate change we use more LED lighting, we drive more hybrid or electrical cars, and more of our energy is produced through wind power generation. One can hardly argue that these results of technological advancement pose any sort of severe problem. But hidden deep within our technology lays the reality of a geopolitical power play, years of trade disputes and a potential global resource crisis. (Featured Image © Peggy Greb)

All of the abovementioned technological applications contain substantial amounts of Rare Earth Elements (REEs). REEs are a group of 17 rather obscure chemical elements, mostly lanthanides such as Cerium (Ce), Neodymium (Nd) and Terbium (Tb), whose specificity, versatility and unique properties make them crucial in the production of especially magnets for many established and cutting-edge technologies, as well as a number of defence applications. Rare Earth Elements are not so rare as their label suggests. Whilst many of the 17 elements are abundant in the earth’s crust, their oxidised mineral forms are much more uncommon, and turning their extraction into an economically viable operation is challenging.¹

Separating and refining rare earth minerals is a complex operation, requiring a series of chemical processes. Most of the REE mineral composites also contain thorium, turning the ore radioactive. Not only does this raise production costs even further, it also produces large amounts of radioactive chemical waste.² Dealing with this waste is heavily regulated around the globe, and needs to be either recycled or safely collected. Both options bring with them a large risk of environmental damage. In short: mining REEs is an expensive and dangerous business.

Up until 1985 REEs were mainly produced in the Mountain Pass mine in California. In 1985 increasingly tough environmental legislation caused the mine, and with it the entire American REE production, to decrease production, and eventually shut down in 2002.³ At the time, REEs were being produced by just a handful of countries such as India, Brazil and Malaysia.4 Their combined production was, however, dwarfed by Chinese REE production.

Sitting on top of an estimated 30% of global REE resources, China accounted for a staggering 90% of the global REE production in the 1990’s, climbing up to 97% in 2011.5 Since the digital and technological boom of the early 2000’s, REE demand has skyrocketed, and it still increases.6 Global supply has had trouble meeting the demand, with price increase and shortage risk as consequences.

Realising the strategic value of REEs, the Chinese government took several steps to receive a bigger share of the profits. In 2002, the government reorganised the REE mining industry, forcing smaller mining businesses to merge into large, state-owned ventures. With the simultaneous reorganisation and consolidation of large parts of the technological industry, Chinese domestic demand for REEs rose spectacularly. This prompted the government to introduce export quotas and export tariffs in 2004, three years after China’s accession to the World Trade Organisation (WTO).7

As the annual domestic production increased, so did the environmental consequences. In an attempt to curb environmental damage and illegal mining operations, the Chinese government in 2006 introduced production quotas.8 Naturally, both quota systems affected global REE availability and prices substantially.

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Due to the 2008 financial crisis, negative consequences in global REE trade did not immediately manifest themselves. However, to strengthen domestic industries, the Chinese government continuously reduced export quotas, driving down exports from 65.000 metric tons in 2004 to 50.000 tons in 2009. In 2010, as technological manufacturers worldwide were recovering from the crisis, China slashed export quotas even further, allowing only 30.000 tons to be exported that year, a reduction of 40% compared to 2004.9

The 2010 cut brought the issue from obscurity into the limelight, sparking global shortage fears. China had proven capable of exploiting REE dependency when it put exports to Japan under a two-month embargo over a maritime border dispute in the South China Sea.10 In 2011 prices of ‘critical rare earths’ went up with as much as 1500%, creating a REE pricing bubble.11 Heavy REE-dependent countries were quick to react.

The effect of what has been dubbed the ‘Rare-Earth crisis’12 was twofold. First, the United States, the European Union and Japan lodged a joint complaint against China’s export quotas with the WTO.13 Because WTO dispute settlement takes time, efforts were made to develop mining operations outside of China. To decrease resource dependency on China, Australia started extracting REEs at Mt. Weld and Brazil and Russia also set-up limited scale extraction projects.14 US mining company Molycorp Minerals reopened the Mountain Pass mine after a sizeable investment.15 REE extraction is, however, not a standalone business. All of the abovementioned countries were, and still are, looking into rebuilding the entire rare earth supply chain through vertical integration, including mining, refining and manufacturing.16 Japan, having no territorial REE deposits, promptly invested in REE recycling research and development (R&D).

In 2014 a WTO dispute settlement panel issued a ruling stating that China’s export quotas were unjustified.17 China appealed parts of this ruling, but the appeal was rejected by the WTO. On December 31st 2014 the Chinese Ministry of Commerce announced that it dropped the export quotas for REEs.18 Rare earths nevertheless still required an export license.19 Moreover, China’s domestic production quotas remain in place20 as they fall well outside the WTO’s jurisdiction. It would seem the country still attempts to manipulate global REE supply by stockpiling REE mineral reserves and by boosting REE consuming industry domestically.

The bubble nevertheless seems to have been pierced. Ever since the first WTO ruling against China, REE prices have been dropping. This process is being facilitated by the increased efforts of other countries to explore and exploit their territories for rare earths. When China scrapped its export taxes together with the quotas, prices went down even further.21

The tide is, however, turning again. The REE’s relatively low value is hampering extraction efforts in other countries. Molycorp Minerals saw its profits dwindle, and filed for bankruptcy in June 2015.22 It may very well be that China is deliberately attempting to drive down market prices to put competing firms out of business. The logical economic result will be a recovery of prices to 2010-2011 levels, and a reestablishment of China’s monopoly.

What is widely recognised in media and academic works around the world, but officially denied by the Chinese government, is the important role of China’s near REE monopoly in its strategy to increase its economic dominion in the world. At the same time, the vast REE supply allows China to increase its military capabilities. A near supply monopoly of materials that are in ever increasing demand results in a strong bargaining position at any diplomatic table. As China has already flexed its muscles towards Japan, and with it the global community, the possibility of future tensions over REE’s cannot be denied.

Whether China is indeed manipulating global REE supply within the limits of its WTO Association Protocol23 remains speculative. But with currently relatively low investment in global market diversification or REE alternatives, the future just might bring increasingly expensive digital gadgets, made in China.

The mine in Baiyon Ebo, Inner Mongolia China, which is the site of almost half the world’s rare earth production.

The mine in Baiyon Ebo, Inner Mongolia China, which is the site of almost half the world’s rare earth production.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of International Perspective. Please be advised that all works found on International Perspective are protected under copyright, more information in the Terms of Use.

 

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By | 2017-02-03T23:22:59+00:00 October 17th, 2015|Categories: Insight|Tags: , , , |0 Comments

About the Author:

Hans Maes
Hans is a Belgian graduate of European Studies and History. His focus in international politics usually prominently features the European Union as a stakeholder in global affairs.

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