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Rare Earth Elements and China’s Dominance of the Global Market

Term Paper 2012 27 Pages

Business economics - Economic Policy

Excerpt

Table of Contents

1. Background Rare Earth Elements (REE)
1.1 Basic Information
1.2 Supply Side
1.3 Demand Side
1.4 Market

2. China
2.1 Policies
2.2 Motivation
2.3 Consequences

3. Japan
3.1 An Incident over a Fisherman
3.2 Japan’s Response

4. The United States
4.1 From Self-Sufficiency to Near Complete Dependence
4.2 Public and Private Efforts to Manage the Situation

5. Europe
5.1 From One Dependency to Another
5.2 Thinking of Solutions

6. Conclusion

7. Bibliography

1. Background Rare Earth Elements (REE)

Almost twenty years after Deng Xiaoping stated: ‘There is oil in the Middle East, but there is rare earth in China,’1 the country controls the REE global supply almost solely.2 Recent Chinese policies of raising taxes and cutting export quotas combined with its temporary ban on REE exports led not only to steadily increasing prices. Most notably it created uncertainty among companies producing outside Chine whether they will be able to get sufficient amounts of REE in the future and how much this is going to cost. Because it will take several years until Western mining capacities meet Western companies’ demand, some manufacturers in need of REE have already started to relocate their factories to China.

Beijing claims that their policies are dedicated to tackle environmental problems which have been caused by mining REE. However, taken into account that Beijing policies also require Chinese partners for foreign companies that operate within China, Western companies that relocate their facilities may risk handing over knowledge to future competitors. Aware of the consequences that Beijing’s new fondness for environmental issues brings, governments and companies especially in Japan, the U.S. and Europe try to find ways to decrease their dependencies.

This report examines factors that led to China’s dominance on the REE market today and presents some counteractions which governments and companies in Japan, the U.S. and Europe have introduced to mitigate this situation. The two principal findings of this report are: first, because Western mining companies will need time to meet their companies’ demand, the current situation is going to sustain for at least a few more years to come; and second, although China runs the risk of selling off its REE resources abroad which it needs for its own economy at home, it may benefit from the technology transfer in the long run.

1.1 Basic Information

Rare earth elements are a group of seventeen chemical elements3 which need to be processed to certain materials for further usage.4 Because of their ‘diverse nuclear, metallurgical, chemical, catalytic, electrical, magnetic, and optical properties,’5 REE have offered an increasing variety of applications over the past four decades:6 for example, lighter flints, glass polishing, magnets, rechargeable batteries,7 mobile phones, computer hard drives, precision-guided munitions,8 catalysts for oil refining, automotive catalytic converters, colour television, flat-panel displays, fibre optics, lasers, superconductors and many more.9 The above mentioned magnets alone ‘have allowed miniaturization of numerous electrical and electronic components’10 and enabled advanced wind turbines and new hybrid vehicles, where electric motors can be made smaller and more powerful.11

In case of a shortfall, developers face the problem that REE cannot be sufficiently, if at all, substituted.12 Moreover, materials that allow for a substitution ‘are usually much less effective …, have higher costs’13 or increase the size of the final product.14

1.2 Supply Side

Although the name implies REE would be rare, they are actually not.15 In fact, ‘the two least abundant [elements] are nearly 200 times more common than gold.’16 However, it is very difficult to mine these metals ‘because it is unusual to find them in concentrations high enough for economical extraction.’17 Thus, ‘most of the world’s supply comes from only a few sources;’18 the largest in China and Australia.19

Moreover, extracting and processing REE ‘is rarely eco-friendly:’20 it creates hundreds of gallons of salty wastewater per minute, requires toxic materials for the refining process and occasionally unearths dirt that is radioactive.21 All this makes extraction difficult and costly.22 When in the early 1990s China started to flood the market with ‘super-cheap REE’23 —mining in poorly maintained local mines and producing at high environmental costs—most of the world’s mines were unable to compete and closed subsequently.24 As a result, China is currently producing an estimated ninety-seven per cent of the world’s REE supply.25

Due to this dominance China has gained a massive advance in knowledge regarding REE. By employing thousands of scientists in this field,26 China’s long-term investment and outlook ‘has yielded significant results for [its] industry.’27 Moreover, as early as five decades ago China built the Baotou-called REE research institute,28 ‘the only rare earth hi-tech zone in … the world.’29

Those investments also increased China’s advance not just in mining, but also in REE processing—a necessary step that, besides adding the biggest value to the product,30 is needed to transform the elements into components for final products.31 China’s technologies are far more advanced than others, for example, its refining extraction is by several percentage points better than the United States.32 If other countries want to build up a similar advanced processing infrastructure, it could take up to fifteen years.33 This means that until then, even if mining outside China, companies will have to send their REE to hundreds of specialised Chinese companies which are capable of processing them.34 This monopoly has widely been seen as critical,35 even before China started to cut export quotas, because China is in a position to affect other countries’ economies to a great extent by simply putting REE exports to a halt.

1.3 Demand Side

On the demand side, China’s cheap REE first increased the availability, and then in turn the number of applications.36 Many of these new products—made possible by the unique properties of REE—are designed for green and high-technology markets.37 Those industries ‘are assumed to have an over-proportionate growth potential,’38 which has in recent years already led to a dramatic increase in the demand for REE.39 By 2014, global demand is estimated to grow by twenty-five per cent.40

Contributing to this trend are industries like those for wind energy41 and electric cars,42 which are forecasted to grow and thus will, if current REE usage levels continue, increase demand for REE. According to predictions, for example, between ten and twenty-five per cent of global auto sales will be electric and hybrid cars by 2020.43 This would mean millions of sold units44 compared to today’s thousands.45 REE are needed for catalytic converters, magnets and rechargeable batteries;46 alone for the latter purpose two kilograms of REE are used in each Toyota Prius, a hybrid vehicle.47 In case Toyota sells its projected two million Prius annually, their demand would alone outstrip the global supply for the REE dysprosium;48 the same is true for GM’s Chevy Volt.49

1.4 Market

REE ‘are not subject to speculative trading like gold,’50 their prices are largely determined by supply and demand.51 Consequently China’s policies led in some cases to price increases by as much as fifteen times.52 However, that does not necessarily mean that final product prices will increase significantly because, compared to other materials, only tiny amounts of REE are used.53 Moreover, the elements are still not very expensive. For example, the above mentioned two kilograms of RRE needed for each Toyota Prius cost only twenty-eight dollars. This constitutes 0.1% of its total production costs54 and gives a hint why the value of the whole REE market is still not larger than a mere two billion dollars—China alone spends the same amount on iron ore in a fortnight.55 The problem, however, is not the current price level but rather the fear that Western ‘green industries are going to be at the complete mercy of China,’56 which needs sixty-five per cent of the world’s REE supply for its own domestic demand.57

Reasons for China’s policies and its implications for others will be discussed in the second part. Mainly affected are industries in Japan, which consume twenty per cent of global supplies, as well as industries in the United States and Europe, which each consume roughly half of the remaining fifteen per cent of global supply.58 How these actors try to cope with the current situation will be shown in the following chapters.

Possibly because the REE issue gained broad publicity only last September, the library of the University of Winchester as well as J-Stor and other sources offered literally not a single journal article regarding REE. Therefore this report used various, widely well-known sources from the Internet.

2. China

2.1 Policies

Beijing is convinced that REE ‘will contribute greatly to [China’s] social progress.’59 To achieve this aim, a twofold development strategy is used: ‘stabilizing the production of raw materials and strengthening applications.’60

To stabilise its production, China granted new mining licenses in order to increase its production quota by five per cent this year.61 On the contrary, industries in need of REE outside China may face a shortfall very soon.62 While global demand has tripled in the last decade, export quotas had been cut annually by six per cent in the same period.63 Last year, Beijing decided to cut quotas sharply, by seventy per cent.64 For 2011, quotas will be cut by another eleven per cent.65 Moreover, last year’s introduction of export duties for REE as high as twenty-five per cent will lead to even higher prices outside China.66 To improve its position even further, Chinese companies acquired foreign rare earth mines and companies in the past.67 Recently, however, governments in Australia68 and in the United States69 have objected further investment activities.

Beijing claims its dominant goal is not to create an OPEC-like price cartel but to avoid domestic shortages.70 To protect reserves, the surplus resulting from an increase in production and a decrease in exports, is stockpiled to build up a strategic reserve.71 This would be China’s legitimate right, state officials claimed,72 who also denied that China would violate World Trade Organisation’s (WTO) rules.73 Nonetheless, Beijing’s policies resulted in soaring REE prices74 which made consequences of ‘China’s market power’75 apparent.

2.2 Motivation

Officially China, the world’s biggest environmental polluter,76 justifies the aforementioned actions with environmental and health issues. Ecclestone, an analyst for Portfolio Strategy firm Hallgarten & Company, believes that China might regret its ‘predatory pricing … over the last thirty years,’77 forcing global production to close down ‘at great environmental costs to themselves.’78 Chemicals, which are used in the mining of REE, are not only hazardous for the workforce.79 In some ‘mom-and-pop mining operations’80 they are also swept into water supplies where they can poison drinking water, kill rice crops or even reservoirs of fish.81 Therefore Beijing aims ‘to run the industry properly, on a sound environmental footing and [tries] to minimise any waste of the resources.’82 In the meantime it has already ‘closed hundreds of illegal operations.’83 One would have good reason to believe that the official version explains a good deal of Beijing’s motivation. Zachmann, analyst at Bruegel, observes in this regard that ‘correctly pricing pollution and labour are well-accepted principles in Western countries.’84

[...]


1 Foster, P. (2011) Rare Earths: Why China is Cutting Exports Crucial to Western Technologies, The Telegraph, 19th March [online], Available from: http://www. telegraph.co.uk/science/8385189/Rare-earths-why-China-is-cutting-exports-crucial-to-Western-technologies.html [Accessed: 14 April 2011].

2 Bailey Grasso, V. (2011) Rare Earth Elements in National Defense: Background, Oversight Issues, and Options for Congress, Congressional Research Service, 31st March [online], Available from: http://www.fas.org/sgp/crs/natsec/R41744.pdf [Accessed: 17th April 2011], p. 7.

3 Geology.com (n.d.) REE—Rare Earth Elements and their Uses, Geology.com, Available from: http://geology .com/articles/rare-earth-elements/ [Accessed: 14 January 2011].

4 GAO (2010) Rare Earth Materials in the Defense Supply Chain, United States Government Accountability Office, 14th April [online], Available from: http://www.gao.gov/new. items/d10617r.pdf [Accessed: 15th April 2011], p. 11.

5 Haxel, G.B.; Hedrick, J.B. & Orris, G.J. (2005) Rare Earth Elements—Critical Resources for High Technology, U.S. Geological Service, Available from: http://pubs.usgs.gov/ fs/2002/fs087-02 /fs087-02.pdf [Accessed: 14th April 2011], p. 1.

6 Ibid.

7 Haxel, G.B.; Hedrick, J.B. & Orris, G.J., p. 2.

8 GAO, p. 26.

9 U.S. Geological Service (2011) Rare Earths, U.S. Geological Service, Available from: http://minerals.usgs.gov /minerals/pubs/commodity/rare_earths/mcs-2011-raree.pdf [Accessed: 14th April 2011], p. 129.

10 Haxel, G.B.; Hedrick, J.B. & Orris, G.J., p. 2.

11 Northeastern University (2011) Magnetic Appeal, News@ Northeastern University, 19th April [online], Available from: http://www.northeastern.edu/news/stories/2011/ 04/kleinlecture.html [Accessed: 22nd April 2011].

12 For example see: Haxel, G.B.; Hedrick, J.B. & Orris, G.J., p. 1.

13 Geology.com.

14 Worstall, T. (2010) You Don’t Bring a Praseodymium Knife to a Gunfight, Foreign Policy, 29th September [online], Available from: http://www.foreignpolicy.com/articles /2010/09/29/you-dont-bring-a-praseodymium-knife-to-a-gunfight?page=full [Accessed: 18th April 2011].

15 U.S. Geological Service, p. 129.

16 Haxel, G.B.; Hedrick, J.B. & Orris, G.J., p. 2.

17 Geology.com.

18 Haxel, G.B.; Hedrick, J.B. & Orris, G.J., p. 1.

19 GAO, p. 16.

20 Hsu, T. (2011) High-Tech’s Ace in the Hole, LA Times, 20 February [online], Available from: http://articles. latimes.com/2011/feb/20/business/la-fi-rare-earth-20110220 [Accessed: 13 April].

21 Ibid.

22 GAO, p. 23.

23 Foster.

24 Ibid.

25 Bailey Grasso, p. 7.

26 Hsu.

27 Humphries, M. (2010) Rare Earth Elements: The Global Supply Chain, Congressional Research Service, 30th September [online], Available from: http://www.fas.org/sgp/ crs/natsec/R41347.pdf [Accessed: 18th April 2011], p. 9.

28 Foster.

29 Baotou (n.d.) Rare Earth—An Introduction, Baotou National Rare-Earth Hi-Tech Industrial Development Zone, Available from: http://www.rev.cn/en/int3.htm [Accessed: 14th January 2011].

30 Ecclestone, C. (2010) Rare Earths: All Hot & Bothered—Portfolio Strategy, Hallgarten & Company, 12th January [online], Available from: http://www.vinegroup.com/news/ Rare_Earths_Unobtainium-Jan_12_2010.pdf [Accessed: 21st April 2011], p. 9.

31 GAO, p. 11.

32 Foster.

33 GAO, p. 24.

34 Humphries, p. 9.

35 For example see: GAO, p. 33.

36 Haxel, G.B.; Hedrick, J.B. & Orris, G.J., p. 1.

37 Waldmeir, P. (2009) China Predicts Rare Earth Shortage, Financial Times, 3rd September [online], Available from: http://cachef.ft.com/cms/s/0/9ecf0c7e-9898-11de-aa1b00144feabdc0,s01=1.html#axzz1JiIKXm fW [Accessed: 16th April 2011].

38 Zachmann, G. (2010) Rare Earth—No Case for Government Intervention, Bruegel, 8th November [online], Available from: http://www.bruegel.org/publications/publication-detail/publication/474-rare-earth-no-case-for-government-intervention/ [Accessed: 23rd April 2011].

39 For example see: Geology.com.

40 Humphries, p. 3.

41 bla

42 U.S. Geological Service, p. 129.

43 Doran, D. (2011b) Carmakers Look to an Electric Future in China, AFP, 21st April [online], Available from: http://www.physorg.com/news/2011-04-carmakers-electric-future-china.html [Accessed: 22nd April 2011].

44 Ibid.

45 Addison, J. (2011) Top 10 Electric Car Makers 2011, Clean Fleet Report, 17th January [online], Available from: http://www.cleanfleetreport.com/clean-fleet-articles/top-electric-cars-2010/ [Accessed: 24th April 2011].

46 U.S. Geological Service, p. 120.

47 Ecclestone, p. 4.

48 Ecclestone, p. 5.

49 Lemer, J. (2011) Companies Look to Cut Use of Rare Earth, Financial Times, 23rd February [online], Available from: http://www.ft.com/cms/s/0/79368284-3f6e-11e0-a1ba00144feabdc0.html#axzz 1JcpofS8Q [Accessed: 16th April 2011].

50 Hamlin, J. (2009) How to Invest in Rare Earth Metals, GoldStockBulls—Investment Strategies, 11th September [online], Available from: http://www.goldstockbull.com /articles/how-to-invest-in-rare-earth-metals/ [Accessed: 21st April 2011].

51 Ibid.

52 Foster.

53 Zachmann.

54 Ecclestone, p. 4.

55 Foster.

56 Hsu.

57 Dickie, M.; Soble, J.; Hook, L. & Blas, J. (2010) Japan Cries Foul over Rare Earths, Financial Times, 24th October [online], Available from: http://www.ft.com/cms/s/0/ 6ad460d4-df93-11df-bed900144feab dc0.html [Accessed: 16th April 2011].

58 Ibid.

59 Baotou.

60 Ibid.

61 AP (2011) China to Raise Rare Earths Production this Year, Associated Press, 31st March [online], Available from: http://hosted2.ap.org/APDEFAULT/f70471f764144b2fab52 6d39972d37b3/Article_2011-03-31-AS-China-Rare-Earths/id-4e5794af113849 c38fa ea439745e3a2e [Accessed: 16th April 2011].

62 Foster.

63 Lee, J. (2009) China’s Ring of Power, Foreign Policy, 9th September [online], Available from: http://www. foreignpolicy.com/articles/2009/09/09/going_green [Accessed: 18th April 2011].

64 Foster.

65 AP.

66 Dickie, M.; Soble, J.; Hook, L. & Blas, J.

67 Latimer, C.; Kim, J.; Tahara-Stubbs, M. & Wang, Y. (2009) China’s Rare Earth Monopoly Threatens Global Suppliers, Rival Producers Claim, Financial Times, 29th May [online], Available from: http://www. ft.com/cms/s/2/75fe65ce-4c4e-11de-a6c5-00144feabdc0.html#axzz1JcpofS8Q [Accessed: 16th April 2011].

68 Waldmeir.

69 Lohr, S. (2005) Unocal Bid Denounced at Hearing, The New York Times, 14th July [online], Available from: http://www.nytimes.com/2005/07/14/business/world business/14unocal.html [Accessed: 20th April 2011].

70 Waldmeir.

71 Lian, R. & Peng, S.A. (2010) China May Consider Minor Metals Reserve: Report, Reuters, 2nd November [online], Available from: http://www.reuters.com/article/2010/11/03/ us-china-minormetals-idUSTRE 6A204120101103?feedType=RSS [Accessed: 15th April 2011].

72 Foster.

73 Hook, L. (2010b) China Defends Policy on Rare Earths, Financial Times, 20th October, [online], Available from: http://www.ft.com/cms/s/4cc15faa-dc3e-11df-a9a4-00144feabdc0,Authorised=false.html?_i_loc ation=http%3A%2 F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F4cc15faa-dc3e-11df-a9a4-00144feabd c0.html&_i_referer= #axzz1JcpofS8Q [Accessed: 22th April 2011].

74 Hsu.

75 GAO, p. 20.

76 Cambreleng, B. (2011) China Says it Wants Green Growth within the Next Five Years, Yahoo Finance, 3rd March [online], Available from: http://au.finance.yahoo.com/news/ China-says-wants-green-growth-afp-2746713320.html?cmtnav=/mwphucmtgetnojs page/headcontent/main/2746713320//date/desc/1/0 [Accessed: 16 April 2011].

77 Ecclestone, p. 8.

78 Ibid.

79 Zachmann.

80 Foster.

81 Ibid.

82 Ibid.

83 Ibid.

84 Zachmann.

Details

Pages
27
Year
2012
ISBN (eBook)
9783656094326
ISBN (Book)
9783656094050
File size
583 KB
Language
English
Catalog Number
v184577
Grade
Tags
China USA Europe Japan REE Rare Earth Elements Technology Science
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Title: Rare Earth Elements and China’s Dominance of the Global Market