(The views expressed by the author are his own)
The trouble with China’s rare earths is that it has them in abundance. In fact, it has a near monopoly hold on global supplies. Currently, around 97 percent of global supplies of rare earth elements (REE) flow from China.
The other, deeper, trouble is that China knows how to exploit them in a determined way with a long-term strategy. Deng Xiaoping, the legendary Chinese leader, is said to have remarked, “Middle East has oil, but China has rare earth elements”. In retrospect, it is one of the most prophetic scenarios ever perceived by a development planner in an emerging economy. That insight continues to inform the policies of China on REE extraction, processing, manufacturing and exports.
It is fashionable among some western economists to lament how abundance of “natural resources” turns into a “curse”. They narrate how in some developing countries in Africa and Latin Americas they become a “curse” and do not help generate wealth to promote economic development.[i] There are a number of books, monographs and academic studies detailing factors like corruption, lack of governance, dictatorships, civil conflicts, etc. destabilizing extraction and marketing of natural resources like oil, diamonds, precious metals, etc. Ultimately, they end up siphoning public resources. The World Bank had set up a special Division under Prof. Paul Collier (now an Oxford don) to study the issues governing ‘resource conflicts’ stymieing growth. There has been no finality among the academia and much of the research, except some by UN agencies, are driven by MNC lobbies. Most of these studies fail to narrate the role of private military corporations (PMCs) employed by MNCs which support rebel groups to facilitate control and exploitation of precious resources.
China’s policy governing exploitation of REE is in sharp contrast to the analyses made in those neo-con studies of economic development. Its policy evolved over the years and also changed in response to global and domestic developments and, in particular, to the changes in demand patterns triggered by new technologies and products. In part, it was serendipitous; in greater part, it was the sagacity of Chinese policymakers. They could take note of technological advances across the globe, especially the demand for newer products, and seize the opportunities. It is a commendable achievement for a developing country and is worthy of emulation by others. Unfortunately, in the current crisis context, it has created fear and suspicion.
The fear, in fact, was triggered by reports that China had restricted supplies of REE to Japan in retaliation against humiliation of tuna fisherman Zhang Qixion by Japanese authorities. China denied the allegations. However, very soon, Japan settled the dispute amicably and released the fisherman and supplies were resumed. That incident did expose the soft under belly of Japan’s economy. Not only Japan’s!
Reports of China controlling supplies to other countries abound. Scary accounts appear in major papers like the New York Times, The Wall Street Journal, Financial Times, etc. about China’s strategies to dominate the world by controlling and/or restricting supplies of REE. The reports get mired with disputes over currency, trade and commodities. Indeed, they enhance the decibel levels of China bashing in the U.S. and elsewhere.
It has raised alarm bells in Germany. The New York Times[ii]reports, “China’s curtailing of rare earth exports is causing so much concern in Germany that industry and government are joining forces by appealing to the European Commission and the World Trade Organization to intervene.” A later report[iii]added, “Stung by Chinese muscle-flexing over minerals for high-technology industries, the German government said Thursday that it would raise the alarm at the Group of 20 talks ….”
The entire atmosphere is surcharged with fear bordering on neurosis. There are doubts over the policies and strategies pursued by China. Indeed, at times, China’s policies are shrouded in opacity bordering on secrecy. However, the near total dependence of many (most!) countries on China for strategic REE supplies creates greater distrust. This results in veiled threats of sanctions, dragging the matter before the WTO, etc. As in the currency dispute, China seems unfazed by these gestures. In fairness, it is not a situation which has developed overnight. China has been working on its policies and programs for nearly two decades. Current global context seems to have taken it to the tipping point.
It is desirable to have a study of the global situation and China’s policies over the years regarding REE to get a better understanding of the issues. Two decades ago, no one would have thought that these rare earth elements (REE) would assume such strategic importance. What are REE? How and why have they assumed importance?
Rare earth elements (REE), as some geologists and chemists quip, are a misnomer. They are not rare. They are fairly abundant in the earth’s crust. According to U.S. Geological Survey, REE comprise 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 lanthanide family because of their similar properties.[iv] REE are separated into two groups, 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 elements (Atomic numbers 64-71 plus yttrium, atomic number 39) are not predominant as light rare earths and are generally used in high tech applications.
Though REE are not rare, their intractability is due to low concentrations throughout the Earth’s crust. They have higher concentration in numerous minerals. They are found in massive rock formations. The problem is with their concentrations which range from ten to a few hundred parts per million by weight. Finding them, mining them economically and processing them are the real challenges.
REE can be found in a variety of minerals, but the most abundant REE are found primarily in bastnaesite and monazite. The former contains mostly the light, but the fraction of the heavy rare earths is two three times larger. U.S. Geological Survey assesses that China and the U.S. contain the maximum bastnaesite deposits.
Data supplied in a Congressional Research Service Report[v] show that China has a near monopoly in world’s rare earth production. In 2009, it produced 120,000 MT against the global production of 124,000 MT. It represents 97 percent of global production. India mined 2,700 MT which is 2 percent of global production. China holds a reserve of 36 percent out of global reserves and its reserves base works out to 59.3 of global reserve base. The report also suggested, “There is no rare earth mine production in the United States.”
Much has been written about the end use and applications of REE. As Cindy Hurst[vi] puts it, “These elements, which are not widely known because they are so low on the production chain, are critical to hundreds of high tech applications. Without rare earth elements, much of the world’s modern technology would be vastly different and many applications would not be possible.” They are also key to the emergence of “green technology” such as the new generation of wind powered turbines and plug-in hybrid vehicles, as well as to all oil refineries where they act as catalyst.
In the U.S., the current dominant end use is as auto and petroleum refining catalysts. Other major uses include phosphors in colour and flat panel displays (cell phones, portable DVDs, and laptops), permanent magnets and rechargeable batteries for hybrid and electric vehicles, and numerous medical devices. There are important defence applications such as in jet fighter engines, missile guidance systems, antimissile defence, and space based satellites and communication systems. Permanent magnets containing neodymium, gadolinium, dysprosium and terbium are used in numerous electronic components and generators for wind turbines.[vii]
These end uses display veritable panoply of applications which go to the heart of ‘clean energy”, “advanced defence” and “advanced electronic” programs. There was uneasiness when the U.S. GAO presented its Briefing for a Congressional Committee.[viii]The briefing said, “DOD has not yet identified national security risks or taken department wide action to address rare earth material dependency……” It went on to highlight that “refined rare earth metals are almost exclusively available from China” and the U.S. “is not currently producing neodymium iron boron (NeFeB) permanent magnets…” It warned, “According to government and industry data, the future availability of materials from some rare earth elements …. is largely controlled by Chinese suppliers.”
These findings should have greatly disturbed the U.S. public and the Senators in particular. The U.S. Department of Defence (DOD) was said to be preparing a report on the security implications of U.S. dependence on REE imports from China. It has not so far declared any item as ‘strategic’ nor, till date, published its report.[ix]By common knowledge, the U.S. is believed be ahead of most countries in technologies listed above which are “frontier areas.” China, it seems, has turned the table against the U.S. How did this come about?
The supply chain for REE generally consists of five stages: mining, separation, refining, alloying and manufacturing (devices and component parts). These stages are easier written about than achieved on the ground. Hurst[x]describes the various stages and the difficulties in processing and extracting them. It is said that mining gold is a much simpler procedure than mining REE! “The mining and processing of rare earth elements, if not carefully controlled, can create environmental hazards. This has happened in China.”
The economics of REE production does not lend itself easily to the vicissitudes of market forces. While it entails huge capital outlays at all stages of production, refining, etc., the demand for end products cannot be estimated in advance. Investment tends to be chunky and fraught with heavy risk. Intuitively, it can be suggested that U.S. companies working under market compulsions could not succeed compared with Chinese companies which are state-owned enterprises (SOE). SOEs seek to achieve policy objectives regardless of profit expectations. Geology and abundance of REE may have helped; but, the rate at which China could develop the sector would not have possible without a concerted industrial policy drive and guidance by the government.
In the post-war years, U.S. was the leader in innovation and trading of REE. Discovery of REE in Mountain Pass, California, was a major development. Search for uranium led to the discovery of bastnaesite and to the establishment of Molybdenum Corporation of America in 1953. Later, it was owned by Molycorp. It was initially designed to separate europium which had a ready market. Europium came to be used as red phosphor in the manufacture of cathode ray tubes for use in colour television. Over time, the company began to extract other REE as well. Now owned by Molycorp Minerals, it became the primary source of REE for the world for some years.
China started recovering REE since the late 1950s. It was connected with the processing and production of iron and steel at Bayan Obo, Inner Mongolia. Though REE deposits were located much earlier at Bayan Obo, there was higher priority for production of steel.
From 1960s China began to place greater importance on establishing plans to maximize use of Bayan Obo. It added more technical personnel and more efficient research methods to recover REE. It was assessed that between 1978 and 1989, China’s increase in production averaged 40 percent annually, making China one of the world’s largest producers. A Research Paper[xi]pointed out, “China’s abrupt rise in status as a major producer, consumer, and supplier of rare earths and rare earth products is the most important even of the 1980s in terms of development of rare earths.”
China’s push for REE production and innovation commenced in the 1980s. Two programs sought to make China the leader in high-tech innovation. One program named National High Technology Research and Development Program, namely program 863 sought “to gain a foothold in the world arena; to strive to achieve breakthroughs in key technical fields that concern the national economic lifeline and national security; and to achieve ‘leap-frog’ development in key high-tech fields in which China enjoys relative advantages or should have strategic positions in order to provide high-tech support to fulfill strategic objectives in the implementation of the third step of China’s modernization process.”[xii] REE are an important strategic reserve in which China has considerable advantage due to the massive reserves in the country. The Program 863 is meant to narrow the gap in technology between the developed world and China.
It was in 1992 that Deng made the famous statement quoted in the beginning of this piece. The same year the Chinese State Council approved the establishment of the Baotou Rare Hi-Tech Industrial Development Zone.
The second massive program was announced in March 1997 by the Ministry of Science and Technology and this was called Program 973. It is said to be the largest basic research program and was to meet the specialized needs of REE in areas like oil refining. Industry analysts have given high credit to the contributions made by the two programs (863 & 93) in strengthening the technological strength of China in the application of REE.
In 1999, President Jiang Zemin wrote, “Improve the development and application of rare earth, and change the direction China has been going.” As some analysts have observed, these were the years when, in the U.S., there was neglect of research in metallurgy related to REE and some laboratories had to close down or languish for funds. There were more Chinese students in metallurgy classes in US universities than US students!
There was global fallout as a result of China’s rise in the sector. By 1980s there was glut in global supplies and prices crashed. There were reports of illegal operators smuggling REE from China. The result was that a number of U.S. companies had to close down as their operations had become uneconomic.
The other side of the story was that factories making plates and products based on REE began to migrate to China. This was a part of the global migration of ‘dirty’ or ‘polluting’ industries to developing countries, especially China. China offered several other advantages to foreign investors and became the natural choice. China also began to adopt a policy of restricting export of REE and encouraging investors to set up plants to make final products. They could get their share of raw material without subjecting themselves to quotas or other restrictions.
These developments led to a situation described by Yale Global[xiii]thus: “Meanwhile the U.S. appears to be the victim of its own astonishing lack of foresight in security related industrial po9licy. Until 1990, the US was self-sufficient in rare earth and the world leader in processing and use. Yet, within a decade, the U.S. became more than 90 percent reliant on rare earths imported either directly from China or from countries that received plant-feed materials from China.”
It is evident that China’s policies were regularly under review and change. China announced Rare Earth Industry Development Plan for six years from 2009 to 2015. The idea was to undertake a thorough review of the working of the units to rationalize them. Smaller were closed down or amalgamated with larger units. The subject was brought under the Ministry of Industry to facilitate better control. The idea was to restrict the annual export to 3.5 million tons and also to prohibit some of the items. China’s own domestic demand for REE is increasing and it has to cater to it. This is critical as the economy has to move forward in high technology applications and areas based on REE.
One of the important objectives was to root out illegal exports or smuggling. Smuggling had become a major issue in the early years of the industry. There were reports how it was possible for many foreign companies to obtain REE at throw away prices and stockpile them. Japan is reported to have stockpiled in submarines! Bigger companies were able to do this. Only the smaller companies or those who adopted “just-in-time-supply” policies are affected when there are restrictions. China has repeatedly emphasized that it has no intention of prohibiting exports. This assurance was given by Premier Wen Jiabao during the recent Chia-EU Meeting in Brussels. However, suspicions persist.
The other major objective of the new policy is to ‘clean’ up the industry. As explained earlier, REE processing is subject to pollution hazards and China paid a very high price when units mushroomed. There was clearly a need to adopt newer methods which are hazard and pollution free.
The new policy has been misunderstood by critics abroad. Of course, China has not come forward and clarified the policy frame explicitly. This opacity has created fear and resentment. There are threats that the US and EU may drag China before the WTO for violation of WTO rules. Sadly, there are no clear cut provisions under the WTO to deal with exports restrictions. It is interesting that though the US has dragged recently China before the WTO for violation of certain rules in a number of traded items, it has not included REE in the list.As suggested earlier, the DOD itself has not classified REE as a strategic item so far. Perhaps, there is a risk. If certain items are classified as “strategic’ the complaint against China will fall through. If they are not treated as such, China can continue with those policies as long as they do not violate ‘subsidy’, ‘discrimination’ and other aspects of GATT arrangement. It will be a long drawn battle and China may have the upper hand.
On date, China has the dominance over supplies and also technology. REE sources will continue to flow from China. There are other deposits in other locations. But as explained by the GAO in its report, “rebuilding of a U.S. supply chain is dependent on several factors.”[xiv] New processing technologies are needed to compete with the Chinese producers on price. Experts assess that these technologies will be available on a full production scale for up to 4 years and will require large start-up costs. There are issues connected with patent rights. As the GAO observed, “The development of alternatives to rare earth materials could reduce the demand and dependence on rare earth materials in 10 to 15 years.”
China is unlikely to give up the leverage it has been able to build up over the last two decades.
There is a paradigm shift in energy sources. REE shift the balance away from fossil fuels to metals. National Geographic carried a special report on this.[xv]It seems that the U.S. is caught in a quandary. Its efforts to move away from fossil fuel drive it into the hands of China which holds the metal. They may have live with this for another decade till such time they are able to build national capability.
Paul Mason caught this quandary graphically[xvi]. As he explained, for decades the U.S. foreign policy and much of western world behind it, focused on security of oil from the Middle East. China’s policy, on the other hand, was focused on finding not just oil, but all major natural resources needed by an economy developing at 9$% for the rest of the century. As he concludes, he west has been largely blindsided by the growing importance of resource strategy.”
How long will it take the west to seek newer resources, technologies and rebalance their energy? Till then, it may be advantageous to have working arrangements of a mutually beneficial manner rather than engaging in trade wars.
(The writer, Mr K.Subramanian, is a former Joint Secretary, Ministry of Finance, Govt of India, New Delhi and is presently Associate of the Chennai Centre for China Studies. Email:email@example.com).
[i] Arvind Subramanian of Peterson Institute, Prof. Paul Collier of Oxford and others have done several studies on this subject. Refer to “The Natural Resource Curse: A Survey”, Jeffrey A. Frankel, NBER Working Paper No.15836, March 2010 for a survey of the area.
[ii] Decline in Rare-Earth Exports Rattles Germany, The New York Times, and October 19, 2010.
[iii] Germany to raise Alarm Over China Rare Earths Restrictions at G-20, The New York Times, October 231, 2010.
[iv] James B. Hedrik, “Rare-earth Metal Prices in the USA ca. 1960 to 1994,” Journal of Alloys and Compounds,250, (1997):471
[v] Rare Earth Elements: The Global Supply, Marc Humphries, CRS Report, September 30, 2010.
[vi]China’s Rare Earth Elements Industry: What Can the West Learn? Cindy Hurst, Institute for the Analysis of Global Security (IAGS), March 2010.
[vii] Ibid, page 2.
[viii] GAO-10-617R “Rare Earth Materials in the Defense Supply Chain”, Briefing for Congressional Committee, April 1, 2010.
[ix] DOD was expected to finalize its report by September 2010. Efforts to trace it through Google search did not find any till date.
[x] Ibid. pages 4-5, Cindy Hurst.
[xi] Wang Minnin and Dou Xuehong, The History of China’s Rare Earth Industry. Ed. C.H. Evans, “Episodes from the History of the rare earth Elements,” (Netherlands, Kluwer Academic Publishers, 1996), 131-147.
[xiv] Ibid viii above.
[xv]Replacing Oil Addiction with Metals Dependence? Catherine Ngai, National Geographic News, October 1, 2010.
[xvi] Rare earth: The New Great Game, Paul Mason, BBC News Insight, 18 November 2009 at http://www.bbc.co.uk/blogs/newsinsight/paulmason/2009/11/rare_earth_the_new_great_game