Analysis: China’s rare earth hammer hits economic raw nerve

By Chris Buckley

BEIJING (BestGrowthStock) – China wants to use its monopoly over global rare earth supplies to win the race for clean energy technology that depends on the metals, but it is a strategy that could backfire, costing Beijing its advantage.

Japanese companies, which use the metals in hi-tech products, worry that Beijing is already using its power to squeeze supplies as a political tool in diplomatic disputes with Tokyo — something China denies.

It has slashed export quotas to about 40 percent below 2009 levels.

“I don’t think it’s political. I think it’s strictly economic,” said Jon Hykawy, an industry analyst with Toronto-based Byron Capital Markets, who specializes in rare and other minerals used in clean technology, referring to China’s export cuts.

“Japanese companies are in full panic mode. As far as they are concerned, this is a red-alert situation,” said Hykawy.

China, as other producers have given up environmentally destructive mining of rare earths, now supplies 97 percent of the world’s demand for the metals, whose magnetic, luminescent and other qualities make them essential for clean energy, computers and electronics.

For a country with a voracious appetite for imported commodities, it is one over which China can exert control as an exporter. It now wants the metals for itself for technology that it can use at home and export.

It has ambitious goals for advanced wind turbines, hybrid and electric vehicles and other clean energy innovations that use rare earth metals.

The properties of the 17 elements called rare earths also make them handy for military hardware, where Beijing spends big.

“The biggest driver in the Chinese system is continued job growth and economic growth, and if they can move a number of high-value manufacturing jobs in the green sector, as well as a lot of the intellectual property, to China by swinging the rare earth hammer, then they’re willing to do that,” said Hykawy.


Spooking the market, however, could backfire and discourage companies hungry for the minerals from setting up shop in China.

Japan has said it will hurry to secure supplies from outside China. U.S. lawmakers are backing plans to restart a shut mine in California. Beijing’s advantage could crumble in a few years.

“It’s a shrinking window they’re dealing with,” said Hykawy.

Transforming the rocks in the ground into clean energy dominance will not be easy, said John Seaman, a researcher at the French Institute of International Relations in Paris, who has studied China’s rare earths policies.

“I think they are well on their way but still have quite some distance to go,” Seaman wrote in emailed answers to questions.

“They may be hammering down on smuggling and illegal mining, he added. “But effective, longer term oversight on the rare earths industry is still a ways away.”

Rare earths are the MSG of high technology, added in machines and computers components to boost performance, like the flavor enhancer used in Chinese restaurants, some Chinese observers say.

For years, China treated its rare earth reserves, about 36 percent of currently known mineable global reserves, as cheap and ubiquitous. Not anymore.

“Industry insiders joke that we’ve been selling gold for the price of carrots,” said an overview of the rare earths sector published this month in Macroeconomics, a journal of Beijing’s Academy of Macroeconomic Research, which advises policy-makers.

China became strong in rare earths using the recipe it has for many other industries: state support, cheap labor and little concern over pollution, illegal mining or smuggling.

It mined about 120,000 metric tons of rare earths in 2008.

The United States shut the rare earths mine in California, unable to compete against cheap Chinese exports. Markets became used to relying on China.

“This happens all the time in China, but because rare earths is such a small industry, nobody paid attention,” said Jack Lifton, co-founder of Technology Metals Research, an Illinois-based company that follows the area.

“We cannot continue to pretend that we’re outraged that China has a monopoly on the supply of rare earths when we’re the ones who gave them that monopoly,” he said.


The recent political ructions may have been an excuse to withhold shipments and prod foreign companies to buy more magnets and other components containing rare earths from China, and even move production there, said some industry analysts.

But if new mines open in Australia and elsewhere and processing and recycling plants also expand, China’s bargaining advantage will be eroded, said Hykawy.

“There are some Japanese corporations and some others who are basically walking around with check books in their hands, saying ‘We’ll help bankroll these projects as long as we can get what we need’,” he said.

Abrupt curtailing of rare earth shipments from China could make foreign companies more wary of moving there, said Seaman, the Paris-based researcher.

“Companies were already worried about sovereign risk, relying too much on China for their chains of production.”

China will also have to contend with homegrown problems that could stifle efforts to turn rare earths into high-tech gold.

Illegal mining has eroded reserves, and smuggling has been common. Even the legitimate sector remains fragmented and inefficient, said the Chinese magazine, Macroeconomics.

“Our rare earths industry is big yet weak,” it said. “The resource advantage has yet to turn into an economic one.”

(Additional reporting by Paul Eckert in Washington, Editing by Jonathan Thatcher)

Analysis: China’s rare earth hammer hits economic raw nerve