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China Holds the World Hostage in Rare Earth Metals

China was smart enough to foresee the importance rare earth metals would assume both in civilian life and military as early as 1960s. This enabled them to flood the market with super-cheap rare earths thereby driving everybody else out of business.

Not many people in the world, especially in the West realize the crisis that is confronting all the countries, with the exception of China, due to rare earth metals that, despite their name, are fairly abundant in the Earth's crust. However, due to their geochemical properties rare earth minerals are typically dispersed and not often found in concentrated in economically exploitable forms. These minerals contain one or more rare earth elements as major metal constituents.

It is this very scarcity of these minerals on Earth that led to the term "rare earth.” These elements are widely used in a range of hardware including precision-guided weapons, hybrid car, magnets for electric vehicle motors wind turbines, compact fluorescent light bulbs and iPads. About 97 per cent of the world’s rare earth metal supplies come from China, not because they are not found globally but because in the 1990s China was able to produce these metals so cheaply that mines in other parts of the world were forced to shut down. In fact China's former leader Deng Xiaoping is supposed to have said "There is oil in the Middle East, but there is rare earth in China" in 1992.

In March, China announced that it will cap its total output of rare earth oxides at 93,800 metric tonnes this year, up 5 per cent from last year. The country further declared that it would not approve any new prospecting or production licenses for rare earths until June 30, 2012. These announcements followed slashing of export quotas of the 17 rare earth metals and raised tariffs on exports, which had caused the price of the elements to breach the $100,000-per-tonne mark for the first time in February, up almost nine fold from a year before.

China’s Customs office changed its method of presenting rare earths exports in its headline data this year, boosting the reported volume by including products made from rare earth metals in the total. I see this as an attempt to mask and divert attention from the decrease in export volumes of rare earths, which is causing China’s trading partners to see red. One of them, Molycorp, a rare earth mining company has been addressing the issue by acquiring companies around the globe to reduce their dependency on China. Others are also racing to fill the gap by prospecting for deposits in Canada, Australia, South Africa and Greenland.

America’s Government Accountability Office (GAO) estimates that it could take up to 15 years for the West to catch up with China and develop alternative supplies. Not many people know that the U.S.'s main battle tank, the M1A2 Abrams, uses rare earth metals in its navigation system. Even the missiles that have targeted Taliban terrorists from drones above the battlefields in Afghanistan need a chemical that is produced only in China.

The rationale given by the Chinese for such drastic moves, which have alarmed foreign governments, are: (1) Such high levels of rare earth production are not environmentally sustainable, and (2) China needs to retain supplies for domestic industries. I can’t argue much about the former, even though China has been mining rare earths at high environmental costs for over a decade. China has “walked the talk” by taking substantial measures towards environmental protection in the last 2-3 years.

China’s 12th five-year plan shows a very strong commitment in dealing with climate issue. However, I am very sceptical about the second reason as China’s Baiyunebo is by far the largest deposit of rare earths in the world.  And even today, industry experts reckon that China is only using about one-fifth of Baiyunebo's potential. In addition, China has proven rare earths deposits in the southern provinces of Jiangxi and Guangdong, where the metals can be found in high concentrations in clays a few feet below the earth's surface. Clearly supply can match demand.

So how does the world find itself in this situation where it is being held hostage by China? And why is China doing this?

In my opinion, China was smart enough to foresee the importance rare earth metals would assume both in civilian life and military as early as 1960s. They founded a research institute in city of Baotou known as “Pioneering Rare Earth Hi-Tech Development Zone” today. The same is currently home to 400 research scientists who specialise rare earths metals. They invested heavily in the complex technologies of rare earths refining and production, discovering far cheaper processes. This, along with supply of cheap labor, enabled them to flood the market with super-cheap rare earths thereby driving everybody else out of business. They almost seduced the world into walking into their monopoly.

Unfortunately, there is no straightforward solution to this problem. China has been cornered in the past on issues ranging from environmental pollution to suppression of human right to appreciation of currency.  A monopoly over these “industrial vitamins” gives China substantial bargaining power at the table on various platforms. Countries around the globe need to collaborate and come up with a plan to address this issue and in this case what is good for China is definitely NOT good for the world.

(Tanuj Khosla is currently working as a Research Analyst at 3 Degrees Asset Management, a fund management firm in Singapore. He can be followed on Twitter @Tanuj_Khosla. Alternatively he can be reached at khosla.tanuj@gmail.com . Views expressed are personal.)

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