China Programme • Volume 10 • Number 20 • 8th November 2010

China Quells Immediate Concerns over Rare Earth Supply, but Future Uncertain

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Recent rumblings from China suggesting the country is looking to slash its exports of rare earth metals (REMs) has many importing countries looking for new sources and questioning whether the trade restrictions would be WTO compliant.

The issue exploded last month when several news outlets reported that China had cut off REM exports to Japan on 21 September and exports to the US and EU on 18 October. Concerns in the US, Japan, and EU over possible shortages of these essential elements peaked when China Daily - China’s state-run news outlet - claimed that the country planned to further reduce 2011 export quotas of by 30 percent.

Rare earth metals are important in the production of many everyday technological products as well as a host of green technologies including hybrid cars, solar panels, and windmills. High-technology industries rely heavily on the availability of these 17 elements - such as scandium, yttrium, and cerium - but combination of low cost high tech products and rapid technological advances has led to an explosion of demand over the past two decades. China produces some 97 percent of the worldwide supply of rare earths.

Following widespread unease in importing countries over the decision to cut exports, Chinese officials announced Friday that the country will continue production at current levels over 2011. However, Trade Minister Chen Deming cautioned that other countries will have to begin sharing the environmental burden of mining the metals in the future. “We are currently in talks with rare earth consuming countries and countries with rich rare resources on how to produce rare earth in a more environmentally friendly way,” Chen said. “We also need to find new rare earth resources.”

Although China possesses 36 percent of worldwide REM deposits, rare earth metals are relatively abundant throughout the Earth’s crust, including within countries such as the US, Canada, Australia, and Brazil. In fact, the US was the world’s leading producer of REMs until China undercut world prices through lax environmental policy and cheap labour in the 1990s. Many importing nations are now in the process of reopening shutdown mines to combat possible shortages; though some estimate it could be several years before REMs are actually extracted.

Sign of Chinese environmental policy shift?

Although the US, EU, Japan, and other REM importers have concerns over the export quotas, China’s environmental defence may make the restrictions WTO compatible. To extract REMs, miners use sulphates, ammonia, and other chemicals, which can enter the soil and pollute the surrounding water supply. In fact, the Mountain Pass REM mine in California - once the largest producer of REMs in the world - was shutdown in 2002, in part due to radioactive waste spilling into the surrounding ecosystem.

Such problems are amplified when such mining is conducted illegally - an issue China has been grappling with for years. In May of this year, China announced a major five month crackdown on illegal mining and has since shutdown a number of illicit operations that fail to conform to environmental regulations. In addition, the government plans to cut the number of rare earth firms from 90 to 20 by 2015, according to Chinese media.

“[M]ass exploitation of rare earths will cause great damage to the environment, that’s why China has tightened controls over rare earth production, exploitation and trade,” said China’s Commerce Minister, Chen Deming. “China has no choice but to take such measures.”

The Chinese argue that the REM industry is unsustainable and is rife with environmental externalities that ultimately take a toll on the public. They maintain that export quotas are in place to reflect the true price of REMs and their ecological costs, while protecting the environment from overexploitation and illegal mining operations.

But rising prices have been a cause for concern in importing nations, which have become reliant on affordable REMs from China. The recent controversy over China’s clampdown has prompted prices such as cerium oxide to climb by 700 percent in less than a year. In light of China’s virtual monopoly of the REM market, critics have argued that the country is simply flexing its economic muscle.

WTO case would be complex

In the meantime, the US, EU, and Japan are calling on China to clarify its REM export policies amid fears of future rare earth shortages. Germany has been especially concerned in regards to Chinese control of rare earth metals, calling upon the US and EU to take the case to the WTO.

“Raw materials have become a geopolitical issue,” said Hans Keitel, president of the Federation of German Industry. “We need raw materials like we need air to breathe.”

But the US has been reluctant to cause a stir with China in the past, worried about harming their economic ties and causing China to retaliate. An ongoing issue between the two countries involves the United Steelworkers union, who filed a petition with the United States Trade Representative charging that Chinese clean energy subsidies are unfair (see Bridges Trade BioRes, 15 September 2010). The USTR accepted the petition on 15 October and has opened the case to public comments up to 15 November.

“It would be best if we could agree at the World Trade Organization on rules to ensure a minimum of competition to secure the worldwide rare earths markets,” said German Economy Minister Rainer Bruederle.

Despite these concerns, WTO General Director Pascal Lamy pointed to the complexities in making a case against China. “When raw materials are highly concentrated in some countries the border between trade and certain domestic policies is often blurred,” he said.

“The resulting gap between domestic prices and world prices constitutes implicit assistance to domestic downstream processors of the targeted products and thus provides them a competitive advantage,” the WTO secretariat said in China’s biennial trade policy review.

Article XI of the 1994 General Agreement on Tariffs and Trade (GATT) prohibits the restriction of trade except under certain circumstances. Under Article XX (9) export restrictions are acceptable as long as they are in place to protect exhaustible natural resources and are made effective in conjunction with restrictions on domestic production or consumption.

But China’s environmental defence has drawn criticism from some importing nations, which claim that China is unfairly protecting its domestic market. Such critics point out that China’s domestic consumption of rare earths is greater than the rest of the world’s combined and that their consumption is on the rise.

The US and EU have both expressed plans to discuss Chinese rare earth export policy with China at the upcoming G20 summit on 11 November in Seoul.

ICTSD Reporting; “China says to maintain rare earth exports in 2011,” REUTERS, 5 November 2010; “China to reduce rare earth export quotas,” CHINA DAILY, 19 October 2010. “EU, US Grapple With Crunch In Rare Earth Supplies,” REUTERS, 27 October 2010. “After China’s Rare Earth Embargo, a New Calculus,” NEW YORK TIMES, 29 October 2010. “Rare-earth limits not aimed at foreign market,” GLOBAL TIMES, 24 October 2010. “China Says No Significant Cut for Rare Earth Quotas,” REUTERS, 1 November 2010.

One response to “China Quells Immediate Concerns over Rare Earth Supply, but Future Uncertain”

VANVITA 8th November 2010 at 14:26
I think the pollution problem at Baotau mine in China is much greater than the Chinese are letting on.

This was reported in the New York Times recently.

But the bottom of the reservoir was not properly lined when it was built decades ago, according to a rare earth engineer who insisted on anonymity because of the Chinese government’s sensitivity about the problem. The sludge, he said, has caused a slowly spreading stain of faint but detectable radioactivity in the groundwater that is spreading at a rate of 300 yards a year toward the Yellow River, seven miles to the south.

The Yellow River supplies most of the drinking water for Northern China. This spreading “faint but detectable radioactivity” may be much closer the Yellow River than is being reported.

This would certainly explain and join the dots on a lot of Chinas statements and actions recently. Perhaps the Baotau mine needs to be shut down / modified in the next few years to avoid an environmental catastrophe.