Bridges Weekly Trade News DigestVolume 15Number 36 • 26th October 2011

Rare Earths: Largest Chinese Producer Shuts Off Production for a Month


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While the WTO has been quiet as of late on the contentious rare earths front, trade in the precious materials has been shaken quite a bit over the past months. The global rare earths market has recently experienced massive upheaval, with prices falling sharply in June 2011. In response, China’s largest rare-earth producer, Inner Mongolia Batou, announced last week that it would be halting production for four weeks’ time.

Rare earths are needed in essentially every area of high-tech production, be it for pharmaceuticals, military equipment, green energy technology, or information technologies.

The 25 percent price drop since June is the result of a series of factors. These include the devastating tsunami in Japan in March of this year, which slowed down production in the major export nation and consequently reduced global demand substantially. The lingering global economic crisis has further weakened the market, while manufacturers world-wide are increasing their efforts to reduce their dependency on China by strengthening rare earth production capacities outside the East-Asian country.

China controls more than 95 percent of the global rare earths market, which makes its mining sector quite sensitive to sudden price drops. On the other hand, holding this quasi-monopoly position allows Beijing to influence world market prices to a considerable extent.

Since 2008, rare earth prices rose from US$ 10 per kilogramme (for a basket of rare earths) to over US$ 200 in early 2011. Prices increased only after China started imposing export quotas for the precious materials.

The recent production halt could similarly, though less severely, impact global supply. China Batou is responsible for about half of all global rare-earth production; shutting it down for a month is expected to remove 5,000 metric tons of rare earth from the market, an RBS analyst told the Wall Street Journal in October.

Foreign manufacturers pursuing other options

Meanwhile, fearing a shortage in rare earth supply coupled with the increased competition of Chinese companies, Western manufacturing giants have started establishing joint ventures with non-Chinese mining companies to build their own production sites and thus guarantee future access.

Lynas, an Australian rare earth mining company, began collaborating this summer with Germany’s Siemens and expects to start its first shipments of rare earths next year (see Bridges Weekly 20 July 2011).

While not necessarily pleased with the price drop, Beijing nonetheless has welcomed these efforts. The government has long argued that its quota and other export restrictions are informed by nature conservation efforts, rather than by protectionist aims as claimed by Beijing’s trading partners.

In August, Beijing closed down several illegal rare earth mines and confiscated unapproved stock piles, measures that the government claims to be part of a larger nature conservation programme aimed at reducing production. This is not the first instance of Beijing taking such a step; China has been attempting to reduce illegal mining since 2009.

In addition, China argues that many of its resources face depletion in the coming decades. Competitor Lynas expects China to become a net importer of rare earths as early as 2015, as company CEO Nick Curtis told the Financial Times this month in an interview.

Export restrictions in a WTO context

With China’s economy booming, making more and more use of the rare earths itself, the nation thus clearly has an interest to keep its resources. However, export restrictions and duties of almost any kind are prohibited under China’s WTO accession protocol, as recently confirmed by a WTO panel in a dispute over other raw material exports from China (see Bridges Weekly, 6 July 2011).

The export restriction system that was the subject of that dispute is very similar to the one used with regards to rare earths.

Much less high-profile but equally telling in this regard is a recent resource trade agreement between rare earth net-importer Germany and Mongolia. The agreement, meant to secure Germany’s energy supply, amongst others, promises the European country limitless raw material exports.

The agreement prevents Mongolia from implementing future export restrictions for raw materials and calls upon the country to eliminate any existing programmes in cases where they impact trade with Germany.

The deal is only one of many that aim to secure free trade in natural resources, including rare earth. While some recently acceded WTO members have vowed to eliminate any export restrictions - including China - general WTO disciplines allow export duties and only outlaw quantitative restrictions.

ICTSD reporting; “Lynas plays down fears of China rare earths plot,” FINANCIAL TIMES, 19 October 2011; “Germany Playing Catch-Up in Scramble for Resources,” SPIEGEL ONLINE, 14 October 2011; “China Baotou to Halt Rare Earth Operations for One Month,” WALL STREET JOURNAL, 19 October 2011.

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