“The Middle East has its oil, China has rare earth metals.” —Deng Xiaoping, Chinese President (1992)
Take an even a cursory look at any major business media today and China’s influence in the minerals and metals commodity markets is inescapable. Next to oil, minerals and metals are arguably the most important commodities for global industry and China is one of the leading cosnumers. What’s more, these are markets for which the Chinese government manages prices carefully through a mixture of trade control policies, export restrictions, tariffs, quotas and environmental policies. The strategic goal is to drive global prices of these commodities and, as demand for these commodities has grown globally, China uses its strong supply power to influence availability, impacting related supply chains all over the world.
China’s industrial development strategy is driven by the ‘two resources, two markets’ paradigm. This exploits the supply differences in the international and domestic markets for key raw materials and allows greater control over the downstream value chain of several industries. Specifically, China’s restraint on exports of strategic raw materials, where they are a dominant producer make them capable of producing low value-added goods (thereby significantly increasing competitive advantage/profit margins of the domestic industry). This strategy also encourages Chinese companies to venture out to source foreign sources of raw materials through both direct and indirect investment. Furthermore, this strategy concurrently promotes the export of high value-added goods. As a result, China’s approach, including past restrictions on exports of key global commodities (including Bauxite, Coke, Fluorite, Magnesium, Manganese, Carborundum, Silicon, and Zinc) has allowed it to exert significant control over global supply and pricing—and certainly raised many eyebrows.
Currently, China is realigning its policy on the rare earth metals industry—where it controls approximately 36% of the world’s rare earth’s reserves but supplies over 95% of global demand (as there is limited operational expertise outside of China). There are 17 rare earth elements (REEs), 15 within the chemical group called lanthanides, plus yttrium and scandium. These 17 chemically similar elements have unique properties that have paved the way for several technological innovations across many high-tech industries—including smart phones, tablet PCs and LCD displays, clean energy industries including wind turbines, solar panels and hybrid/electric car batteries, and defense applications such as guided missiles and radar applications. (Interestingly, these ‘rare earth’ metals have applications that are not-so-rare indeed.)
Since Deng Xiaoping’s declaration almost two decades ago, the Chinese have aggressively pursued this industry. Most recently, in December 2010, China announced a cut in its export quota by 35% for the first half of 2011, compared with the first half of 2010. That said, the reduction in exports is not directly proportional to a reduction in production, thereby indicating a consistent supply of these metals to boost domestic industries. (China has stated that environmental concerns related to the mining of these metals as its chief rationale for these recent export restrictions.)
These restrictions send out a clear message that China wants to retain supply control as it aims to become the global leader in a host of industries (including green technologies). By pursuing the ‘two resources, two markets ’ strategy, the move will further boost its rapidly growing domestic industries which produce the low value, high margin products clearly driving global competition.
Chinese companies have been aggressively pursuing investments in rare earth metal resources around the world – at one point, almost acquiring Molycorp, which owns the Mountain Pass mine in California, the only rare earth mine in the US. (The acquisition would have given it a complete monopoly over rare earth metal supply). Chinese companies have also pursued a stake in some of Australia’s rare earth resources including Lynas Corporation, an Australian mining company. Before that deal could be finalized, the Australian government intervened, keeping in mind the implications of the deal’s impact on world supply. (China did invest in another Australian rare earth developer, Arafura Resources and currently controls a 25% stake in the company.)
Clearly, with domestic rare earth metal demand sky rocketing, the country is making sure to retain enough supply to meet its own economic aspirations through a mix of export restrictions, domestic industry consolidation and foreign acquisitions. According to many industry experts, China may halt all rare earths exports at some point in this decade.
Not surprisingly, these developments have been tracked closely by other leading economies and industry groups. In early 2010, the US Congress debated setting up a US stockpile of rare earth minerals, similar to the US’s Strategic Petroleum Reserve. (The US was once self-reliant on locally produced rare earth metals, but over the past two decades has become heavily reliant on imports, primarily from China, because of its lower-cost operations.) In February 2011, US-based MolyCorp announced targeted collaborations with industry groups to significantly increase production of rare earth minerals by 2012. Clearly, other rare earth metal supply sources such as Australia, Canada, Vietnam, Kazakhstan, India and South Africa could become likely beneficiaries of the China- created supply shortage. At the same time, these supply fears are causing some rare earths end-users to evaluate alternative materials. For instance, Japanese automaker Toyota is now looking at battery technology for its hybrid vehicles that does not rely on rare earths.
Still, for many applications, there are no viable replacements for rare earths. Thus, the global economy is likely to witness continued volatility and uncertainty in supply of rare earths over the medium term.
Author: Umang Maheshwari