The Geopolitics of 17 Very Obscure Minerals
Rare earths aren't the world's sexiest commodity. The 17 elements are notoriously difficult to extract from the ground and have brazenly obscure names. (Don't make the classic rookie mistake of confusing yttrium with ytterbium.) But what they lack in branding, they certainly make up for in utility and ubiquity: they’re essential to products as wide-ranging as wind turbines, smartphones, high-tech weapon systems, and even your fishing reel.
Although the United States was once a major supplier of rare earths, China has been the world’s primary source since the 1990s. And that makes them more than just a commodity; they're a test of how China's vast economic and diplomatic ambitions bear on one another. As recent events demonstrate, they're also a window into understanding that, even in the face of obstacles, China won't give them up so easily.
As recently as 2013 China provided 86 percent of the world's rare earths supply and, especially over the past several years, Chinese officials have made no secret of their plans to use their accumulating monopoly power.
In 2009, a senior official in Inner Mongolia, home to China’s most productive rare earth mine, explained to Xinhua, the state newswire, that export controls on rare earths (dating back to 1999) were designed “to attract more Chinese and foreign investors into the region.” This was a message to companies the world over: if you want to ensure continued access to rare earths, you’d better relocate your factory to China.
Then, in September 2010, China abruptly blocked export of rare earths to Japan after Japan detained one of its fishermen caught in waters claimed by both countries. Only after he was released did the flow of rare earths start again. But for Japan and the United States, two of its biggest and most vulnerable rare earth customers -- and two of China’s biggest geopolitical rivals -- the implication was clear: when it comes to rare earths, China saw no reason to separate economic goals from political ones. In the words of then-Secretary of State Hillary Clinton, China’s application of political pressure against Japan served as a "wake up call."
In one sense, that call came too late. By 2011, several foreign users of rare earths had already relocated production to China, according to the New York Times. Meanwhile, fear and speculation served to drive up prices. For example, cerium -- a rare earth often used in aluminum and iron alloys -- rocketed from $6 per pound in 2008 to a record of $77 per pound in August 2011.
But the demand -- both political and economic -- for alternative sources of rare earths soon began to shift the market. Alternatives to Chinese rare earths quickly began cropping up, whether via recycling, new mines, alternative materials, or even smuggling. In July 2010, the Colorado-based Molycorp raised $393.8 million in an IPO, the proceeds of which went to re-opening a rare earths mine it had closed the previous decade. For its part, Japan set a goal of securing 60 percent of its rare earth supply from outside of China by 2018.
By mid-2011, the combination of conservation, new mine, and alternative materials had produced a price crash from which the rare earth market has yet to recover completely. And this has forced China to change course: on New Years’ Day Beijing lifted the 15 year-old export controls on rare earth minerals, in accord with the WTO ruling.
But it would be naive to expect China to give up its mercantile aspirations without a fight. Indeed, rescinding the export quotas wasn't a very significant concession in the first place: demand has fallen off so significantly that the quotas had ceased to be an issue. During the first 11 months of 2014, for example, China exported 24,866 metric tons of rare earths -- significantly less than the full-year quota of 30,611 tons. Thus, when the WTO ruled in March 2013 that China’s export controls on rare earths and other industrial metals violated its rules, China didn’t so much as complain.
Moreover, rather than abandoning its plans for rare earths, China has already moved onto its Plan B: consolidating the industry into two state-owned conglomerates. The thought seems to be that consolidation will address one of the main problems in China’s domestic market: the proliferation of private mines and wildcatters who can and do supply smugglers.
This isn't to suggest that the West should be lamenting the disappearance of these smaller mines -- they tend to be especially destructive to the environment. But it seems pretty obvious that China's decision-making in this case is motivated less by environmental concerns than a desire to maintain its monopoly power. “The move will help the country maintain its pricing power for rare earth products,” reported Caixin, a Chinese business magazine in August.
It’s an open question whether Chinese industrial policy can maintain the country’s rare earths primacy -- and a return to high rare earth prices -- via consolidation. But, if their goal is to maintain the country’s geopolitical leverage, they probably don’t need to do anything at all. As the Wall Street Journal noted in December 2013, even if China doesn’t dominate rare earth mining, it continues to dominate rare earth processing (the dirty, dangerous, energy-intensive and expensive process of turning rare earths into something useful).
Even Molycorp, the company that was meant to be America’s great rare earths hope, sends some of its rare earths to China for processing, and that’s unlikely to change. The company, whose shares reached $77.54 in 2011, at the rare earth market peak, closed at $.60 on Friday. Unless there’s a dramatic change in rare earth prices in the near term, there’s no guarantee that Molycorp will even have enough cash to make it to the end of the year, much less build an expensive processing operation. Either way, China’s new rare earth conglomerates -- which enjoy state-backing to cover their losses -- seem likely to continue their dominance for years to come.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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