The War Over the Periodic Table
A little past 9:30 on the morning of Sept. 7, 2010, a Japanese Coast Guard vessel in the East China Sea spots a Chinese fishing trawler off the coast of islands, known as Senkaku in Japanese and Diaoyu in Chinese.
The Japanese have little tolerance for such incursions in the Senkakus, which they annexed in 1895 after the Sino-Japanese War. But recently China has asserted claims to these islands extending hundreds of years earlier. The island dispute is wrapped up in a morass of misunderstanding and oneupmanship, with an eye toward the rich seabed resources nearby.
When you ask Japanese officials about the territorial dispute, they will look at you as if it is almost insulting to answer the question. “It’s our land,” one government official told me, as if an American diplomat had been asked if Hawaii is part of the United States.
On that morning, the Japanese vessel pulls alongside the smaller Chinese trawler and blares messages to the crew in Chinese from loudspeakers: “You are inside Japanese territorial waters. Leave these waters.”
Videos from the day show that instead of leaving, the Chinese boat bends toward the stern of the Japanese cutter, hitting it and then sailing on. Forty minutes later, the same captain veers into another Japanese coast guard ship.
Tokyo has managed previous incursions with little fanfare. However, the newly elected Democratic Party of Japan detained the trawler’s crew and captain. It planned to put the captain on trial. China retaliated by detaining four Japanese citizens.
Then, on Sept. 21, Japanese trading houses informed its Ministry of Economy, Trade and Industry that China was refusing to fill orders for rare-earth elements -- a set of 17 different, obscure rare metals. What seemed like a battle over seabed resources became a new conflict, one that is potentially far larger, a War over the Periodic Table.
Japanese officials and manufacturers were frightened. These elements -- essential materials in Japan’s high-tech industry, well known for its high quality components -- were virtually all produced in China.
Beijing never acknowledged an export ban or said it would use the rare-metal trade as a political weapon. But no other country reported such delays. And Beijing never explained why all 32 of the country’s rare-earth exporters halted trade on the same day. Restricting these exports was an astute move if Beijing’s goal was to escalate the political conflict between the two countries without the use of force.
Tokyo worried that rare earths were just the beginning of what China might withhold because China is also the leading global producer of 28 advanced metals also vital to Japanese industry.
Bowing to Beijing’s pressure, Tokyo quickly released the Chinese captain. But the damage to Japan and the rare-earth market had only just begun. Prices for rare earths started to climb, some as much as 2,000 percent over the next year and a half.
Prices have since returned to lower levels, and China changed its export regime after being found in violation of global trade rules last year. But the lessons from this episode have not yet been fully realized as a fundamental market instability remains.
A little perspective is in order.
China had begun mining its rare metals including rare earths in the late 1970s. It realized exporting them could provide hard currency. Over time, mining companies outside China could not compete against Chinese mining operations, which had lower labor costs and lower environmental standards.
Tungsten mines in Germany and France shuttered in the 1980s; likewise, rare earth producers in the U.S. in the 1990s. Soon manufacturers came to rely on China's low prices as the new normal.
Within just a decade, China had gone from producing very few rare metals to gaining near monopolistic control over many rare-metal markets. They soon became the dominant processor of many metals, even those not mined in China. China’s large role in the market continued to expand in the 2000s: In 2010 the country produced about 40 percent of the world’s rare metals up from 29 percent in 2000.
The reason why China became dominant in production of many critical metals was not just government resource policy. It was also the result of geological good fortune and a long-term focus on developing its manufacturing base.
Beijing’s policies increasingly became more sophisticated. It realized that selling minerals and metals abroad was a lost opportunity. Instead of exporting metals to help create jobs in Japan, China wanted to build high-tech manufacturing plants to use its own resources.
Beijing imposed export restrictions, and offered lower domestic prices and access to reliable supplies of rare metals to entice foreign companies to bring their high-tech operations to China.
The strategy worked. Over the past decade, industries in Japan, which were the biggest export market for Chinese rare metals, moved operations that rely on those elements to China. Michael Silver, chief executive officer of the California-based American Elements, told me, “We have witnessed in my business a huge number of our customers finally building facilities in China to access elements.”
The move wasn’t just from Japan. Historically, the U.S. supplied all of the cerium and neodymium for General Electric’s lightbulbs. But access to resources changed that. “All of that is done in China now," Silver said. "Similarly, every major wind turbine manufacturer has moved operations over to China.”
In 2013, Gan Yong, the head of the China Society of Rare Earths, laid bare what had long been the rationale at the heart of Beijing’s rare metal policy: “The real value of rare earths is realized in the final product.” The country is now consolidating the rare metal industry into the hands of many state-owned entities to retain market discipline. Beijing no longer wants to assemble gadgets with foreign components. It, like all resource-rich countries, wants to maximize domestic resources for domestic gain.
What’s more, both increasing and upgrading its manufacturing base are critical to China’s leadership. The regime’s political legitimacy is connected to its ability to ensure the country has the resources it needs to maintain growth. This means prosperous high-tech industries that create jobs throughout the country’s supply chain. With these metals playing an integral part in that chain, it is likely that the geopolitical resource battles will continue.
To insulate against the risk, which in Japanese circles is dubbed “China risk,” many companies have been trying to replace rare metals in their supply lines. But this is a tall task. Substitution is a growing challenge in today’s complex hardware when each element has specific properties that are not widely shared, if at all, with other elements. And if we can’t find a suitable replacement for sugar in our soft drinks, with millions of dollars of research going into that task, companies will be hard pressed to replace neodymium in magnets.
Even if companies and countries shift away from certain rare metals, they are setting themselves up to once again learn that substitution might not make them any more resource secure. Japanese companies decades ago switched from magnets made from cobalt, a metal produced almost entirely in Congo, to what seemed then the relative safety of rare earths produced in China.
Increasingly today, national economic security and the fate of many businesses are beholden to a handful of unheralded metals, produced often in one country, in many cases China. As our products become more advanced and supply lines intertwined, manufacturers become tied to the properties of specific rare metals, leaving them hostage to the resources. Without more robust supply lines, the War over the Periodic Table may be just beginning.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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