The last few years have been a turbulent time for the rare earths market. This group of 17 elements, which have become vital in the manufacturing of high-tech products ranging from military jet components and hybrid cars to wind turbines and smartphones, aren’t all that rare, but their geological distribution is such that there are relatively few deposits of rare earth-bearing minerals that are economical to mine.
According to estimates, China plays host to around a third of the world’s proven rare earth reserves. Due to the country’s strategic and brilliantly prescient focus on developing its rare earth mining and processing capacity in the 1980s, today it controls around 85-95% of the global supply of rare earths, with 70% of the world’s light rare earths coming from a single mining operation at the Bayan Obo deposit in Inner Mongolia.
China’s overwhelming presence in this market affords the country significant influence over the market, a fact that has alarmed many international users, especially the US military, which has come to rely on China for the rare earths it uses in missiles and other advanced military hardware.
Indeed, while the Chinese dominance over the supply of rare earths went unnoticed for decades as the supply was cheap and abundant, in recent years Beijing hasn’t been shy about exerting its influence to bolster its own industrial sector at the expense of foreign markets. It has even used this power as an economic weapon, reportedly cutting off rare earth supplies to Japan in September 2010 over a long-standing territorial dispute.
China’s rare earth export quotas
The issue over China’s rare earth exports policy went global in 2009 and 2010 when the country implemented stringent export quotas, choking off much of the supply of rare earth elements and their byproducts to technology companies and high-tech manufacturers around the world. The quotas, which were first implemented in 2009 and then cut by a further 35% in 2010, sparked a panic, with rare earth prices spiking. The price of rare earth byproduct dysprosium oxide, for example, shot up from $166 per kilo in 2010 to nearly $1,000 per kilo in 2011.
For the first time ever a Chinese commerce institution has publicly endorsed international supply chain due diligence.
The quotas sent the US, along with major markets such as Japan and the European Union, to the World Trade Organisation (WTO) with a complaint. After several years of investigation, the WTO found in favour of the complainants, concluding in summer 2014 that China was indeed violating its free trade commitments.
China had attempted to argue that the export quotas were put in place to limit as a matter of conservation and environmental protection, as the extraction and processing of rare earths is an energy-intensive and toxic process. But, as the WTO summary of the case notes: "The panel did not agree. It found that China’s export quotas were designed to achieve industrial policy goals rather than conservation."
In response to the ruling, China announced in early 2015 that it would lift the export quotas.
Rare earths: a false monopoly
Despite the international hair-pulling over the constrained supplies, the rare earth quota crisis and its resolution has laid bare the vulnerability of China’s rare earths ‘monopoly’, as many have described it. After all, there is no shortage of proven rare earth deposits outside of China; the country’s dominance in the market doesn’t come from any physical exclusivity. It comes from the rock-bottom rare earth prices that hit the market because of China’s ability to produce and export these commodities cheaply, due to its highly developed industry and lower labour costs (not to mention lax environmental regulation and a booming cottage industry of illegal rare earth miners and exporters).
As a result, rare earth mining operations elsewhere in the world have been priced out of the market, as seen in the case of MolyCorp’s Mountain Pass mine in California, the US’s only rare earth operation, which shut down due to low prices in 2002. But as there is no shortage of rare earth prospects around the world and developed markets like Japan and the US have been incentivised to invest in non-Chinese rare earth mining projects, China’s ability to use its influence to control the market is severely limited.
As Tim Worstall, a rare earths expert and senior fellow at free market think tank the Adam Smith Institute, put it in the Foreign Policy blog at the outset of the quota crisis in 2010: "If Beijing wants to raise its prices and start using supplies as geopolitical bargaining chips, so what? The rest of the world will simply roll up its sleeves and ramp up production, and the monopoly will be broken."
As it turned out, that is almost exactly what happened. The bubble of high prices made it economically viable for other rare earth mines to open, and they did. The mothballed Mountain Pass mine came back online in 2012, ramping up to full production in 2015, and in May 2011 the Australian miner Lynas Corporation started production at its Mount Weld rare earth mine. Since then, Lynas has built a refining facility in Malaysia to process rare earth products.
Of course, now that China’s export quotas are a thing of the past, prices have dropped again and non-Chinese rare earth operations are once again struggling to compete. Both Lynas and MolyCorp have come close to bankruptcy in 2014 and 2015, and both companies have required extensive recapitalisation to keep operations running.
Although the market as it stands certainly still favours China as the world’s premier exporter of rare earths, the essential question of whether global supply security is threatened by Chinese dominance has been asked and answered. China maintains its position because the market likes its prices, and if it tries to bottleneck supply again, international operations will likely be there to fill the gap.
"We don’t need to worry about China’s monopoly precisely because it is contestable," wrote Worstall in a 2014 article for Forbes.
Other alternatives to Chinese supply
The challenge posed by China’s rare earth export quotas also forced companies and governments to look more closely at other options to ease the supply tension. And as it happens, viable options do seem to be out there, even if significant investment is still needed to make them available.
Rare earths are often present as byproducts of other mining operations, but are rarely used. The waste from alumina and zirconium production, and even sifting through the fly ash residue from coal combustion, have all been highlighted as potential sources of rare earths, even if they’re not currently economical.
Kazakhstan, the world’s top producer of uranium, is now entering the rare earths discussion because both heavy and light rare earths are commonly found in the tailings of uranium mines. In 2012, the country’s state-owned nuclear company Kazatomprom received investment from Japanese corporation Sumitomo to build a processing facility that will eventually produce 1,500 tonnes of rare earth oxides a year.
"Our plan is to build a production plant for separating rare earth oxides and metals from ore concentrate by 2016 and start producing REE [rare earth element] permanent magnets by 2018," Kazatomprom president Vladimir Shkolnik told a press conference in February.
Mining-technology.com profiles the eight biggest rare earth producers based on latest production and reserve data.
Recycling rare earths from discarded consumer products and other hardware has also been picking up steam as a potential solution, and one that is being heavily researched in Japan, Europe, the US and elsewhere, while other scientists are looking into advanced composite materials that might one day replace rare earths in electronic products, although clearly that is a longer-term gambit.
In reality, the security of rare earth supplies is less of a pressing issue than the social and environmental realities of these elements’ production. High prices during China’s export quota experiment encouraged a massive surge in small-scale rare earth mining operations, which are often illegal and completely unregulated in terms of environmental damage. Up to 40% of rare earths sold today could be classified as illegal according to Chinese officials, and while the government is attempting to regain control by consolidating smaller companies into larger groups, the problem is unlikely to go away.
"Unfortunately, some manufacturers who use rare earth magnets in their products clearly value low rare earth prices more than the environment," Curtin University professor and rare earths expert Dudley Kingsnorth told Forbes in an article that likened illegal rare earth production to the ‘blood diamond’ crisis of recent years. "Unequivocally the illegal mining of rare earths in China is the biggest issue facing the industry."
The carbon footprint in China’s sprawling rare earths sector is likely to grow, along with the contamination of water sources with toxins and other environmental damage. As is so often the case, while governments and industry squabble over supply and demand, it’s the natural world that will continue to silently bear the brunt.