EXPERT VIEW: In defence of the Chinese on rare earths

Far from being the villains, the Chinese should be applauded for taking action by applying tariffs and quota restrictions on rare earth exports, says veteran REE expert Mick Muir.

Far from being the villains, the Chinese should be applauded for taking action by applying tariffs and quota restrictions on rare earth exports, says veteran REE expert Mick Muir.

China’s grip on rare earth elements (REEs) is being challenged at the World Trade Organisation, with a motion that declares that Beijing’s policies on these commodities amounts to restrictive practices.

And worldwide concern about China’s stance on REEs (or as they are technically known, lanthanides) has been heightened by visits to China by German chancellor Angela Merkel and US secretary of state Hillary Clinton.

However, because I have been involved in REE commerce for a number of years, I decided to investigate why and how the confrontation developed and whether any blame should be apportioned to the Chinese.

At the end of my deliberations, I concluded that, far from being the villains, the Chinese should be applauded for taking action by applying tariffs and quota restrictions on REE exports.

In essence, what the Chinese have achieved is to dramatically alert the world to a forthcoming crisis in supply.

This warning would not have come as a surprise to those people who had access to a 2002 report issued by the US Geological Survey (USGS) entitled Rare Earth Elements – Critical Resources for High Technology, which said that “high-technology and environmental applications of REE have grown dramatically in diversity and importance over the past four decades”.

This dramatic growth has continued undiminished, and the real value of rare earths has shown a dramatic increase.

The first question to ask is “Why have the Chinese undertaken steps to limit exports?”

The answer is, of course, economic and strategic self-interest.

Shift in control of supply to China
If we look at the REE story historically, the shift in supply and control from the USA to China took place in the 1980s when, due to both environmental and cost pressures, the Mountain Pass mine in the USA was closed, and China became the dominant global supplier of REEs.

At that time, this situation was of no great concern to US industry and government. American companies were happy to receive reliable, low cost supplies. Many white-goods manufacturers went the extra step and relocated factories to China.

The US strong-dollar policy accelerated the movement, with some US economists claiming their country was exporting jobs.

However, dramatic technological advances in recent years in separation technology and the development of more and more uses for REEs have seen an almost exponential growth in applications that rely upon these previously obscure commodities.

From basic uses such as lighter flints and glass polishing agents, REEs have attained a level of technological significance much greater than expected. They now have a very high value. A senior Japanese industrialist described REE as the “vitamins of industry”.

Many technological innovations, already regarded as commonplace and taken for granted, would not be possible without REEs. The USGS Bulletin said that many of the REE applications are highly specific, in that substitutes are inferior or unknown.

Rare-earth magnets have widespread uses in high technology

A case in point has been the revolutionary development of small, lightweight, high-strength, permanent REE magnets that have enabled the miniaturisation of many electrical and electronic components used in such applications as motor vehicles, energy-efficient white goods, communications systems and military hardware. A familiar example of REE pervasiveness is that there would be no flat-panel colour TV screens without them.

Modest beginnings
In the beginning, the Chinese companies used US technology, but, after intensive research, they became major players in the food chain from the mine site to the final application.

The major beneficiaries of early Chinese development were the Japanese electronic powerhouses, followed by South Korean interests.

Having attained dominance in REE production in the 1980s, the Chinese began to realise that they would be best served by limiting exports of raw REE products and capitalising on value-added products that contained REEs.

This strategy has taken two forms, the first being the sale of manufactured goods under Chinese own-labels and the second being the encouragement of international firms to relocate their factories to China, with its low labour costs.

This approach has served China well.

From a modest beginning, a powerhouse has developed, which was recognised by Chinese leader Deng Xiaoping who famously stated “the Middle East has oil, and China has rare earths”.

Technological advances
There are two main drivers to technological advances – breakthroughs from laboratory work and government directives.

Both the above drivers have been in play in the evolution of REE applications.

The Chinese Ministry of Science and Technology has undertaken national basic research programmes that have produced applications over a wide range of commercial and defence activities. Some of these are either yet to be implemented, such as magnetic refrigeration, and others are being steadily introduced to everyday life.

Beijing’s policies aimed at promoting green energy for both environmental reasons and to limit dependency on fossil fuels have driven rapid advances in REE-dependent wind turbines, solar technology and energy-efficient lighting systems.

I attended the first international REE conference in Hong Kong in 2002, where a speech from the Chinese REE Assn stated that China had sufficient REEs for all the world’s needs, meaning there was no need for any new reserves to be found.

However, by 2011 the Chinese attitude had changed significantly, and a spokesman indicated that China expected to be an REE importer in the near future.

China can see that domestic demand alone will be enough to stretch their own sources of supply.

One striking example of this shift in demand is contained in China’s five-year plan, which gives the electric vehicle industry special status. Wan Gang, the Chinese minister of science and technology, has been given the task of producing one million electric cars per year. Attaining this target will require huge quantities of REEs.

The world has been given a warning that REEs are high-value resources for a modern economy.

With this warning, the world’s governments and private companies have committed significant funds to the exploitation of resources that were previously considered uneconomic.

Chinese dominance
One of the reasons why China was able to dominate the REE supply situation for so long was the limited size of the market. Chinese dominance was well-established by the year 2000.

At that time, total production was about 80,000 tpy. The price of an average mix of REEs then was about $8 per kg. This put the total value of produced REEs at $800 million.

This figure was too low to encourage investment by mature companies in what was considered a high-risk undertaking, competing for scarce company resources.

There has now been a dramatic change in the dynamics, with current annual output at about 130,000 tpy, and an average mix price of $50 per kg, which makes a total output value of $6.5 billion – an 850% increase over 11 years.

Analysts widely predict that by the year 2020, markets will demand 250,000 tonnes of REEs, with the price of an average REE mix reaching $80 per kg. This would give a total value of produced REE at $20 billion.

A market of this size warrants serious investment.

It is interesting that just as the aspiring US presidential candidates are vying with each other in condemning Chinese economic practices, companies such as General Electric and Siemens are content to have their high-tech MRI machines manufactured in China.

Mick Muir was the initial ceo of Arafura Resources and has been involved in the industry for 35 years.

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