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China and the supply chain of rare metals: Table of [dis]contents

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In Brief

Following Chinese restrictions on exports to Japan after the Senkaku maritime incident in September the spotlight has remained on rare earth metals. But it is difficult to ascertain the details of the restrictions as the Chinese government did not impose an official ban.

Disruptions in the supply chain, according to the Chinese government, were due to the private actions of rare metals exporters. In China, there are 32 companies with a licence to export rare metals, of which 10 are foreign owned. Although Japan’s detention of the Chinese trawler captain may have roused the ire of Chinese firms, it is hard to see why foreign-owned companies would react likewise.

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Hence, the Chinese government’s insistence that there was no official policy to restrict exports seems rather implausible. It would be an unlikely coincidence were all 32 firms, with no prior planning, to decide to cease exports simultaneously. Wen Jiaobao’s assurance that China would not use the supply of rare metals as a bargaining chip appeared equally so.

Whatever the motivations for the restrictions, the result was the same: decreased supply led to increased prices. There was a panic in the market because it was not known how long the restrictions would last. Compounding matters, China had already announced plans to cut export quantities for the next few years. Then, as suddenly as the restrictions were imposed, without fanfare they were lifted. Conveniently the restrictions ended just as Hillary Clinton made it clear that the United States was paying attention to the dispute. She said in a press conference in Honolulu with Japanese Foreign Minister Seiji Maehara that recent Chinese actions ‘[that] disruption could occur for natural disaster reasons or other kinds of events… served as a wakeup call [against] being so dependent on only one source’.

A balanced analysis of the situation indicates that it is rather unfair to blame China solely for the current shortage of rare metals. During the 1960s and 1970s the US was the world leader in rare metals research. By the 1980s funding for such research was reduced and the Ames Laboratory, which is the main research centre in America, was unable to continue research into analytical chemistry, separation chemistry, process metallurgy, and ceramics. As a result, American expertise in this area was lost.

Alongside the erosion of the US lead in research and development, the United States also lost its position as the leading rare metal producer. The mine in Mountain Pass, California, now owned by Molymer Corporation, used to be the world’s biggest rare earth mine until the early 1990s. Low prices of these rare metals meant that it was unprofitable to mine them. On the other hand, lax environmental and labour standards in China meant that it was economical to mine such materials there. Market forces, and not geopolitical forces, therefore caused companies in other states to either wind down or to cease mining operations. China did not intend from the outset to dominate the global market for rare metals; it was more of a case of China dominating the market as other actors withdrew for commercial reasons.

According to the United States Geological Service, China has approximately 37 per cent of the world’s known rare metal reserves. The United States has approximately 13 per cent of reserves. To place this in perspective, from 2008 to 2009 Chinese mines accounted for 240,000 tonnes out of an estimated total global production of 248,000 tonnes. Even though China has less than 40 per cent of the known global supply of rare metals, it is responsible for meeting almost 100 per cent of the global production. Significantly during this period, the output of American mines was negligible.

The global demand for rare metals will increase at a quicker rate as new uses are found for them. As Clinton noted, disruptions in the Chinese supply chain will directly impact on other countries. The time needed to restart mining operations, and the  price fluctuations inherently associated with raw materials make rare metals production far from riskless. It remains to be seen if other countries have the political and economic willpower necessary to reduce their dependence on Chinese exports and incur the financial and environmental costs associated with large scale mining operations.

This episode demonstrates that China still lacks diplomatic adroitness. Despite the official stance that China did not impose a ban, the highly coordinated nature of the ensuing restrictions made Chinese claims to the contrary difficult to believe. The ensuing restrictions were interpreted by many to be a blatant and crude display of power, despite Wen’s best efforts to argue otherwise.

The competition for rare metals and the ensuing tension will remain as long as a single country exercises so much control on the supply chain. But new mines and processing facilities in Australia, Malaysia and Vietnam are expected to come into operation over the next few years. We should see the global supply of rare metals increase, thereby reducing the world’s dependence on China. It remains to be seen if these new projects will deliver on their promise. If not, China will remain the primary source and these periodic episodes in the market  will become a  regular occurrence.

Ming Hwa Ting is a recent doctoral graduate from the University of Adelaide.

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