China’s Rare Earth Dominance: Another Global Resource Scramble in the Making?

In 1978, Saudi Arabia sent a foreign geological team to survey a large granite intrusion in its northwest region, known as the Ghurayyah deposit. The team was dispatched with the hopes of discovering uranium. What they found was the deposit was rich in the bluish-grey metals known as tantalum and niobium. With little demand for the metals, the surveyors moved on, and a year later, the Iranian revolution spurred a second global oil crisis, resulting in Saudi Arabia’s main resource skyrocketing in price.

Almost three decades later, geologists have returned to the Ghurayyah deposit. The British company currently awarded the area’s exploratory license, Tertiary Minerals, calls it the world’s largest known deposit of tantalum and niobium, estimating almost 95,000 metric tons available for mining. The renewed interest is because in the years since that initial survey, the metals have found application a number of modern electronic devices. But more importantly, they belong to the mineral set known as rare earth metals, a resource whose demand could lead to tensions mimicking those over oil supply.

That’s because China now controls over 95% of the world’s supplies of rare earth metals, and has placed curbs on rare earth exports, creating a resource stranglehold. China slashed export quotas by 72% in the second half of last year, and imposed a further 35% cut in the first half of 2011 from the year-ago level. As a result prices for some rare earths have jumped more than 1,000%. Some estimates show that global demand for the minerals might more than double by 2020 from 125,000 metric tons last year.

Two U.S. Senators recently urged the White House to block Chinese mining projects in the United States and elsewhere until Beijing eases curbs on export of rare earth minerals, which are indispensable ingredients in a range of products including hybrid cars, batteries used in mobile phones, high-tech magnets, and catalysts in petroleum refining. Democratic Senators, Chuck Schumer and Debbie Stabenow, said in a statement that they aimed to address China’s "hoarding" of the lucrative metals, a group of 17 elements with exotic-sounding names such as terbium, europium, dysprosium and lutetium.

The Chinese have engaged in politics of their own regarding the metals. They are slowly easing the restrictions on rare earth shipments to Japan, which were halted since September 21, following the arrest of a Chinese fishing boat captain by the Japanese authorities in disputed territorial waters. Though Chinese officials maintain there is no official embargo, the timing of the sudden stoppage on Japanese shipments did not seem purely coincidental. Then in mid-October, China halted all exports of its rare earth materials for 10 days, effectively disrupting trade to the United States and Europe. The moves highlighted China’s virtual monopoly on the global supply. China has in fact been reducing its export quota on rare earth minerals in a controlled, regulated manner since 2005; giving fair warning that fewer and fewer supplies would be available to the rest of the world.

In language referencing the energy crises of the 1970s, former Chinese leader Deng Xiaoping is reported to have said in a 1992 speech, "the Middle East has its oil, and China has rare earth." A few years later, Chinese President Jiang Zemin asked more of his country, stating, "Improve the development and applications of rare earth and change the resource advantage into economic superiority."

Reasons for Chinese Dominance

China’s control over 95% of the global supply of rare earth is a remarkable statistic for an industry that it had only begun developing since the 1950s, according to a paper outlining the Development and Policies of China’s Rare Earth Industry published by Zhanheng Chen, deputy director of the Chinese Society of Rare Earths. The U.S. Geological Survey estimates that China has about 36% of the world’s reserves but it’s easier to extract the minerals in China for geological reasons. Also the country has, in the past, been more tolerant of the ecological damage the mines cause to the surrounding areas. Recently, China has come down harder on rare earth operations to adhere to stricter environmental laws as the country campaigns to be a global leader in clean energy.

"I don’t believe there is anything sinister about what China is doing with the embargoes," says Keith Delaney, executive director of the Rare Earth Industry and Technology Association. The Colorado-based, nonprofit organization was founded about a year ago to support alternative supplies of rare earth materials around the world. "The water has calmed but it doesn’t really diminish the vulnerability of commerce that businesses have to face," he adds.

"In general, the Chinese government may be guilty of being too eager to export, but rarely restricts export," says Z. John Zhang, a marketing professor at the Wharton School. Indeed, even in this case, the Chinese government officially denies any embargo. My understanding is that China’s awareness of its monopoly position in producing rare earth elements has been there for a while. However, until recently, it has been producing and selling rare earth elements as if it is in a competitive marketplace. For some time now, China has been gearing up to change the practice and to behave as a monopolist. These changes are rather expected and China cannot be faulted for taking advantage of market forces like many other resource countries.

"Ideally, China wants to price rare earth elements in such a way that it squeezes the maximal profitability (or benefits) out of buyers, but yet the price is not so high so as to encourage the emergence of alternative suppliers or substitutes," Zhang adds. "Now, with the restriction on rare earth exports being politicized because of the unfortunate timing, the buyers may be so much more motivated to look for alternatives in the long run."

In 2009, global sales of rare earth oxides was worth US$1.4 billion and has grown more than 10% a year, reported The New York Times. Since the shortage of rare earth materials, their value has soared. Prices for rare earth materials have increased sevenfold since China reduced its exports by 72% in the second half of 2010, according to Bloomberg Businessweek.

In 2009, approximately 125,000 tons of rare earth oxides were supplied to global industries, according to Roskill Information Services, a London-based metals and minerals research firm. Of that quantity, China supplied 120,000 tons, while Russia provided 2,500 tons, the U.S. supplied 2,400 tons, and India provided 25 tons. There are also rare earth mineral deposits in Malaysia, Vietnam and Brazil being explored. In total, Roskill has identified about 200 rare earth projects taking place in different parts of the globe.

By 2014, Roskill estimates the demand for rare earth metals will be 205,000 tons but production is expected to increase to just 180,000 tons, leaving the world with a shortfall of 25,000 tons. Certain rare earth elements, like dysprosium, used to make magnets and lasers, will have a deficit supply of as much as 700 tons, and europium, used to create the color red in televisions, will be 50 tons short of projected requirements.

What are Rare Earth Elements?

There are between 15 and 17 rare earth elements that occupy the bottom two rows of the periodic table. But in reality, they’re not very rare. These minerals are replete in the Earth’s crust but seldom found concentrated in exploitable ore deposits and are difficult to process and mine in a safe, efficient, and environmentally friendly way. In fact, the U.S. Geological Survey points out that all of the rare earth elements, except promethium, are more abundant than silver or mercury. However, the radioactive waste from extracting the rare earth minerals is a major consideration when developing a mine. It’s also difficult to find ore deposits with rich enough concentrations to make the mining operation economically viable.

The elements were originally called "rare" because they weren’t discovered until the 18th and 19th centuries and found as oxide components in seemingly rare minerals, according to the U.S. Geological Survey. The first rare earth element Yttrium (Y) was discovered in 1787 in a quarry in Ytterby, Sweden. This particular element is used in high-temperature superconductors. Rare earth minerals are also vital to miniaturized battery technology, hence its importance in laptops, digital cameras, and mobile phones.

The global campaign for clean energy has meant increased demand for rare earth metals. To make hybrid cars, wind turbines, and energy-efficient compact fluorescent light bulbs, rare earth metals are essential. Hybrid cars contain as much as five pounds of rare earth materials for its batteries and magnets.

Rare earth metals are used to power wind turbines more efficiently and with fewer maintenance issues. "Not all wind turbines have to be powered by rare earths but the technology is so compelling," Delaney says. In an interview with The Australian, Kazunori Fukuda, deputy director of the non-ferrous metals division at the Ministry of Economy, Trade and Industry, states, "All green technology depends on rare earth metals and all global trade in rare earth depends on China."

In addition, rare earth materials are essential in U.S. military applications, like precision-guided weapons, stealth technology, and night-vision goggles. The Pentagon has realized its dependence on China’s rare earth supply could potentially jeopardize America’s defense operations and commissioned a study to research the rare earth supply chain. However, in late October, Bloomberg News reported the U.S. Defense Department concluded, after a yearlong study, that China’s control of the rare earth materials is not a threat to national security since the military requires less than 5% of U.S. rare earth consumption.

Modern Devices Drive Demand

Roskill estimates that in 2008 China consumed approximately 60% of its own rare earth supply for magnets and significantly more in 2009 as their own automotive and green technology industries developed. The demand for rare earth magnets has increased 15% annually for the past 10 years, according to Reuters. The U.S. and Europe primarily use rare earth materials as catalysts in the auto industry. The U.S. Geological Survey estimated American domestic consumption of rare earth metals was 10,200 tons in 2007. However, the Western countries are avid purchasers of products like iPads, laptops, mobile phones, and flat-screen televisions, which all require rare earth materials.

While China is the biggest consumer itself, Japan is the largest importer of rare earth materials. "There’s been a lot more angst in Japan than in the U.S. [over the embargo] because Japan has a lot more at stake than the U.S.," Delaney notes.

However, Bloomberg recently quoted a Chinese official for Baotou Rare Earth High-Tech Industrial Development Zone Committee as saying that China may start importing some of the heavy rare earths in the next three to four year to meet rising domestic demand. The official said that domestic demand for rare earths has increased as much as 200% in the last 12 months, with almost half of that increase coming since the start of the year.

The quantity of rare earth materials that Japan officially imports is not a huge amount. In 2009, their allotted shipment from China was only 38,000 tons, which was barely enough to fulfill the requirements of Toyota and Honda alone, according to The Australian.

Over the past few years, Japan has been stockpiling rare earth materials as a precaution, well aware of their dependency on — and potential vulnerability to — China’s export quotas. In addition, Japan has been purchasing rare earth oxides on the black market, as much as a fifth of its annual consumption, according to The Australian. Ginya Adachi of the Japanese Rare Earth Association said in the same article, "The Chinese government wants full control but it doesn’t have it. It is not in control of the rare-earths market in the same way that OPEC is in control of oil. Local miners will sell even if the government tries to control the price or the quotas." Chen, of the Chinese Society of Rare Earths, also acknowledges the thriving black market for rare earth materials in his report, estimating that 30,000 to 40,000 tons leave China illegally. However, in the last year, China has cracked down on the black market, citing the environmental damage the illegal miners inflict.

New focus has also been turned to urban mining, which recycles metals and minerals from used electronics like laptops and mobile phones. The National Institute for Materials Science estimates there are 300,000 tons of rare earth metals in Japan’s junkyards, according to The New York Times. Dowa Holdings in Kosaka has managed to recycle antimony, used in semiconductors, and indium, found in liquid-crystal display screens. They’ve still researching ways to extract neodymium, used in electric motors, and dysprosium, found in lasers.

The process involves shearing electronic parts into two-centimeter squares and melting them at high temperatures. In a single day, Dowa goes through 300 tons of materials, extracting 45 kilograms of rare earth metals, as reported in The New York Times.

Other Japanese companies are developing motors that will no longer use rare earth metals. The New York Times reported that Japan’s New Energy and Industrial Technology Development Organization, known as N.E.D.O., now produces a motor for hybrid vehicles that uses ferrite magnets instead of rare earth metals. Nidec Corporation is manufacturing motors for heavy machinery and tractors that will no longer use neodymium, according to Reuters.

Seeking Rare Earth Sources

Meanwhile, other companies around the world are racing to either ramp up production in existing rare earth mines outside of China or discover new rare earth deposits. However, starting a new rare earth mine takes a tremendous amount of investment and time. Delaney of Rare Earth Industry and Technology Association estimates it takes between five and 12 years and up to US$1 billion for a new rare earth mine to get underway.

Until the 1980s, Colorado-based Molycorp Inc. supplied most of the world’s rare earth minerals. Their Mountain Pass, California mine in the Mojave Desert is located about an hour away from Las Vegas. Prospectors who noticed radioactivity in the vicinity first discovered the mine in 1949. It made history when europium from its deposits enabled televisions to broadcast in color for the first time, according to PBS NewsHour.

The company couldn’t compete with the low prices China offered for their rare earth minerals, and closed their mine in 2002. But in the past five years, Chinese companies have attempted to purchase the mine three times, only to have Congress block the sale, according to The New York Times. Currently, Molycorp is processing ore from the stockpile they extracted several years ago, producing 2,000 to 3,000 tons of rare earth oxides. With plans for capital investment totaling US$500 to US$530 million, the company is aiming to improve water recycling operations and install a natural gas power plant to generate their own electricity. By next year, Molycorp aims to be back in full production with a target annual output of 20,000 tons of rare earth oxides.

Another big player in the rare earth mining industry is Lynas in Australia. Their Mount Weld mine in Western Australia is expected to reach full production also by 2012 with the potential to produce 21,000 annual tons of rare earth oxides, according to Roskill. Lynas’ main processing plant is located in Malaysia. The New York Times reported a Chinese state-owned company successfully negotiated a deal to buy 52% of Lynas but the Australian government blocked the deal, based on national security grounds.

Also, Indian Rare Earths Limited, owned by the Indian government, is now back in production with a planned target of producing 5,000 tons of rare earth oxides by 2012. "It’s not a major supplier, but not insignificant either, because five percent of global supplies means a substantial secondary source for at least some of the big companies," said R.N. Patra, chairman and managing director of the company, in an interview with Reuters.

Meanwhile, the hunt for more rare earth deposits is taking place around the world. Toyota is partnering with the Vietnamese government to explore mines in that country, Mitsubishi is searching in Brazil, and Sumitomo, a Japanese industrial company, is investing in Kazakhstan, according to Bloomberg Businessweek and Roskill.

Furkhat Faizulla, marketing manager, Advanced Material Japan Corp. was quoted by Bloomberg as saying, at a recent conference organized by Asian Metal in Pittsburgh, that if all other rare-earth mining projects in the world come online as planned, China’s share of global supplies may drop to 70% in the next five years.

But Delaney points out, "We’re dependent on China’s exports until the non-Chinese mines are up and running. Between now and 2012, there’s not much anybody else can do. The original equipment manufacturers are aware of these issues. They’re concerned they’ve put all their eggs in a Chinese basket and they don’t want to do it again."

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