China’s virtual monopoly on supplies of rare earth metals used in many high-tech applications is drawing much less attention now than it did several years ago, when Beijing unilaterally halted shipments to Japan, the biggest consumer of the metals. In the meantime, Japan has maneuvered to diversify its supply base, sought to develop reserves of its own and increased its use of recycled rare earths, while big non-Chinese producers like Lynas of Australia and Molycorp of the U.S. have stepped up their own projects. Despite these developments, industry experts say Japan is as dependent as ever on Chinese supplies. They question, however, whether China is able or likely to manipulate its control over the supply chain for political ends.
Rare earths include 17 elements used in most high tech goods, from advanced military technology to mobile phones. Total world output was 110,000 tons in 2012, down from 111,000 tons in 2011. Although the metals actually are not rare, China’s unique ability to produce them at low cost has won it a 90% share of the world market. As a leading manufacturer of electronic devices, sophisticated vehicles and other advanced technology, Japan is the biggest market for rare earths. Brought up short by Beijing’s de facto embargo in 2010, Tokyo has sought to expand access to rare earth reserves in Mongolia, India and other producing countries. But while its direct imports from China have fallen from more than 80% before 2010 to below 60% of the total last year, the original supplier for most rare earths sold to Japan still is China. Ministry of Finance figures show that in 2012, Japan bought 17% of its rare earth imports from France; 9.9% from Vietnam; 4.9% from South Korea; 6.8% from Estonia and 2.4% from the U.S.
“The statistics are misleading, because France, South Korea and Vietnam rare earths are all coming from China, since they do not produce them themselves. So counting both indirect and direct imports, Japan still buys more than 80% of its supplies from China,” says Konosuke Takegami, a professor at Takushoku University in Tokyo and specialist in resource economics. A look at production figures bears that out: According to the U.S. Geological Survey’s Mineral Commodity Summaries, France, South Korea and Estonia produced no rare earths in 2011 or 2012. China produced 95,000 tons in 2012, followed by the U.S. at 7,000 tons, Australia at 4,000 tons, Brazil at 300 tons, India at 2,800 tons and Malaysia at 350 tons. “It is completely a mistake to say Japan is now much less dependent on China,” says Toru H. Okabe, a rare earth specialist and professor at the Institute of Industrial Science at the University of Tokyo.
As relations with China have deteriorated due to a festering territorial dispute, resource-scarce Japan has recently stepped up efforts to demonstrate it can produce various resources at home. That includes a project to mine methane hydrate from the sea bed and exploit shale gas deposits off its northern coast. Yasuhiro Kato, a professor at the Frontiers Research Center for Energy and Resources and Graduate School of Engineering at the University of Tokyo and a geologist who discovered huge rare earths deposits in the seabed around the island of Minami Torishima, downplays that find as a potential substitute for Chinese supplies. Even if the Minami Torishima project proves feasible, the intention is to supply only about 10% of total Japanese demand from there, to give Japan a bit of bargaining leverage against the Chinese, he says.
“Which would you rather buy, Chinese rare earths or rare earths costing 10 times more from other countries?” asks Okabe. “China became the biggest supplier because it produces them at the lowest cost, since they have ignored environmental issues,” he adds. Other countries have shied away from expanding rare earths production for just that reason. Rare earths are bound up in mineral deposits with thorium, whose low level radioactivity has been linked to increased risks for lung, pancreatic and other cancers.
Experts are divided over whether China may once again use its control over rare earths supplies as a diplomatic tool, as it is thought to have done in 2010 when it suddenly halted shipments to Japan amid a dispute over the collision between a Japanese coast guard ship and Chinese fishing ships near disputed islands in the East China Sea. At the time, China cited environmental and regulatory concerns as the main reason for the embargo. But shipments to the U.S. and E.U. resumed within 10 days, while the ban on exports to Japan lasted more than two months. Chinese officials also contended that any embargo may have been imposed spontaneously by the industry due to anti-Japanese sentiment.
Takegami says he expects Beijing to use such tactics again, especially if rare earths prices surge. For the moment, while it continues to set half-yearly export quotas, Beijing is constrained by a pending ruling by the World Trade Organization (WTO), which is considering complaints filed by Japan, the U.S. and E.U. in 2012 over the earlier export controls. The three countries accused China of manipulating rare earth prices by keeping them low for domestic users while raising them for exports in a bid to force foreign companies to move their operations to China. In response, the WTO began an investigation into China’s restrictive rare earths trade policies, while China argued that it is carrying an unfairly heavy burden in supplying 97% of the rare earths consumed in the world while holding 50% of global reserves. China also said its policy is necessary for the healthy development of the rare earths mining and processing industries and to protect national strategic interests.
The WTO is expected to rule on this later in 2013. It may indeed find that China violated rules against export controls, but it will likely decide there was no damage to its trading partners, thus obviating the need for any sanctions, said Edward Gresser, a trade expert and director of the Progressive Economy Project at the Global Works Foundation.
Whatever WTO ruling emerges, Beijing will likely carry on as it sees fit. Chinese industry remains by far the most competitive, says Takegami. Molycorp, based in the U.S. state of Colorado, and Lynas Corp. have each begun initial production, but their prices are much higher due to high costs. They also lack reserves of heavy rare earth elements, such as dysprosium, that China has in abundance. Recent weakness in rare earth prices and environmental concerns have delayed production schedules in both countries.
Takegami expects China to use rare earths as a diplomatic weapon again, after the WTO ruling or if rare earth prices go up again. “China is likely to do it again because Chinese industrial policy changes all the time,” agrees Shigeo Nakamura, president of Advanced Material Japan Corp, a medium size metal trading company in Tokyo.
However much it may seek to exert control over the global market for rare earths, though, China has been unable to counter a sharp drop in prices. The bursting of a speculative bubble in the metals, and softer demand due to China’s own slowing economy, have caused prices to plunge since the summer of 2011. Chinese rare earth producers suspended output for three months last year, seeking to reduce their stockpiles, but so far prices show no sign of recovering. Dysprosium cost US$500 per kilogram as of June 6, compared with an average price of US$1,449.80 in 2011 and US$1,035.60 in 2012. It peaked at an astonishing US$2,300 by September 2011. Neodymium was U$61 per kilogram on June 6, down from US$234.40 in 2011 and US$123.20 in 2012. (These are FOB average China prices.) Japan’s demand for rare earths was 14,470 tons in 2012, down 31.4% from the 21,080 tons in 2011, according to the Japanese Society of New Metals. China’s domestic demand was estimated at 79,000 tons in 2012.
China would be making a mistake if it tries to abuse its de facto monopoly to manipulate supply, says Patrick Chovanec, chief strategist at Silvercrest Asset Management Group in New York. “Once burned, twice shy,” he says. Although China still dominates the market, it does not hold a monopoly on world reserves, which are quite widespread. “They simply dominated the market because they are cheapest and there was no reason not to buy from them,” Chovanec says. China never had a stranglehold on the market, though there was no reason to pay a premium as long as the metals from China were cheap and available. “If people are willing to pay a premium, they can find them elsewhere,” he adds.
Nakamura of Japan Advanced Material agrees. “These are just industrial materials. There are other suppliers, and world demand is only about 120,000 tons. It is such a small demand compared with other metals like copper.”
The lower prices prevailing now, however, have put the alternative suppliers such as Molycorp and Lynas in a bind. Molycorp, the biggest producer outside of China, reopened its Mountain Pass mine in California and was due to boost output to 19,050 tons a year in the third quarter of 2012, from 3,102 tons in 2011. Now the company said it expects to hit that target by mid-2013. Lynas Corp of Australia originally was due to start production in Malaysia by late 2012, but it has been embroiled in lengthy environmental and safety disputes with residents near the plant that delayed a production launch until February 2013. “Japanese government agency and companies are investing in some rare earths mines overseas, but I do not think it is economical to invest in such high cost mines. It is important to have alternative sources in terms of security, but it costs much more to produce in the U.S. or Australia,” says Okabe.
Heavy Rare Earths: Rarest of All
One area where China does exert more control over the market is for heavy rare earth elements used in high tech products such as electric cars and flat screen televisions. Heavy rare earths are mined almost exclusively in southern China, and so far the U.S., Australia and other countries have not found deposits of such metals, which include dysprosium, terbium and ytterbium.
The discovery of huge reserves of heavy rare earths, or the huge rare earth mud with high concentration of rare earth elements in Japan’s Exclusive Economic Zone near Minami-Torishima, by Kato and a team of scientists from Japan’s Agency for Marine and Earth Sciences and Tokyo University has raised hopes that Japan may be able to tap its own supplies. The deep sea rare earth mud they found does not contain radioactive elements such as thorium or uranium, says Kato. But other experts question whether, at 5,000 meters below sea level, extracting such metals would be economically feasible. “The problem is cost. How much will it cost to bring rare earths up from the deep sea, and what you would do with the residue mud?” asks Okabe.
Mitsui Ocean Development and Engineering Co. Ltd., a member of the development research team, intends to use deep sea oil exploration technology to develop rare earths in the sea bed, notes Kato. “We will do our best to lower the cost, but we do not have to be competitive with Chinese rare earths. All we need to produce is about a tenth of Japan’s demand from this development,” he says. Okabe agrees: “The project can be used as a bargaining chip or constraint against China.”
Hedging against threats to its access to rare earths, the Japanese government spent 100 billion yen on securing alternative sources, recycling and other measures in the fiscal year that ended on March 31, 2012. It spent 46 billion yen on overseas rare earth projects. In March 2011, Japan Oil, Gas and Metals National Corp., a government owned natural resources development agency, and the Japanese trading house Sojitz Corp. announced they invested US$250 million for a minimum of 8,500 tons of rare earths per year from Lynas Corp. So far, Japan has not received any shipments from Lynas due to the delay in its Malaysia project. Japan has also invested in rare earths projects in Malaysia, India and Kazakhstan.
Ultimately, given its need for rare earths, and for access to China’s fast-growing domestic market and manufacturing bases, Japan needs to have better relations with Beijing, notes Takegami. He suggests that Japan set up a rare earths trading organization to negotiate long-term supplies from China. “Japan will continue to be dependent on China, especially for heavy rare earths, so it should set up a trade association to deal with China on this issue,” he suggests. More importantly, “Japan needs to improve its relations with China, which are now at their worst in recent years.”