No ban on exports of rare-earth metals

By Will Freeman

Will Freeman is a staff member of Dragonomics Advisory and is a guest contributor to Dragonbeat blog this week.

China’s rare earth miners, if you believe a flurry of recent newspaper articles, have the world’s producers of high-tech equipment by the short and curlies.

A draft plan by China’s Ministry of Industry and Information Technology (MIIT) to ban exports of certain rare-earth metals has fuelled fears of an impending global shortage of high-tech products reliant on these metals.

Although MIIT now assures that no such ban will be enforced, high-tech producers remain nervous. Rare-earth metals are used to make vital components in wind turbines, electric cars and a host of electronics appliances.

Our advice: don’t panic.

The hullaballoo over China’s rare earths policy goes like this. China mines 95 per cent of the world’s rare earth ores and controls the global market for processed rare earth metals.

Beijing has steadily lowered export quotas of rare earth metals since 2004, and its increasingly stringent export restrictions will cause a global rare-earth shortage that will lay waste to these industries.

In short, Western high-tech companies will be held hostage by Beijing until alternative mines can be developed abroad, which would probably take at least 10 years.

But, in truth, a global shortage of rare-earth metals is highly unlikely – even as growing domestic demand means China swallows more of its own rare-earth resources.

China has dominated the rare-earths market since the 1990s, when Chinese mining companies used cheap labour and lax environmental standards to undercut their competitors. In the early 2000s, Beijing introduced export quotas and taxes on rare-earth metals, including an outright ban on the export of raw ores, in an attempt to force foreign producers of high value-added rare-earth products to shift production to the mainland.

China now consumes over 60 per cent of the world’s rare earth metals, up from just over 30 per cent in 2001, and exports the rest.

Most of the recent fuss over China’s 95 per cent dominance of the global rare-earth ore supply focused on “heavy” rare earths mined primarily from clays found in southern China. But shortages of these rare earths are unlikely to materialise for three reasons.

First, rising rare-earth consumption in China will not necessarily constrain the supply of rare-earth products abroad. China already manufactures and then exports most parts and products that depend on rare-earth metals.

And since less than 65 per cent of China’s rare-earth mining capacity was operational when prices peaked in 2007, China can easily step up production to meet demand. China’s Baiyun Obo mine – the world’s largest rare-earth mine, located in Inner Mongolia – has huge potential for expansion.

Second, the prospect of declining Chinese exports means that foreign rare-earth mining companies are already boosting production and developing new mines, while high-tech producers are finding substitute materials for a number of rare earths.

US rare-earth company Molycorp Minerals plans to restart mining at its Mountain Pass deposit in California in 2012 with a proposed output equivalent to 15 per cent of global production in 2008, while Australian rare-earth company Lynas Corp plans to develop another major project in Western Australia by 2012.

Rare-earth mines are costly to bring to market and a number of planned projects still need to undertake feasibility studies—but non-Chinese rare-earth supplies and their alternatives should increase significantly over the next decade.

Finally, any short-term spike in demand can be met by large global stockpiles of rare-earth ores and metals. Major foreign consumers like Japan stockpiled as prices rose from 2004 to 2007 and have yet to draw down inventories because of recent depressed global demand.

China remains the dominant force in the rare-earth industry, but it does not have the capacity to hold the rest of the world for ransom.

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