Rhein on Energy and Climate

Quietly and without the rest of the world taking much notice, China has managed during the last 20 years to establish a global monopoly over rare earths. Today, the country mines 95 percent of the global production of these minerals, which are essential for manufacturing many high-tech products from wind turbines to missiles, hybrid cars and drills.

The export of rare earths is subject to export duties and licences. In the past, licences have been granted without any problems. But during the past weeks it has been increasingly difficult to obtain them, as China seems to have drastically cut the numbers. This combined with rumours about further cuts in 2011 has set on the alarm bells, especially in Japanese, German and American industries depending on the import of rare earths from China.

Trade and industry ministers from Japan and Germany have raised the issue with their Chinese counterparts. The response has been revealing: China has to closely monitor the production because its reserves are limited and the mining causes major environmental damage. According to some estimates, the Chinese reserves of major rare earths might be depleted within the next 20 years. China will therefore prefer to export the transformed products rather than the minerals.

In order to strengthen its grip on the market China plans to regroup the mining of rare earths in three big state-owned producers responsible for light, medium-weight and heavy-weight rare earths.

The crisis about the rare earths demonstrates the differences of approach between China and the West when it comes to securing long-term market opportunities.

China follows a strategic approach where government and business operate in close inter-action. They look far ahead ignoring geographic limitations. Their arena is the entire planet 20-30 years ahead. Government and business scan the world for the future business risks and opportunities. In this search every single piece of information matters and helps them construct an overall picture.

It is through such an approach that Chinese business and government agencies have realised 20 years or so ago the importance of rare earths for many strategically important high tech industries and encouraged private and state enterprise to engage in mining rare earths and purchasing the necessary technology from Western companies.

Today it is apparent that their bet was the right one: Relying on its substantial deposits of rare earths, China controls the world market and can dictate the “terms of trade”.

It was also foreseeable that sooner or later China would become more interested in transforming rare earths at home rather than exporting the raw material. By 2010 we seem to have reached that stage. China wants to keep as much of its rare earths for its own high tech industries rather than selling them to their competitors in Japan, Europe or USA.

The West seems unable to take a long-term view. It lacks the collusion between government and business. Government has to control business and prevent it from getting too powerful. It would therefore be unthinkable for the USA or Japan to create state monopolies for rare earths. Moreover, the West is fragmented: it is difficult to get companies around the table in view of pursuing common long-term strategic objectives. State monopoly authorities would immediately intervene.

But the most serious handicap is the inability of Western countries to elaborate long-term strategies binding the private and public sector and commanding government financial or political support.

The West has moved out of rare earths because mining them has been environmentally difficult and not very attractive financially. Governments would never have offered any financial support.

Naïve belief in the market mechanism has misled European companies to think and act as if raw materials will always be available somewhere on earth. They did therefore not invest much if anything in securing their long- term supply pipe-line…

Here as in other fields European business has underestimated Chinese mercantilism and pays a heavy price for this naivenety.

There is not much Western industry can do to come to terms with what might become an increasing scarcity of rare earths.

Western governments will certainly take up the matter at the forthcoming G20 Summit in Seoul. But the Chinese side will continue to chant its familiar song that it has to supply its domestic industry and think about the environmental impact of mining. The prospects of depletion have already led to active search for new sources of supply in Central Asia and Latin America.

The USA and the EU might also raise the issue at the WTO. But though export tariffs and restrictions are illegal and though China has assured its partners that it would respect its commitments it is likely to plead the need give preference to the supply of its domestic industries. Launching a formal procedure against China will therefore take years to settle, while leaving Western industries without the necessary supply.

Europe, USA and Japan have no other option but to rapidly invest in alternative sources of supply including recycling, which will have to become much more important, as rare earths will become even scarcer and more costly.

Hopefully they draw the right lesson from this experience and stop waiting until the alarm bells ring. Europe must urgently define a long-term policy for insuring its supply of energy and strategic materials. Its external policy, including cooperation with developing countries, needs to be more focused on resources. Europe has to remind itself that scarcity will be defining factor for humanity in the course of the 21st century.

Brussels 28.10.10 Eberhard Rhein

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