Japanese spanner in Chinese works
In early June this year China released a white paper on its rare earths industry. For the most part the document confirms what the international community suspected about China’s intentions in this important area of industry, and serves as a robust defence of its strategy on quotas. But recent developments in Japan may give pause to China, and force a re-evaluation.
China is sitting on about 30% of the world’s proven reserves of rare earth elements (REE), a group of 17 elements critical in the production of much of the technology the developed world has come to rely on. But the nation is responsible for approximately 97% of the world’s supply; it has been accused, not without cause, of maintaining a stranglehold.
China has been accused of using the supply as a lever in disputes with nations dependent on a regular flow of REE. Export quotas have been slashed by more than half in the last decade, and it halted the supply of REE to Japan in 2010 during a spat when a Chinese fishing trawler captain was detained after his boat collided with two Japanese coast guard vessels that challenged him for fishing in disputed waters.
In the new white paper China seems particularly keen to stress that it is a paragon of virtue in terms of international trade. It takes pains to point out that “[i]t will continue to follow the WTO [World Trade Organisation] rules, strengthen scientific management of this industry and supply rare earth products to the global market, so as to make its due contribution to the development and prosperity of the world economy”, and again later to point out “[f]or many years, China has been faithfully fulfilling its pledges upon its accession to the WTO, honouring the WTO rules, and promoting fair trade in rare earths.”
But China has already been in the spotlight this year for poor conduct in international trade, having lost an appeal in the WTO in January after the US, the EU and Mexico launched cases over China’s export restraints on nine raw materials, including zinc, coke and magnesium.
Now, the EU, the US and Japan have formally asked the WTO to settle a similar dispute with China over exports of other raw materials, including REE. The US in particular is worried about China’s control of the world’s REE supply, given that much of the electronic equipment used by its military includes REE based components. The US is understandably uncomfortable about having its military dependent on the whims of a foreign power with which it has very strained relations.
China has been working to change the shape of its REE industry in the last few years, and the white paper indicates that it intends to continue this strategy. According to Beijing’s figures the REE market is currently worth 100 billion yuan, and it sees potential for significant further growth. It has made concerted efforts to move from being an exporter of raw REE, to being a manufacturer of components. By keeping the supplies within its own shores it can build up its processing and manufacturing industries, with the consequent boost to education and training.
Beijing has encouraged this further by using its state backed companies to invest in overseas REE mining and processing concerns, and by encouraging foreign companies to invest in Chinese companies, and even to move to China.
Now, however, new finds of REE could jeopardise China’s strategy.
In an announcement on 29 June a Japanese scientist announced that a large deposit of REE had been found in the Pacific seabed in Japanese territorial waters, enough to supply its hi-tech industries for more than 200 years.
Around 6.8 million tonnes of the valuable minerals, used in electric cars, iPods and lasers, are sitting under the seabed near a far eastern Japanese island, Tokyo University professor Yasuhiro Kato told the AFP news agency.
He said mud samples taken from an area near Minamitorishima Island, some 2,000 kilometres (1,250 miles) southeast of Tokyo, indicated deposits amounted to around 220 times the average annual amount used by industry in Japan. In particular, the deposits contain a substantial amount of dysprosium which, among other things, is particularly important in the construction of hybrid car engines.
“Specifically on dysprosium, I estimate at least 400 years worth of Japan’s current consumption is in the deposits,” said the professor, who examined mud samples taken from the seabed around 5,600 metres (18,300 feet) down.
The find is the first time large scale REE deposits have been discovered inside Japan’s exclusive economic zone.
The Japanese government has yet to officially recognise the reserve and set out a plan for exploiting these new found REE, but given tensions with Beijing it seems unlikely that Tokyo would turn down the opportunity to end its reliance on China. “I would like to see the Japanese government recognise the existence of the rare earth deposits and soon start making investment in developing the area,” said professor Kato. “We can start drilling in the mud, using oil extraction technology, within three years at the earliest and start producing rare earth minerals within five years,” he said.
Pacific resources
That this vast reserve of REE should have been discovered in Japan’s Pacific seabed is not as surprising as it might have been a couple of years ago, although the quantity is certainly a pleasant revelation. A paper in Nature Geoscience in August 2011 revealed that researchers had discovered REE in various places across the Pacific.
The new study has revealed REE-rich muds at 78 different sites spread across the Pacific Ocean floor. While most of the sites are to be found in uncontested waters, a small number of some of the richest sites are quite close to the Latin American western coast. It is not surprising that rich deposits have been found here as Latin America was one of the main sources of REE throughout the 20th Century. The countries closest to the newly recognised REE-rich sites are Ecuador, Peru and Chile. Unfortunately, these countries have endured long-running, bitter and sometimes violent disputes over their borders, both land and sea; wars have been fought, most recently the 33-day Cenepa War in 1995 between Ecuador and Peru (both countries claim victory).
Latin American boundary disputes aside, China will be watching these discoveries with concern. In its white paper Beijing is keen to appear statesmanlike, using language such as:
“China opposes politicizing the rare earth issue, and is willing to strengthen dialogue and cooperation with other rare earth producers and consumers in a constructive and responsible manner…”
It is much easier to be statesmanlike when other countries have no other option but to come to you for their resources. If other nations are able to realise new found reserves China may find that not only could it cease to be the only supplier, but that it might not even be the supplier of choice for any countries who have the option to go elsewhere. China can try to hold onto market share by increasing quotas and lowering prices to levels other producing nations cannot match.
But other potential suppliers, especially new suppliers (which would be most of them), have the advantage of not having played politics with these resources in the past, and may well have more credibility when they pledge not to do so in the future. Some private industry may still choose to opt for the cheapest supplier, but nations sourcing REE and REE based components for their militaries will be keen to future-proof the supply chain as much as possible.
On reflection, China might well regret including in its white paper the argument for driving up prices of REE. It stated, quite openly, that one of the problems facing the REE industry in China is the “divergence between price and value”.
China is not known for pulling its punches when it comes to international rhetoric, but it may also come to rue using the white paper to have a dig at the countries that have taken complaints to the WTO. The argument of the document is introduced with the statement: “For some time now, some countries have been particularly fretful about the situation of China’s rare earth industry and related policies, doing a lot of guesswork and conjuring up many stories.”
One thing China had not anticipated when it formulated the REE strategy it has been following for the last decade, and has just committed to continue following, was the discovery of enough easily recoverable reserves elsewhere to limit its influence on markets. Beijing may well have to make some bold moves to regain the initiative, but what is yet to be seen is whether these are politically conciliatory or economically aggressive.