8 July 2011

Jaakko Kooroshy

Former Chatham House Expert


On 5 July, the World Trade Organisation declared Chinese export restrictions on seven raw materials as illegal. This was hailed in Washington and Brussels as an important step to solving the global supply crisis for rare earths elements (REEs), even though the ruling did not directly address this group of strategic metals.

Europe's Trade Commissioner de Gucht said the ruling should push China to 'ensure free and fair access to rare earth supplies'. A Financial Times editorial argued that the precedent should also apply to REEs case. Even though the WTO is sending the right signal, the verdict will not solve the world's rare earth problems. Pushing Beijing to play by the rules is important but not enough; other countries clearly will have to step up their game too.

Since 2004, Beijing's progressively heavier restrictions on the exports of REEs have drawn the ire of OECD countries. China produces well over 90% of the global supply, and prices have increased tenfold over the past twelve months outside of China. Critics claim that China uses its supply monopoly strategically to gain unfair advantage in the global competition for advanced technologies relying on rare earths, from smart phones, hybrids to wind turbines and guided missiles.

China will probably appeal the ruling and is unlikely to fundamentally change its rare earths policy until a specific case on REEs is brought to the WTO. This may take a long time. It is also unclear if such a ruling would prevent China from maintaining some form of preferential access. Chinese producers may for example enter into long-term supply contracts with domestic downstream industries or even integrate vertically. It can take a long time to get large trading powers to comply with WTO rulings, as the drawn-out dispute over US cotton subsidies demonstrates.

More importantly, Chinese export restrictions are only part of the problem. Detailed data are hard to get by, but industry expert Dudley Kingsnorth estimates that global demand for REEs increased by more than 25% since 2005, with no indications of a slow-down on the horizon. Over the same period, global production grew by just over 5%. While Beijing's export restrictions have clearly exacerbated the supply crunch outside of China, they are not the root cause of the global rare earths predicament.

To solve the crisis, the world needs additional supplies, especially from outside of China. In the past advanced economies had all too happily outsourced a dirty and often not particularly profitable business to China. Beijing's use of export restrictions to move into the more profitable parts of the booming REE value chain became a crude wake-up call, triggering a scramble to re-develop REE mining outside of China.

Despite grand plans, OECD economies' capacity to produce these critical raw materials remains embarrassingly dismal. REE mining - particularly the chemical separation of the individual elements - is an extremely complex business, riddled with technical, environmental and financial pitfalls. Apart from minimal mining activities, two small separation plants - both of which are ageing Cold War relics (one in California and one Estonia) - is all there is in terms of a rare earths upstream industry outside of East Asia. Taken together, their capacity stands at 6,000 tons of rare earth oxides per annum, less than five percent of current global supply.

Efforts to build new facilities are feverishly underway, but progress remains slow. The frontrunner is a facility constructed in Malaysia by Lynas' Corporation, an Australian mining company. The facility has been half finished, but has lately run into trouble over protests by environmental safety concerns. The runner-up is a new facility being built next to the old Cold War plant in California by the US company Molycorp. I visited the site last month and while a modernisation of the mining complex is in full swing, the construction of the actual separation plant itself is yet to start.

In short, there is no quick fix for the global REE supply crisis. Both companies are adamant that they will be in production by next year and will in time provide around 20% of world demand. Many experts remain sceptical about the ambitious schedule. Similarly, much-discussed recycling and substitution options are years away from making a meaningful impact on supply and demand balance. This is all the more true as Chinese capacity to export is shrinking rapidly. Chinese annual REE demand growth is estimated at 15%, against supply growth projections of only 5% as China consolidates its industry to get a grip on rampant environmental damage. Chinese experts have warned that China's demand for rare earths is likely to outstrip its supply within this decade.

Finger-wagging at China should not distract from the shortcomings of industry and policy-shortcomings with regards to REEs, which have contributed to the global supply crisis at least as much as China has. It is therefore time for OECD economies to make a much more systematic effort to increase their ability to contribute to global REE supply. Japan's quiet but effective hands-on cooperation between industry and government on REEs - including global upstream exploration, mining, separation, resource efficiency and recycling - could serve as an example.