China’s Elemental Monopoly

What started as a rather innocuous blip on supply chain radars within the high-tech industry a couple of decades ago, the topic of rare earth minerals has grown into a true strategic concern for U.S. manufacturers and security. Not to be confused with conflict minerals, rare earth elements, or REEs, are a set of 17 heavy metals (elements 57 to 71 on the periodic table), with unique properties key to such applications as aerospace, advanced defense systems, mobile devices, computers, infrared lasers, fiber-optic technology, wind turbines and rare earth magnets.

Despite the name, nearly all REEs are relatively abundant in the earth’s crust. Instead, their rarity is associated with the fact that these elements are generally widely dispersed throughout the earth, versus concentrated deposits, which makes them largely uneconomical to mine. 

In China, however, large-scale production combined with a strategic pricing program in the 1990s that undercut the global market, enabled the country to become the undisputed global leader in REEs, with low prices and easy access serving as a deterrent to other countries to develop their own supplies.

But then came a wake-up call: In July 2010, China enacted a 40 percent quota on REE exports that triggered panic throughout global supply chains and raised prices to unprecedented levels. In some cases, the export restriction forced large commercial electronics companies to relocate their production of REE-reliant devices to China.

As a U.S. national security issue, China’s dominance in REEs was included in the March 2013 report to the Senate Select Committee on Intelligence, which stated: “China holds a commanding monopoly over world REE supplies, controlling about 95 percent of mined production and refining. China’s dominance and policies on pricing and exports are leading other countries to pursue mitigation strategies, but those strategies probably will have only limited impact within the next five years and will almost certainly not end Chinese REE dominance. As of December 2010, REE prices had receded, but still remained at least 80 percent, and as much as 600 percent (depending on the type of REE), above pre-July 2010 levels. China will also continue to dominate production of the most scarce and expensive REEs, known as heavy REEs, which are critical to defense systems.”    

Some of those mitigation efforts included the U.S., European Union and Japan requesting the World Trade Organization to evaluate China’s practices. Just weeks ago, the WTO announced it had indeed determined China’s export restrictions on REEs to be incompatible with WTO rules, making it the second time Beijing’s use of export quotas as an industrial policy has been challenged successfully. (In 2010, the U.S., EU and Mexico won a similar WTO case against China’s use of export quotas on a variety of industrial raw materials.)   

But don’t expect the WTO’s decision to prompt any immediate changes. Instead, what may serve as a real deterrent to China’s continued growth in REE production are the environmental problems it has brought upon itself. According to the New York Times, China’s Cabinet, in a rare admission of guilt, produced a white paper that detailed the environmental harm that the rare earth industry has caused.

“Excessive rare earth mining has resulted in landslides, clogged rivers, environmental pollution emergencies and even major accidents and disasters,” the white paper concluded.

Poor refining methods reportedly have been responsible for high cancer rates in neighboring villages, and in northern China, contaminated water from two decades worth of refining has found its way into the Yellow River, a crucial water source for 150 million Chinese.      

In the U.S., new REE deposit sites, such as a massive discovery in the Bear Lodge Mountains of Wyoming, are being groomed for production, while previously closed mines are being reopened by companies gambling that increased demand, combined with more cost-efficient methods of mining, will make REE mining profitable.

In support, the U.S. Department of Energy reportedly has received more than $100 million in funding to create a new “Critical Minerals Institute” designed to find creative methods for cost-effectively mining the rare metals. But even if the mining challenge is met, it still must be refined, which has its own equally challenging issues.

Only time will tell whether the CMI will produce any breakthroughs, or if environmental requirements will be loosened due to the strategic importance of REEs. But one thing is certain: The U.S. has a lot of catching up to do, and the clock is running.   

Jerry Peck is a licensed customs broker and Global Trade Management expert with more than 30 years experience in regulatory compliance and GTM optimization solutions. Contact him at 469-235-5229, or at wgpeck@global-trade-ms.com.

 

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