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Rare Earth Shortage – Made In China

Nationalistic policies aimed at monopolizing resources are nothing new in the international trade arena. A regular candidate, the Chinese government, has joined this list (again) by continuing to tighten its grip on the countries relatively abundant supply of rare earth metals. The Information Office of the State Council, a government controlled agency, recently released its first white paper outlining the negative effects stemming from this industry. Chinese officials hold the belief that there country continues to be exploited by foreign corporations, significantly increasing its environmental and socioeconomic problems.

Rare earth metals include 17 different elements that are used in a majority of electronic devices, ranging from smart cars to smart phones. Almost all technological advancements in recent history rely heavily on these resources, forcing many to question the government's true intentions behind the crackdown. It seems that the underlying motive is to force manufacturers to purchase resources from one of the state mandated supplies, ultimately controlling the market.

The Chinese have maintained a dominant role in supplying rare earth metals because of their cost-effective ability in extracting the elements. The country only holds an estimated 23% of the global reserves, but has crowded out foreign competition by undercutting production costs, leading to over a 90% stake in the global rare earth metal production (Chinese Gov, IOSC). The reason that Chinese rare earth metal producers, especially the government sanctioned ones, are able to undercut the majority of international competition is due to a multitude of macroeconomic strategies (Yuan peg, trade tariffs, etc) that are fully discussed in this article.

The US Government, along with numerous other international leaders, has brought this issue to the attention of the World Trade Organizationbecause it is a violation of international trade laws. When China joined the WTO in 2001, they did not include rare earth metals in their export exclusions, but are now justifying the addition through environmental concerns.

In my opinion, this heightened regulation is a cover for the government's consolidation of the rare earth industry. As consumer demand grows for products that utilize these metals, the Chinese government continues to tighten its control over suppliers to profit from the manipulation of market prices. Not to downplay the need for global environmental regulation, but it seems a little suspicious that China is just now stepping up to the plate and releasing research.

Japan is China's largest trading partner for rare earth metals, accounting for 56% of exports in 2011 (see graph above). Scientists haverecently discovered a massive deposit of rare earth metals off of the Japanese coast, stating that it "is enough to supply its hi-tech industry for more than 200 years". Although this is years from production, deposits such as this will help wean international dependence off of China's supply, rendering any ulterior motives useless.

In the short-term, we expect the price of rare earth metals to escalate on low supply of international producers, spurring increased exploration and production of new deposits like the one found in Japan. Production will lag as additional operations come online, forcing current manufacturers to continue purchasing from the main supplier in town. This will leverage China's power as the number one rare earth supplier in the immediate future, but as market forces shift, I expect the power to become less efficient.

Additional companies that are pushing to become the first major supplier of rare earth metals outside of China include Lynas Corporationand Molycorp. Two mines that are nearing production, located in Malaysia and California, have faced multiple setbacks as they attempt to enter into production.

The industry is hopeful that the Lynas Advanced Materials Plant (LAMP) will start producing in the near future; stating that its plant is currently 98% complete and the government infrastructure for successful operations are in place. Anti-mining groups, such as Save Malaysia, regularly speak out against the environmental damage caused by proposed operations and the long-term cost to the locals. Lynas has faced multiple appeals, but successfully defended it's two-year operating license.

Molycorp's flagship facility is Project Phoenix, located in Mountain Pass, California. The firm expects the project to reach Phase 2 by mid-2013, producing 40,000 metric tonnes annually. So far in 2012, Molycorp has increased proven and probable reserves by 36%. Expansions in exploration and production, like at the Project Phoenix site, will be continue to be extremely vital in meeting global demand.

The Information Office of the State Council has clearly stated it's intentions to stockpile rare earth metals to create a state reserve. Ever since a government press release in May 2011, their has been multiplerumors of the Chinese government hoarding these elements, presumably, to manipulate global supply. The government solidifies these rumors by specifically stating it's concern for the supply of europium, terbium, dysprosium, and yttrium in their recent white paper (viaRareMetalBlog). It is still unclear to what degree the major producing companies are contributing to the state reserves, but I'm sure they will be heavily compensated through government subsidies, continuing to widen the gap in international production costs.

The environmental regulation, related to the mining of rare earth metals, will persist as a necessary cost derived from processing these elements. A majority of international producers have implemented precautionary safeguards and strive to operate within an acceptable threat range, posing minimal harm to local communities. The current environment needs regulatory oversight to make sure that safety standards are improved and markets are left free to fluctuate, but don't be fooled by China's weak attempts at consolidating the industry.