China's Virtual Monopoly of Rare Earth Elements

Economic, Technological and Strategic Implications

Roland Howanietz

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9780367590130
• eBook ISBN: 9781351109895
• Edition: 1
• Topic: Social Sciences
• Subtopic: Ethnic Studies
• Index: Social Sciences

Rare Earth Elements are a group of 17 metals which have a central role in modern industry, increasingly used in the fields of green technologies, high technological consumer goods, industrial and medical appliances and modern weapons systems. Although deposits of Rare Earths are globally dispersed, over 90% of global demand has been provided by Chinese mines since the late 1990s, leading to a situation where China has a virtual monopoly. This book surveys the Rare Earths mining industry, discusses the extent to which Rare Earths really are scarce elsewhere in the world and assesses the economics of production, considering arguments for the rationing of supply, for higher pricing and for a total export embargo. This actually occurred in 2010, demonstrating the vulnerability of the rest of the world to China's control of these increasingly vital resources.

1
Introduction

On 7 September 2010, a Chinese fishing trawler rammed two Japan Cost Guard vessels in the waters around the disputed Senkaku/Diaoyu islands in the East China Sea, which are claimed by both the People’s Republic of China¹ and Japan to be in their exclusive zones at least since the discovery of potentially large oil and natural gas reserves located around the islands at the end of the 1960s. As a consequence of their provocative and dangerous behavior, the crew of the Chinese trawler was arrested and detained by the Japanese coast guard (Lackner & McEwen-Fial, 2011, p. 7; Smith, 2014; “Bare anger”, 2010). While this event has led to increasing concerns that future peace in East Asia might be threatened by both arising, ever-fiercer territorial conflicts and by the revision of geostrategic analyses and strategies, this event also turned out to be of great importance for the discipline of resource economics and the strategic natural resources policies² of highly industrialized countries that were not even involved in the dispute. As a reaction on the detainment of Chinese citizens, the Chinese government not only arrested four Japanese business-persons but also informally embargoed the exports of the natural resource “Rare Earths” to Japan (Mazza et al., 2013, p. 4; Smith, 2014).

Rare Earths³ are a group of 15, respectively 17, metals with the atomic numbers 57 through 71, which form the lanthanide series in the periodic table. The metallic elements of Scandium and Yttrium do not belong to the lanthanide series but are incorporated in the REE group in many studies because they have very similar physical-chemical properties (Hurst, 2010, p. 3; Jordens et al., 2013, p. 98). Due to their increasing use, these metals are also called “technology metals”, “vitamins of technology” or “seeds of technology”. Although the deposits of Rare Earths are globally dispersed and have been extracted in several countries since their commercialization in the mid-1880s, over 90% of the global demand is provided by the production of Chinese mines since the late 1990s (Humphries, 2013, pp. 1–4). This situation is the “Chinese Rare Earths virtual monopoly”.

In microeconomic theory, a monopoly is a market situation in which there is only one supplier of a specific good so that this supplier has a market share of 100% and the market power to set prices due to the lack of competition. When compared to the idealistic, welfare-maximizing market structure of perfect competition,⁴ the price is set higher by the monopolist in order to maximize his/her profits, and the resulting supplied quantity is lower. Due to its history of Soviet-style economic planning, the existence of State-owned enterprises in many key sectors and industries still today, the ongoing issuance of Five-Year-Plans⁵ as a basis for an active, all-embracing industrial policy and its status as a non-market economy in international trade,⁶ the PRC is often assumed to be a unitary, strategically planning economic actor. Therefore, the high concentration of global REEs production in China is sometimes seen as a monopolistic situation (Lackner & McEwen-Fial, 2011, p. 12; Ting & Seaman, 2013, p. 235). However, the market structure of the Chinese REEs mining sector was not as highly concentrated as in the standard definition of a monopolist market or of even an oligopolistic market⁷ at the time of the embargo. The concentration of production in China was achieved by the domestic location advantages of low Chinese wages and lax environmental standards in combination with active governmental promoting measures. One of these measures was the policy of “easy access” so that new mining permits were granted without large requirements. As a consequence, mining companies of all ownership types –privately owned, State-owned and joint-stock companies –and of all operational sizes have been established. Consequently, the prices of Rare Earths steadily declined as the Chinese REEs mining sector expanded (Ting & Seaman, 2013, p. 239). Therefore, the virtual monopoly of China is not a monopoly by definition and has no intrinsic pricing power. However, for REEs consumers outside of China, the virtual monopoly poses an uncertain threat to supply security. While the potential risks of the concentration of REEs production in China was overlooked or ignored before September 2010, and consumers believed in the security of REEs supply through free markets, the issue gained a lot of international attention when the Chinese government enforced the acting of China as a unitary economic agent in the form of an embargo. In addition to the embargo of REEs exports to Japan, exports to both the European Union and the USA were stopped in October 2010. The embargo to the USA is predominantly explained as a Chinese counteraction against the opening of an investigation of the U.S. Trade Representative against Chinese policies in the green energy sector that violated WTO rules on 15 October 2010. These violations included export subsidies, restriction of domestic market access for foreign firms and also the preferential treatment of domestic companies in the access to Rare Earths as required material for green technologies. The export ban to the EU is mainly explained by the attempts of Japanese companies to bypass the embargo to Japan by purchasing Rare Earths from European companies. As a consequence, all major REEs consuming countries outside of China were embargoed at the same time from 18–28 October (Lackner & McEwen-Fial, 2011, pp. 8–10).

There were two major immediate impacts of this total embargo. First, prices for REEs skyrocketed due to the restriction of their physical availability on the world market. The price of some REMs increased tenfold as a consequence of short supply (Lackner & McEwen-Fial, 2011, p. 10). Second, Rare Earths came under the spotlight of the media, governments and economists that previously neglected the role of REEs as a strategic natural resource that is indispensable for the development and expansion of new technologies but whose production is highly concentrated in a country that might not be fully considered a secure supplier. The majority of scientific articles on Rare Earths published before 2010 were in the fields of geology, metallurgy and theoretical and practical applications. The geological articles mainly provide information on global stocks of reserves and resources and specific deposits that are dispersed in several countries around the world, and describe the special geological characteristics of REEs-bearing minerals (Castor, 2008; Kanazawa & Kamitani, 2006; Long et al., 2010; Olson et al., 1954). The articles on REEs metallurgy mainly cover the techniques that are required to process REEs into refined and pure metals, such as separation through electrolysis. The articles on application fields include the research in the fields of superconductors, batteries, phosphors and catalysts (Adachi et al., 2010) but also fields of medical and biological research, such as the effects of using Rare Earths as feed additives in the fattening of pigs and calves (Miller, 2006). The only publications that acknowledged Rare Earths as strategic natural resources prior to the embargo were the studies of Papp et al. (2008), who identify the factors that influence the price determination of REEs, and the U.S. National Research Council (2008) and Angerer et al. (2009), who identify REEs as critical resources for the USA and Germany, respectively. As a consequence of the embargo, not only prices but also the number of published articles and studies that deal with REEs as strategic and potentially scarce natural resources increased significantly. Studies on behalf of different governments or from private research institutes mainly try to cover the whole spectrum of assumingly relevant aspects of Rare Earths: the summary of geological information on deposits, the current market concentration in China and its impact on prices, the fields of application in which REMs are used, the possibility to secure or diversify supply, the impact of REEs mining on the environment and human health and the exploration of possibilities to recycle REEs (Grasso, 2013; Hilpert & Kröger, 2011; Hilpert & Mildner, 2013; Humphries, 2013; Hurst, 2010; Schueler et al., 2011; United Nations Conference on Trade and Development, 2014). Scientific journal articles and working papers predominantly focus more specifically on one of these aspects, or on the assessment of the scarcity or criticality of Rare Earths (Alonso et al., 2012; Binnemans & Jones, 2015; Boer & Lammertsma, 2013; Bradshaw et al., 2013; Erdmann et al., 2011; Graedel et al., 2012; Nassar et al., 2015; Ruettinger & Feil, 2011; Silberglitt et al., 2013), or on the benefitting factors in China and the rest of the world that fostered the establishment of the Chinese virtual monopoly (Biedermann, 2014; Butler, 2014; Clagett, 2013; Goldman, 2014; He, 2014). Because China did not only embargo REEs exports for the short term but also announced the adjustment of its general trade regime for REEs in order to limit the volumes of future exports, several papers especially focus on the economic implications of these trade-restricting measures and/or on the analysis of whether these restrictions might violate WTO law (He, 2014; Jebe et al., 2012; Lackner & McEwen-Fial, 2011; Mancheri, 2015; Morrison & Tang, 2012; Ribeiro, 2014; Van Calster, 2013; Zhang, 2013; Zhang et al., 2015). However, the current number of papers with empirical-quantitative approaches is low. Those papers have been published in the period from 2013 on so that there was a distinct time delay between the publication of qualitative and quantitative literature. Pothen (2013b) utilizes the METRO model that has been formalized in Pothen (2013a) in order to measure the market power of China gained through its restrictive trade policies and to simulate the future developments of supply, demand and prices on the REEs market. Sanyal et al. (2013) investigates the impact of trade costs on Rare Earths exports based on a stochastic frontier model. Mueller et al. (2014) analyzes the wealth effects of Rare Earths prices and China’s REEs policy for listed companies that are involved in the REEs industry in China or the USA. Wang et al. (2015) utilizes the curve-fitting “Generalized Weng model” in order to forecast the date of the production peaks of Chinese mines. Zhang et al. (2015) measure the effectiveness of China’s restrictive measures by carrying out a price sensitivity analysis of Chinese REEs products on the Japanese and U.S. markets in different periods.

This study will expand the relatively small economic literature of Rare Earths as a strategic natural resource. It will use both an eclectic approach based on the existing literature and a qualitative analysis as well as a quantitative analysis based on the Hotelling rule for optimal paths of natural resource extraction. The main research goal is to analyze the explicit impacts and implicit implications of the Chinese virtual monopoly in the Rare Earth Metals sector for China itself and the REEs consuming countries in the rest of the world. The Chinese view of its virtual monopoly is best described by the “three narratives of reinventing an industry” of Wuebbeke (2013). According to the Chinese government, the short-term embargo and the longer-term restrictive adjustments in the trade regime of REEs were not based on international, geopolitical issues but were imperative due to the situation of the domestic Rare Earths industry. First, the extracted amount of REEs is seen to be excessive, while the prices are deemed to be too low for a natural resource that is both exhaustible and indispensable for the development of emerging high technologies. The intrinsic value of REEs is assumedly not reflected by their prices on the global market. In the industrial structure before 2010, neither the Chinese government nor individual companies had the price-setting power that a pure monopo-list possesses. Therefore, REMs as strategic resources would be “squandered” at low prices while China is threatened to run out of natural resources rapidly due to excessive extraction of REEs for exports. Thus, the adjustments in the trade regime and the overall regulatory framework are seen as measures that should not only restrict exports but also limit the overall production of REEs. This should lead to an upward revision of prices and to the conservation of natural resources for future Chinese generations. These goals are also supported by policies of industrial reorganization that aim to reduce the number of mining companies as well as prevent cases of occurring illegal mining. Second, the Chinese government stresses the importance of the restriction of REEs mining and exportation for environmental protection. REEs mines were not environmentally regulated until 2010 so that the lax Chinese environmental standards even constituted a competitive advantage. This has led to a severe impact on the environment and human health in the surroundings of REEs mines. Thus, the restriction of exports and production, the reorganization of the industry and the close monitoring of the compliance of companies to new standards in the long term are also seen as necessary for the implementation of stricter environmental regulations of REEs mining (Wuebbeke, 2013, pp. 387–392). From the view of the Chinese government, the virtual monopoly is therefore more a burden for the country than an advantage because it implicates a high concentration of the environmental impact of REEs mining in China while China lacks the monopolistic benefit of price-setting power. The government officially explained the embargo as necessary for an inspection of REEs companies in order to monitor which firms would violate the existing regulations or would even operate without permits (Lackner & McEwen-Fial, 2011, p. 4f.). However, the embargoed economies saw the issue differently. There were suggestions that China would use its virtual monopoly in order to achieve geopolitical objectives, for example, to pressure Japan to make political concessions in the island dispute. Thus, the embargo and the general restriction of trade were partly seen as a sign of emerging neomercantilism (Lackner & McEwen-Fial, 2011, p. 10ff.). A second, purely economic explanatory approach is based on the view that export restrictions and taxes on Rare Earths should give Chinese companies in REEs-dependent production sectors an important competitive advantage. The adjustments of the trade regime would be only another stone in the Chinese mosaic of industrial policy consisting of State subsidies, pressure on foreign companies to invest in China and the exchange-rate policy of undervaluing the Chinese currency Renminbi (Krugman, 2010). Both explanatory approaches have led to efforts to break the Chinese virtual monopoly. These efforts include the diversification and securing of supply by th...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Figures and map
• Tables
• Abbreviations
• 1 Introduction
• 2 Introduction to Rare Earth Metals
• 3 Assessment of Rare Earths scarcity
• 4 The optimal extraction path of Rare Earth Metals for China
• 5 Adjustments in the regulatory framework of the Chinese Rare Earths sector
• 6 Conclusions
• Index