China’s Dominance of the Rare Earth Industry 

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Source: National Geographic
The world’s focus has drifted from rare earth elements as a strategic resource. Countries such as the United States and Australia had challenged China’s near-monopoly by investing in rare earth mining and production companies. But because of Beijing’s new regulations on the industry, the Chinese rare earth supply chain is being consolidated and improved.

Rare earth minerals may not be on everyone’s mind during dinner conversations, but they are critical in defense technology and in the manufacture of high-tech goods, from electric or hybrid vehicles, consumer electronics, wind turbines, missile systems and other clean-energy technology. Until alternatives are found, rare earth minerals are vital to a country’s aspiration for military power and renewable energy. Given China’s considerable investment in military technology and renewable power, rare earth elements are important not only to the future of China’s economy, but also to its geopolitical standing.

Many people believe that in 2010, in a territorial dispute, Beijing used its dominance in rare earth materials strategically by withholding their export to Japanese ports, which alarmed nations from Australia to the United States. So in turn, many manufacturers acted to reduce dependence on rare earth elements, while others, drawn by cheap and stable supplies, relocated their manufacturing plants to China. Knowing that China was producing more than 90% of all rare earths, some companies collaborated with national governments, including the United States, to promote rare earth production outside of China.

Today, most Chinese rare earth miners operate at a loss, and that has reduced rare earth prices. These companies are state subsidized and currently under state restructuring. Chen Zhanheng, the deputy secretary general of China Rare Earth Industry, told China Daily, "Rare earths are not as difficult to mine and process as many seem to think, so many illegal miners are bypassing regulations to dig and smelt the metals. This, in turn, has led to a glut in the market.” Illegal mining has caused pervasive environmental damage to mining areas in Northern China, and it has forced the national government to buttress and consolidate the industry.

China’s controversial reforms for the sector include, first, plans to consolidate production in six state-owned conglomerates, and second, to impose strict quotas on export and production. Also Chinese technocrats are cracking down on illegal mining and processing. Because of low rare earth prices driven down by excess, the only United States rare earth miner and processor of REEs, Molycorp, has gone bankrupt. For now, Molycorp will continue operations, but future prospects are slim.

The Americans are not the only ones compromised. Australia’s Lynas Corp, one of the largest non-Chinese rare earth companies, is struggling. Last March, the company warned it may not be able to repay lenders. The company’s auditor says that he has “significant doubts” about  Lynas’ survival. 

Along with these reforms, Beijing has ended its export tariffs on rare earths and begun to change its rare earth tax regime. Experts believe this move could boost prices by 20-30 percent for some rare earth metals.  This surge will likely come too late for non-Chinese producers, leaving China’s state-owned companies in control of the world’s rare earth materials.

How does its newly empowered rare earth industry empower China? First, China is able to leverage its monopolistic position to introduce uncertainty into the minerals market. The resulting apprehension has driven manufacturers of these materials, from hybrid cars to wind turbine manufacturers, to China’s shores to secure supplies. Zhao Shuanglian, vice chairman of the Inner Mongolia Autonomous Region, has said that “we are not taking the short-term view of just trying to prop up prices. Imposing controls and reducing exports aim to attract more factories.” Despite the fact that China was barred by the World Trade Organization from instituting quotas on rare earth materials, China’s strategy of leveraging these resources will certainly continue.

Developing the domestic rare earth industry is central to Beijing’s “Made in China 2025 strategy,” which focuses on developing China’s green and high tech industries. Innovation has followed, along with China’s increase in rare earth production, while in the US innovation has fallen. Because these metals are central to new technological inventions and technologies, China is poised to reap the rewards from discoveries made using rare earth minerals.

Some experts believe that the United States, European Union and Japan should not worry about China’s dominance in the rare earth mining industry, because if prices increase, their mining industries will restart. Others are wary of a Chinese monopoly. David Abraham, director of the Technology, Rare and Electronic Materials Center, wrote, “This is not so much a problem with China as a problem with any monopoly: the dominant player in the market is often able to dictate terms. China is the largest producer of rare earths, but it is also the largest consumer -- less than a quarter of rare earths produced in China are exported. But these materials are critical for component manufacturers, and it’s essential for them to understand the ramifications of relying on a single country for rare earths.”

Imagine the supply chain for a rare metal. First, there is the mine that produces rare earth mineral concentrates. Next, we have the buyer who then produces rare earth chemical concentrate. The next business separates rare earth oxides, and on and on the supply chain goes. Historically, the seven businesses were located all over the globe, but China discovered the opportunity to extract materials, at the cheapest prices, by ignoring environmental protection. Then China started to produce mineral concentrates. They were able to do it cheap, because of low labor prices. Because of the cheap labor and supply chain restructuring, the Chinese government was able to undercut the world’s mining businesses, so that now, most of the world’s rare earth mineral concentrate comes from China.

Since the government has now backed the development of the rest of the supply chain, the Chinese have a monopoly on rare earth materials. With each progressive development of the next business in the supply chain, the rest of the world’s rare earth mining and producing businesses declared China’s unfair advantage and went to the WTO for resolution, which later came.  Meanwhile, during this time, there have been no successful competing mines developed outside China, and the ones that exist have been going bankrupt. If China were to implement a rare earth export quota, it would take years for countries such as the United States to build up the rare earth infrastructure 
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All in all, China’s dominant position in the industry seems set to strengthen as a result of Beijing’s new reforms. This will worry Asian states, such as Japan, that are reliant on rare earth metals for manufacturing technology. If rare earth-free green technology and technological alternatives are nowhere to be found, that should raise fear in defense industries of countries like the United States, which could become reliant on the Chinese rare earth industry for maintenance and manufacturing of defense. Coercive policies from the Chinese could force more manufacturers and producers of technological goods to set up operations in China or, with supply chains dominated by Chinese companies, force closer ties between China and other manufacturers in Southeast and East Asia.

JP Thomas is a junior at Duke University.