China's Rare Earth Metals Clampdown Drives New Trade, Mining Ties

China's restriction of global access to its deposits of rare earth elements starting in 2010 changed the status of these materials in the global economy, creating new diplomatic alliances across Asia and increasing the importance of mining in trade agreements. A series of trade agreements in Central and Southeast Asia, announced over the past month, reveal the ways manufacturers and mining conglomerates are coping with potential shortages two years after China's rare earth consolidation. Nevertheless, difficulties inherent to extraction and processing mean that delays will hamper access to new sources of rare earth supplies even when supported by strong investments.

Deng Xiaoping's observation that rare earths were to the Chinese economy what oil is to Saudi Arabia's has proved accurate. Like Saudi Arabia and its oil reserves, China has gradually retained more and more of its rare earth elements for domestic use over the past decade. Supplying roughly 95 percent of the world's rare earth consumption, China shocked markets with its sudden restrictions on exports in 2010 and 2011, cutting quantities sent to Japan and then the U.S. and other Western trading partners in the aftermath of a maritime incident off the disputed Senkaku Islands. Rare earths take longer to find and extract than oil, and many of the world's mines had closed over the years when China was becoming the world’s principal supplier. Shortfalls in global rare earth supplies now seem imminent, as electronics manufacturers continue to increase their demand. In response, mining corporations backed by national governments are scouring the developing world, especially Central Asia, for new sites.

The U.S. has yet to formulate a comprehensive plan for dealing with probable shortfalls in rare earth supplies and has not reacted as quickly as major Asian economies. Congress and the Defense Department first publicly discussed the issue last year, noting that rare earth elements are essential components of missile guidance systems and other military electronics. Ultimately, both the U.S. and the European Union responded to China's actions by calling for rare earth elements to be stockpiled for emergency shortages. British leaders also directed construction of a “strategic metals stockpile.” None of these plans is accompanied by clear indications of where the elements will be sourced, however, and there are no standout candidates among mining corporations in this regard.

Elsewhere, the search for new rare earth deposits has kindled significant interest in infrastructure development aid to Central Asia, where China's competitors must woo governments to secure multi-decade rights to rare earth deposits. The Chinese mine in Bayo Obo is close enough to the Mongolian border that international interests are already scouring the Mongolian side for mineral deposits. Mongolian officials, who tried for years to attract international investment for domestic infrastructure, now see companies queuing up to build access roads, supporting businesses and shipping systems around major sites. Japan, which was not forthcoming with aid a decade ago, recently signed a free trade agreement with Mongolia and offered Ulan Bator development assistance. Earlier, Germany and Kazakhstan signed a $4 billion agreement allowing German mining companies access to Kazakhstan’s rare earth elements in exchange for technical assistance in modernizing railroads, building chemical plants and other forms of development.

For China's neighbors, trade agreements for rare earth access have become defensive alliances driven by concerns over long-term sourcing. Japan, the world's largest importer of rare earths due to its electronics sector, announced this month that its government and several corporations, including Japan Oil, Gas and Metals National Corp., are joining with India Rare Earths to exploit alternative mine locations. They intend to avoid Chinese processing altogether by building a plant in Kazakhstan. As early as 2004, India, an early rare earth supplier, was losing out in price competition with China, but over recent months it has seen increased reinvestment and planning in mines in Orissa state. India hopes to develop more processing facilities domestically and in Central Asia to meet some of the world's demand.

Complicating the picture, however, is the fact that rare earth deposits require extensive processing to yield usable ores. The extraction and purification process is waste-intensive, including radioactive materials, with plants often located in emerging or frontier market nations increasingly concerned about the risk of pollution. Ongoing disputes about environmental contamination are now causing delays in the launch of new rare earth supply chains. Australian mining giant Lynas, for instance, has developed a site near Mount Weld, Australia, which the firm believes can provide 10-15 percent of current global demand. However, ongoing negotiations with the Malaysian government for the use of an operational processing plant in Pahang state have delayed bringing the supplies online. In addition, the Malaysian opposition is now threatening to close the plant, which opened less than a year ago, if they win elections in 2013.

Over the long run, the ramp-up in global production of rare earths will likely meet the strategic needs of manufacturers. In the nearer term, the risk of shortages varies by country, but the growing need for “clean” technology might further increase demand. One of the key applications for rare earth metals is the use of dysprosium in powering permanent magnets, which are essential to electric motors and, by extension, electric cars. China's tightening of supplies indicates they hope to keep more essential rare earth elements within their domestic supply chain, in order to sell domestically produced electric cars, rather than supply foreign manufacturers with rare earths.

One could also imagine a scenario in which cellphones and other existing products received most of the rare earth reserves during a temporary supply stoppage. This possibility worried some automobile manufacturers enough that they began to research alternative materials for clean engines. Indeed, Toyota began this research before China cut access to its rare earth supplies. Nevertheless, it remains uncertain how long it would take for such research to bear fruit.

In the meantime, efforts currently underway to bring new sources of rare earths online will likely need to be supplemented, by programs that recycle existing rare earths, for example, and expedited, by quicker processing plant approvals where possible, to help ensure a shortage-free transition to a reliable international supply chain.

Greg Caramenico is a journalist and analyst covering finance, science and energy policy, as well as Italy, Iran and the Levant. He has a master's degree in history from Vanderbilt University.

Photo: Oyu Tolgoi Copper and Gold mine, South Gobi Desert, Mongolia (Photo by Brücke-Osteuropa).