Economics · International Affairs · Strategy · Technology

China And Its Monopoly Over Rare Earth Elements Market

Ashirbad Nayak elucidates the dominance of China the Rare Earth Elements Market, which comprise of seventeen elements present in the Earth’s crust and how China, by the virtue of it’s advanced technology, has been able to achieve the difficult task.

Rare Earth Elements are a group of seventeen elements which have widespread application in a number of different industries. They form an essential component of electronic goods and machines. They are generally found dispersed across the earth’s crust and it is not easy to extract them from it. Since the inception of the 21st century, the world has witnessed an unprecedented rise in the use of Rare Earth Elements (henceforth referred to as REE). REE are used across a wide spectrum of industries and are major components of numerous electronic goods, renewable energy production machines and defence equipment. They are used by numerous corporations, from automobile giants (Nissan, Toyota), smartphone manufacturers (Blackberry, Apple), and even by conglomerates as General Electronic. The Lockheed Martin F-35, the most advanced fighter jet ever manufactured, has 500 kg of REE in its 14 tonne body. REE contribute over 300 billion dollars annually to the US economy. The dependence over REE is only set to grow in the forthcoming years.

China is the numero uno player in the market involving REE, and it is thus imperative for it to maintain its control over this sector. China has absolute monopoly in the Rare Earth Element sector, controlling over 90% of the production. In addition to that, China has over 50% of reserves. However, of late China’s position at the top has been threatened by a slew of different factors. The factors trying to unseat China from its perch are rising prices of REE, stepping up of production by other countries, the sanctions levied against China by international agencies, and smuggling of the REE out of China. In this article we shall examine all the factors for ourselves and see as to why despite all the challenges, China shall continue to maintain its dominance over REE exports in the future. The reasons for China’s continued dominance over REE are not far to seek, and have been elucidated below.

China has a thirty year lead over the other countries, having invested heavily invested in skilled labour, and sophisticated mining techniques. The country’s relaxed environmental laws make the usage of such techniques possible. It also operates the world’s largest rare earth mine, Bayan Obo. Its biggest competitors US based ‘Molycorp’, and Australian ‘Lynas’, face dire financial crisis, with Molycorp having filed for bankruptcy. Molycorp’s mine in California had remained non-functional since 2002. Operating at full capacity (which they are quite far from achieving), both the companies can together contribute around 10% of the total production of REE. But China shall still have a stranglehold over the rest 90%. Although, other countries have tried coming up with alternatives and have even tried stepping up their production, yet it requires over a billion dollars in investment, and between 5-12 years for a single REE mine to get underway . Besides, it would take decades of innovation to find a suitable economical alternative to REE. Upon comparing it was found that it would require tens of millions of dollars and major environmental clearance for other countries to produce the same quantity of REE, which China provides them for only a few hundred thousand dollars. The uneconomical and time consuming nature of finding an alternative to REE ensures the continued reliance of other nations upon China.

However, the biggest trump card in China’s hand is that since 2008 it has consolidated, streamlined and unified the production, purchasing, and sales of REE, under a single company, which in turn is completely state-owned. The company, Inner Mongolia Baotou Steel Rare Earth High Tech Co. Ltd., possesses the sole authority to mine, produce, and export REE in China. The greatest advantage gained from this move is, China can control the price of REE across the world. A uniform pricing system works well for the Chinese, and since it already has tremendous production capability, it can force all the countries to accept the prices fixed by it. The presence of a single company also eliminates the middlemen, obliterates chances of smuggling, and directly transfers the proceeds from the sales to the government coffers, thus maximising profits. In addition to that China also stockpiles the REE, and imposes OPEC style export quotas to maintain its vice grip on the REE market.

China can, thus, create an artificial shortage in the sector by restricting sales of REE to foreign countries. By exploiting loopholes in international law China can escape sanctions. One such instance is China can invoke Article XX(g) of the GATT Agreement, 1994, this shall offer it protect WTO sanctions if it proves that trade quotas were imposed for environmental protection. Another factor in favour of continued Chinese monopoly is the $ 46 billion Pakistan China Economic Corridor, and the Chinese investment in the Port of Gwadar, which gives it access to the Arabian Sea, and in turn a channel of distribution to the Middle East. Couple that up with the aggressive expansion in South China Sea, the proposed revival of the Silk Route, and the String of Pearls scheme, and China not only has the reigns over the production, but also holds the leash over the channels of distribution of REE. This gives it a tremendous edge in exporting REE, reducing associated costs, and cutting off regional competitors such as India (India has around 2.5% of REE deposits).

China has also established close economic ties with several nations. It has supplanted the USA and EU amongst Latin America, Africa, and Asian nations, as their largest trading partner. China is also the biggest trading partner of USA and contributes $1.5 trillion to the latter’s economy. This economic superiority, gives China the upper hand in arbitration and negotiations relating to trade disputes over REE. China can use its economic clout, to maintain its hegemony in the sector. A testament to this was, when China stopped REE exports to Japan in 2010, in a retaliatory move over the latter’s seizure of a Chinese fishing vessel. It took over four years for the dispute to be resolved by WTO . In the meantime, China imposed export quotas which led to a ten-fold jump in prices of REE, and left several companies reeling. Due to this, there was a danger of closure of dozens of major companies between 2012 and 2014 .

China can also use this economic clout to gain concession in other treaties and negotiations in a quid pro quo move, if a nation seeks to mitigate its dominance in REE sector by involving intergovernmental agencies. Since, China also happens to be the biggest consumer of REE (around 70%), thus, there is little scope for international sanctions to affect the sale or consumption of REE.
Smuggling used to be a headache for

China, until it brought out an official ‘white paper’ report in 2012, the first of its kind, which contained measures to curb smuggling of REE. It also come down heavily upon the smugglers who accounted for tens of thousands of tonnes of illegal sales of REE. Owing to stringent security measures and imposition of a system of permits to monitor the sale of REE, China has greatly mitigated the losses it used to previously sustain due to smuggling.
Thus, owing to a combination of shrewd strategic manoeuvres, ever-expanding economic power, a continuing hegemony over production and sales of REE, and most of all the ability to regulate the prices of REE, we can clearly conclude that China shall retain the monopoly in the REE sector even in the face of risings challenges.

 

REFERENCES

[1] A report by Rare Earth Industry and Technology Association.

[2] Dispute DS431, China-Measures Relating to Exportation of Rare Earths, Tungsten and Molybdenum, World Trade Organisation.

[3] Elliot Brenan, China’s Strengthening Position on Rare Earths, July 2015, The Diplomat.