Forbes playing up the first resource war of the twenty-first century. It has Tim Worstall (a Scandium and exotic metals dealer by day. See his personal blog here) suggesting three pieces of evidence that point to China losing the rare earths war.
Related reading –
Japan finds major rare earth deposits (News.com.au – August 2, 2012)
Winning the Rare Earth Economic War: Luisa Moreno (The AU Report, March 20, 2012)
U.S. and China On Trade War Over Rare Earth Export Restriction (International Business Times, March 13, 2012)
The New Opium War: China’s Rare Earth Minerals (New American Media, March 15, 2012)
It has even popped up as part of an intertextual background of a Cold War between the U.S. and China in the top-selling Call of Duty: Black Ops II computer game. Its entire series has sold over a hundred million copies – China cuts off rare earths. World War ensues. It’s Call of Duty, the video game (Smart Planet, July 6, 2012).
Why China Has Lost The Rare Earths War: The Power of Markets
Tim Worstall, Contributor
Source – Forbes, published June 24, 2012
This will strike some as over-dramatic but I think it’s fair to say that recent events in the rare earths market have been the first resource war of the 21 st century. And I also think it’s fair to say that China has lost this war as a result of really not understanding sufficiently the power of markets.
Yes, possibly over-dramatic but I do still think that it is true.
The rare earths are the 15 lanthanides plus yttrium and scandium. My professional expertise is with scandium but of course I have a working knowledge of the others and the various marketplaces for them. I have also spent considerable time in recent years exploring the technologies of extraction and processing. I think I’m in a near unique position as an observer of this market: someone well versed in economics and also in the details of the technologies of this industry. It is this combination that leads to my perhaps idiosyncratic views.
China has been producing some 90-95% of the rare earths used around the world for some decades now. This is not for any particular reason other than they were willing to produce the materials at the price everyone was willing to pay. In the past couple of years the country has been imposing export quotas on rare earths and this has led to significant (in some cases, 10x) price increases. This has in turn led to any number of articles (I’ve written a few of them myself) wondering whether China is exploiting its near monopoly on supply. Thus to various governmental initiatives around the world about how to diversify supplies and the usual rent seeking that such plans generate.
My view is that there was and is just such an attempt: but it is one that is in the process of failing. The reason for failure being I think an insufficient knowledge of the particular market allied with insufficient knowledge on the part of those planning it of the power of market reaction to such attempts. As a general observation trying to corner a market doesn’t work for long. How long it can be made to work depends upon the ability of people to substitute away from the product and or the ability of people to substitute to new suppliers of the product. If you really do control all the world’s diamond mines then you can possibly last a century gouging that monopoly. But even there there will be a point where mines open that you do not control, driven by those juicy profits available.
Here is China’s recent government paper on their plans for the rare earths production and market cycle. As ever with a government pronouncement (from any government) it is necessary to study both what they say and what they mean. The general point being made here is that the rare earths industry is particularly messy and environmentally degrading, thus it needs to be controlled. This is entirely true. However, that control can be at the general level, insisting that the industry obeys the normal environmental legislation, or it can be at a more specific level, trying to plan output, mines and industry structure. China has taken that second path. The general assumption within the RE industry is that they have done so for a second reason, not the environmental one stated. The desire is to capture more of the margins from the processing of the REs rather than just be providers of the raw material to the world.
The industry generally breaks down into three parts. The mining of the ores (of which there are many possible sources) and from them the production of an RE concentrate. This will be a mixture, in some proportion, of the 15 lanthanides, possibly with the addition of yttrium and normally without enough scandium to bother speaking about. The second part is the separation of these mixed concentrates into the individual elements and then the production of the various salts (oxides, chlorides and so on) and the metals. The third is to take these raw materials and make the products that people actually use.
We might add lanthanum to batteries, lanthanum oxide to camera lenses, europium oxide, terbium oxide to the phosphors for TV and computer screens, neodymium and dysprosium metals to the magnets in various automotive applications, into wind turbines. The list of uses is long. The point here being though that for some decades the profits to be made, the value to be added, is in the manufacturing of these end products. The production of the salts and metals has been at best a marginally profitable occupation.
It is the specific form of the export quotas that have been imposed that lead to the conclusion (one that can certainly be argued against but it is a widely shared one) that China is trying to capture more of that value adding part of the industry. For quotas are imposed upon exports of the mixed concentrates, upon the salts, upon the metals: but not upon any product that is manufactured out of these things inside China.
Consider a hypothetical…well, not quite so hypothetical actually as this is based upon an historical example….and you are a factory in Texas which makes the crystals which make magnetic resonance imaging machines work. You use some 90% of all the world’s consumption of lutetium a year: you are also totally reliant upon Chinese supplies of this RE salt for you to be able to continue to operate. You are then told that exports of simple RE salts from China are now to be subject to quotas. (As it happens, Lu2O3 is not so controlled but allow me the example.) However, exports of crystals that are made in China from Chinese RE salts will not be controlled. There will be at least some pressure upon you to consider moving your crystal growing to China in order to secure those supplies of your vital raw materials. There really isn’t anyone else in the world who can supply you, there is no substitute for lutetium in this use.
The suspicion – OK, let’s be honest here, the general assumption in the industry – is that this is what China has been trying to do as part of a strategic plan to attract, under various assumptions of compulsion, the RE processing industry to China. As opposed to just the RE production in which it has long been dominant.
Now it is true that their own document emphasises the environmental costs of the mining and processing. However, under World Trade Organisation rules “We’d like to impose export quotas so that people move their factories to our country” doesn’t work. In fact such actions are illegal under WTO rules. Export quotas for environmental purposes are just fine though. One does not have to be entirely and totally cynical to think that protestations of one might be a cover for the other.
We can therefore think of this, as the totally and entirely cynical people that we are, as the first resource war of the 21 st century. An attempt to use a dominant market position to ensure the movement of valuable industries into one specific economy. And my claim is that this has failed. Failed because those making the plan, running the War Room, have not understood either the details of the industry they are trying to control nor the power of markets at slipping out from under such control.
I’ll offer just three pieces of evidence here. The first is almost a trivial news report.
The hunt for substitutes for rare earth minerals is gaining momentum as auto makers, lighting companies and clean tech developers seek to reduce their reliance on thin and unreliable supplies of the raw material.
The thing is, people are finding ways of doing without the REs in some applications. This is the first part of the standard marketplace reaction to a monopolist throwing their weight around: find some way of doing without said monopolised product.
The second is this from an industry magazine:
FYI, TMR is tracking a total of 429 rare-earth projects under development associated with 261 different companies in 37 different countries.
The way the mining industry works it would be amazing if more than 5-10% of those projects ever got beyond the planning stage. Some of them will be three blokes with a wheelbarrow and title to a hillside. Others won’t even be that advanced. But some of them are large and well capitalised companies with known large deposits of REs and the technology to extract them. I can think of three that are coming online in the next two to four years (Molycorp in California, Lynas in Australia and GFW in South Africa) who will between them produce 30-40% of current world demand. That 90-95% control that China had is leaching away quickly. Given that I’m in the industry I can think of all sorts of places where more basic ore can be found as well: it’s a usual or potential byproduct of all sorts of extant production. It’s certainly possible, even if not necessarily economic, to produce REs from titanium sands, zirconium processing wastes, there’s another 15% or so of world demand being thrown away by the aluminium industry each year.
Which brings me to my third piece of evidence, from that Chinese government report:
China is relatively abundant in rare earth resources, and its rare earth reserves account for approximately 23 percent of the world’s total.
What they’ve said there is true: but I’m not entirely sure that they’ve understood what it is that they’ve said. For reserves has a specific meaning in mining. It isn’t, as many assume (and this has led to all sorts of people getting resource depletion rates wrong, from the Club of Rome through to various Peak Oil, Peak Copper and so on enthusiasts) a measurement of how much of the stuff there is left in the ground. It’s much more specific than that: it’s how much there is, that we know where it is, that we think we can extract using current technologies and at roughly current or forseeable prices.
And you can imagine that if prices rise by 10x, as they recently have done, that a lot more running around the world checking for reserves is going to take place. As it has done, as those 429 projects make very clear it has done.
I agree that is just a supposition of mine. That those deploying the export quotas in order to attract the value adding part of the industry to China do think that 23% of reserves means 23% of all the rare earths there are. But the other two points I am making are not suppositions at all: they are observable facts. People are both substituting away from the use of REs and also searching for and finding (and more importantly, investing in and building) non-China sources of the REs.
The end result is again a supposition though. That the Chinese Government, or some subsection of it, has tried to parlay the country’s current near monopoly on the production of rare earths into an economic benefit by attracting the value adding part of the industry into the country. Further, that they’re failing in this as they under-estimated the speed and power of markets. Markets that will scramble to substitute away from such controlled production and also scramble to create uncontrolled production elsewhere. Scramble successfully too as we’re going to see in the next few years.
Of course, there are many people who so under-estimate the power of markets, most politicians most of the time for example. So I don’t think we should blame communist (in name at least) bureaucrats for making this mistake indeed I rather think it a mistake they were and are likely to make.
But I do think it’s possible to say that we’ve just seen, over the past few years, the first resource war of the 21 st century and it is, thankfully, the planners and would be monopolists in China who are losing it. And there’s a more general point as well: such is the power of markets at this substitution, of use and supply, that almost all such supply monopolies do fail. Another way to put this is that as long as China’s monopoly on rare earths meant cheap rare earths then no one cared and it could continue. As soon as attempts are made to exploit that monopolistic position the monopoly itself fails.
At which point there is a larger lesson for us all. As long as there is potential entrance into a market then we really don’t have to worry about monopolies very much. For exploitation of any monopoly that does exist will lead to entrance and the failure of the monopoly. That is, except in certain unusual circumstances (natural or legally and even illegally backed monopolies for example), that monopolistic positions that get exploited fail through market forces and who cares about monopolies that are not exploited?