China the New OPEC for Rare Earth Elements?

If it is a daunting thought that the OPEC controls 40% of the world’s crude oil supply, think again. China has 95% of the world’s rare earth elements (REE) leading the late Deng Xiaoping to presciently remark that “the Middle East has oil, but China has rare earths.”

While oil gets a lot of attention, what does REE have in relevance to consumers? REE, which include 17 hard-to-pronounce names of chemical elements (e.g. praseodymium, yttrium, europium, dysprosium, erbium), are important ingredients in many high-tech devices and clean technologies. You need them in iPod, laptop, cell phones, TV, hybrid cars, batteries, wind farm facilities, military applications etc.

Until the mid-1980s, a single US mine was the world’s main source of REE. It was shut down due to environment concerns and low prices and China cornered the market. Outside of China, there are 3 big potential sources of REE – in California, Canada and Australia. The California mine has not produced since 1998, the Australian mine was due to start production in 2011 but has just lost its financing and the Canadian mine is aiming at 2011. Together their annual production could amount to one third of China’s.

It is no surprise then that Chinese companies have bought stakes in the Australian and Canadian projects but were so far unsuccessful in buying the Californian project. China’s State Council, or Cabinet, recently was considering tightening export restriction or even banning the export of certain elements and closing mines. While this will increase prices, secure supply for its own needs and create jobs for its own people, this will cause fear among foreign companies and governments as they may not have access to the metals and this will lure more foreign companies to the country to set up manufacturing plants there.

But foreign and Chinese industry sources doubt Beijing’s dominant goal is to create an Opec-like price cartel as China has flooded the world market with cheap REE for more than a decade. Now, Beijing needs to ensure that it has enough materials to grow its own advanced and clean technology industries, especially in Inner Mongolia where it contains 75% of China’s REE deposits.

However, foreign companies and governments know that if the supply is suddenly stopped, production outside of China will be stopped as well. While the Pentagon has raised alarm over the US military’s vulnerability in the event of an armed conflict with China, the US has been slow in focusing on securing the supply of REE as compared to its supply of oil. Meanwhile, the Japanese firms such as Sumitomo Corp and Toyota Motor Corp have begun developing alternative sources of REE in Kazakhstan and Vietnam. The Japanese has great incentives to explore new sources and diversify its supply risks because it imports over 90% of REE from China. It would be interesting to see how these countries’ resource strategies will work out in this new century.

Sources:
Will China Tighten ‘Rare Earth’ Grip?
China predicts rare earths shortage
Beijing may tighten grip on rare earths

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6 comments

  1. Sascha K · November 25, 2009

    Matthew- good work. Did you find a Think Tank/ Investment Banking research that you could refer us to? The topic is spot on, especially if one puts the market in $-value. Some of the REE sell already a solid prices and are unlikely to weaken.

    One question that arises from your report is within China, who controls the firms? Are these still SOE or now predominately free floating? Any insight who the biggest players in the varies segments are?

  2. brettalan · November 25, 2009

    Some are saying China instead wants to use Mongolia as the place to develop clean tech companies- and as such trying to use the REEs as the tool to accomplish this. See WSJ article:
    http://online.wsj.com/article/SB125188565571379063.html?mg=com-wsj

    Also, I do believe the new value placed on REE will help to establish new REE mines in places like South America and California.

  3. brettalan · November 25, 2009

    Here is an example of a mine in California:

    “The open-pit mine at Mountain Pass, California, holds the world’s richest proven reserve of “rare earth” metals, a family of minerals vital to producing the powerful, lightweight magnets used in the engines of Toyota Motor Corp’s Prius and other hybrid vehicles as well as generators in wind turbines.

    Seeking to replace China as the leading supplier of these scarce materials, Colorado-based Molycorp Minerals LLC plans to reopen its long-idled quarry to resume extracting and refining thousands of tons of rare earth ore in the next few years.”

    http://www.reuters.com/article/newsOne/idUSTRE57U02I20090831

  4. matthewlim · November 27, 2009

    There is one report http://www.asianmetal.com/report/en/2008xitu_en.pdf that list the Chinese rare earth exporters. The licenses are controlled and as natural resources are becoming the focus of China’s economy, the question should be which of these firms are not SOE. Not surprisingly, the top 3, Sinosteel, China Minmerals and China National Nonferrous Metals are SOE.

    Although there are possible mines outside China to mitigate the rare earth supply risks, we should also consider the possibility of these mines run out of supply eventually in the future. We may need to investigate which recycling companies are capable to re-extract these rare earths. So when your iPod is no longer in use, remember to recycle it and not throw it away!

  5. Pingback: Top 10 cleantech stories of 2009 « Clean Technology & Private Equity/ VC, Company and Fund Research
  6. rareearthsgold · February 4, 2010

    President Obama signed the US National Defense Authorization Act for Fiscal Year 2010. The Act mandates the General Accounting Office (GAO) to conduct an assessment of the rare earths used in US Department of Defense (DOD) supply chains. The GAO will also report on the long-term vision of the DOD for rare earths metals. This could not come too soon as China is flexing its muscles and has threatened to impose sanctions on US military suppliers. We will not have to wait too long to see whether China cuts off the rare earths supplies.

    Mandeep S. Sidhu
    http://rareearthsgold.wordpress.com/

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