Friday, October 15, 2010

STRATFOR: China and the Future of Rare Earth Elements

Interesting the way China came to produce 95% of the global supply of REE. I don’t think they teach the “government subsidizing loans to money-losing operations to create jobs but collapse the price of the commodity and drive away almost all foreign competition theory” in most business schools.

China and the Future of Rare Earth Elements

A recent diplomatic spat between China and Japan has heightened territorial tensions and called attention to China’s growing forcefulness with foreign powers. One of the more intriguing aspects of this development was China’s suspension of the export of “rare earth” elements (REE) to Japan. REE comprise 17 metallic elements with a variety of modern industrial and commercial applications ranging from petroleum refining to laptop computers to green energy applications to radar. China produces roughly 95 percent of the global supply of REE and Japan is the largest importer. China’s disruption of REE shipments to Japan has caused alarm among other importer countries, bringing new urgency to the search for new supplies and substitutes.

The China Factor

Chinese control of the base of the REE supply chain has increasingly made China the go-to location for the intermediate goods made from REE. In time, China hopes to extend production into the final products as well. As new REE supplies cannot be brought online overnight, the Chinese will enjoy a powerful position in the short term. The Chinese Ministry of Commerce reports that China has ratcheted down REE export quotas by an average of 12 percent per year over the past five years, further leveraging this position. Reflecting that and the current China-Japan spat, the average price for REE has tripled in the year to date.

Rare earth elements are not as rare as their name suggests, however. Before the Chinese began a dedicated effort to mass-produce REE in 1979, there were several major suppliers. Pre-China, the United States was the largest producer. Appreciable amounts of REE were also produced in Australia, Brazil, India, Malaysia and Russia. Any sort of real monopoly on REE, therefore, is not sustainable in the long-run. But before one can understand the future of the REE industry, one must first understand the past.