The joint complaint by the
United States, European Union (EU), and Japan
filed against the People's Republic of China (PRC)
before the World Trade Organization (WTO) for its
restrictive rare earth export policies marks
another satisfying act in President Barack Obama's
contain-China political theater. It also provides
some insight into where the world is headed, and
Japan's attempts to maintain its economic and
geopolitical relevance.
The handwriting is
on the wall for the PRC to lose the rare earth
case. It is a virtual carbon copy of the raw
materials export
restrictions case brought by
the US, EU, and Mexico against the PRC. Beijing
lost, both in the original adjudication and on
appeal in January 2012. [1]
In the raw
materials case, the WTO found that China's regime
of export duties and quotas for bauxite and other
materials created a two-tier system that favored
domestically based traders and processors
(including FDI entities), and discriminated
against foreign purchasers. It rejected the PRC's
defense that these measures were protected under
GATT provisions permitting restrictions on exports
for the purpose of conserving scarce resources and
preventing environmental degradation, observing
that price and quantity controls that primarily
targeted foreign purchasers was not a plausible
implementation of a conservation policy.
At the time, it was widely believed that a
rare earth complaint would be next, and indeed the
shoe dropped in high-profile remarks by Obama in
the White House Rose Garden on March 13.
China-bashing makes for good politics in
this election season, and his administration and
the media did their best to paint the case as a
victory for freedom and fair play against the
Chinese menace, citing China's monopolistic 97%
share of current rare earth production.
However, beyond the 97% number, the story
gets a little thin. China only accounts for around
30% of world rare earth reserves, begging the
question of how vital the WTO complaint is the
protection of Western interests. After all,
shouldn't Adam Smith's invisible handyman be busy
knocking holes in the Chinese monopoly?
In
fact, the market is responding pretty much as one
would expect, with a certain, surprising, amount
of help from China.
In addition to
enforcement of the export quota system, China's
widely reported measures to consolidate
production, decrease pollution, and shut down the
wildcatters and their inefficient, polluting mines
have pushed up global rare earth prices.
In response, there are at least two major
rare earth plays going ahead: the Mountain Pass
mine in the United States and the Lynas project
(mine & concentration in Australia; refining
to metal powder in Malaysia).
Mountain
Pass, in California's Mojave Desert, is the
biggest rare earth mine in the world, once
responsible for half of global output. It ceased
operation in 2002, shuttered by a flood of
inexpensive Chinese product. Now owned by Molycorp
and flush with IPO money, the mine is reopening.
It recently purchased Neo Materials Technologies,
a Canadian rare earths processor, for $1.3 billion
Canadian dollars.
In the requisite ironic
counterpoint that seems to accompany almost every
China sanctions story, a dismantling of Chinese
duty and quota barriers would push down global
prices and, perhaps, strangle these Western rare
earth investments in the cradle.
As the
Chinese government pointed out, only half of its
2011 rare earth export quota was subscribed,
implying that there are limits to the pent-up
global demand that can keep prices up to a level
healthy to Molycorp and Lynas' investments.
Also, the Chinese government has openly
welcomed development of new rare earth sources
overseas in order to relieve pressure on Chinese
suppliers to serve the export market instead of
domestic users. In fact, Lynas' CEO, Nicholas
Curtis, is a China resource insider with close
ties to the PRC establishment; China Non-Ferrous
Metals Mining Group would have funded the rare
earth play but for Australian government
opposition. The process technology for the Lynas
processing plant in Malaysia is supplied by China.
[2]
As for Mountain Pass, its chairman,
Ross Bhappu, told reporters:
''It has been surprising, the
Chinese are extremely supportive of us starting
this mine, they have told us they don't want to
be the world's sole supplier…They are concerned
they are going to consume everything they
produce internally and they won't have excess
production to export." [3]
A study by
Technology Metals concluded that every rare earth
element will pass into permanent surplus by 2017
or earlier. [4]
The key issue is not
access to the raw material, or even processing
technology. The heart of the rare earth kerfuffle
lies in Japan and its efforts to maintain its
economic and diplomatic relevance as it is
overshadowed by China as Asia's leading exporter
and growth engine.
Rare earths attained
their current geopolitical celebrity in 2010, when
the PRC cracked down on rare earth shipments to
Japan (perhaps one third of which are estimated to
be smuggled material evading the export licensing
system) during the spat over the detention of the
crew of a Chinese fishing vessel near the
Diaoyutai/Senkakyu Islands at the direction of
Japan's ambitious, pro-US. defense minister at the
time, Seiji Maehara. [5]
The PRC's
attempts to fire a shot across Japan's bow
backfired. Despite the fact that Japan had, by its
own estimation, stockpiles of rare earths
sufficient for six months (the Chinese suspect the
figure is much higher) and no disruption to
Japanese production occurred, rare earths became
the useful symbol of overweening Chinese ambition
in North Asia, just as the PRC's aggressive claims
in the South China Sea have come to epitomize the
Chinese threat in South Asia.
In an
example of diplomatic and political synergy, the
United States piggybacked its "return to Asia" on
the back of Japan's rare earth woes.
The
rare earth dispute provided a perfect showcase for
alleged Chinese perfidy. Not only were rare earth
elements declared to be at the core of Western
defense technology; enjoyment of the green marvel
of the Prius and the high tech wonder of the
iPhone were tainted by the awareness that China,
with its rare earth monopoly, could snatch them
away at any time.
WTO proceedings against
China appeared on the Japanese diplomatic agenda.
In July 2011 Asahi Shimbun editorialized that
Japan, "which has never filed a complaint against
China" with the WTO, should do so over rare
earths, drawing on the experience of the PRC's
loss in the raw materials case. [6]
One
can speculate that Japan cautiously held back on
inclusion of rare earths in the original raw
materials complaint so it could see how the case
came out before taking the risky step of
challenging China directly on the rare earths
issue. Japan has not been a paragon of courage in
the current rare earth case, either. Although the
Japanese government has by far the biggest dog in
the rare earth fight with China, it has let
President Obama and the EU carry the China-bashing
ball with high profile statements, while Tokyo has
been conspicuously silent.
The universal
complaint underlying criticism of China's two tier
system is not so much the cost disadvantage to
non-local purchasers; it is that the PRC has been
using its temporary rare earth monopoly as bait to
entice or compel downstream processors and
fabricators to set up shop in China in order to
gain access to raw material at preferential
pricing.
China has been strikingly
successful, and 25% of China's rare earth exports
now pass through joint venture companies. As Keith
Bradsher of the New York Times pointed out in
August 2011:
For most industrial products that
are manufactured in China using rare earths and
then exported, China imposes no quotas or export
taxes, and frequently no value-added taxes,
either.
Companies do that math, and many
decide it is more cost-effective to move to
China to get cheaper access to the metals.
"When we export materials such as
neodymium from China, we have to pay high
tariffs," said Junichi Tagaki, a spokesman for
Showa Denko, which announced last month that it
would sharply expand its production of
neodymium-based magnetic alloys, used in hybrid
cars and computers, in southern China. The
company saves money by manufacturing in China
instead of Japan because the alloys are subject
to no Chinese export taxes or value-added taxes,
he said. [7]
An August 2011 Reuters
article presents a picture of barely concealed
Japanese panic:
But with no significant supply of
rare earths expected outside China before 2013,
analysts say the production move by Hitachi and
Showa Denko could indicate the beginning of a
mass exodus of technology manufacturers from
Japan.
"If the differential between the
export price and the domestic price continues as
it is, I think we're going to see a lot more
people following suit," said Asian Metal analyst
Brandon Tirpak. "It's like the big fish, when it
starts moving then all the others follow."
… Japan's rare earth market is expected to
shrink by 30% in this year alone, due to the
flight to China. The trend is expected to
continue until prices outside China drop.
"Japanese production is moving to China
faster than I've ever seen in the past," said
Neo Material Chief Executive Constantine
Karayannopoulos. "We may be witnessing a
fundamental restructuring of the global rare
earth supply chain." [8]
Beyond a $700
million government war chest to fund the
strengthening of the domestic supply chain, Japan
engaged in a flurry of rare-earth related
activity: setting up a rare earth magnet recycling
operation in Vietnam, inking an agreement with
Kazakhstan, and touting the discovery of a trove
of rare earths on the Pacific seabed.
Developments in the US gave Japan a
desperately-needed lifeline.
In August
2011, Hitachi Metals, the world's largest producer
of rare earth magnets, announced an agreement to
source material from Molycorp's Mountain Pass
facility; in December it announced it would invest
2 billion Japanese Yen to set up a neodymium
magnet production line in North Carolina to serve
the electric vehicle and hybrid vehicle market.
The plant was characterized as Hitachi's
first overseas neodymium magnet investment,
implying that a previously announced plan to put
20% of its production in South China is, perhaps,
on hold.
Then came the simultaneous
US/EU/Japanese rare earth complaint to the WTO.
And now there is the "Second Trilateral
EU-Japan-US. Conference on Critical Materials", to
be held in Tokyo March 22 "to explore ways to
counter the unstable supply of critical materials
such as rare earth elements." [9]
This all
looks, walks, and quacks like rollback against
China on rare earth materials, perhaps driven by a
combination of economic realities and the
recognition that the rare earth "crisis" is a
heaven-sent rallying point for the US-Japanese
alliance.
For its part, the Obama
administration has happily joined the chorus of
anti-Chinese rhetoric and welcomed the opportunity
to help pound a wedge between Beijing and Tokyo on
the rare earth issue, and discomfit China before
the WTO.
However, beneath the harrumphing,
the US appears to have a surprisingly relaxed
attitude toward the rare earth issue.
This
may be because the odds for China on the WTO case
look very bad, and the raw materials precedent
indicates that China will accept the WTO's
nostrums (after a lengthy adjudication and appeals
process that may take two years) in order to
remain a member of good standing in the
international trade fraternity, despite its
current defiant chest-thumping.
China may
also decide to relieve itself of its
export-related embarrassment by following through
on previously floated plans to build a major
government rare earth stockpile of up to 200,000
tons on the grounds of national security, thereby
substituting de facto rationing for the repudiated
export quota system.
In any case, in a few
years the dreaded Chinese rare earth monopoly will
have collapsed, with the assistance of the Chinese
themselves, and the free world can enjoy its
hybrid vehicles, its smartphones, its Tomahawk
missiles, and its night vision goggles free of the
anxiety that China will make the rare earth world
go dark.
The Obama administration's
balanced overall approach to China policy (pairing
a public kick in the behind with a discrete pat on
the back) was also demonstrated in the rare earths
matter. Just as President Obama issued his stern
Rose Garden pronouncement on rare earth, the US
government quietly assessed a remarkably temperate
punitive tariffs of under 5% (instead of the
expected 20-30%) in the case of another high
profile Chinese infraction in the precious green
industry sector: the solar panel dumping case.
This nuanced outlook apparently does not
please certain members of the US rare earth
fraternity, who rightly consider the evaporation
of the US rare earth industry as a colossal
failure of industrial policy and long for some
kind of Manhattan Project-type government
commitment to restoring America's previous
eminence in the field of rare earths on the sacred
grounds of national security.
An editor of
the premier rare earths website, RareMetalBlog,
wrote indignantly on March 15 that President
Obama's announcement of the WTO rare earth
complaint concentrated on mundane economic
considerations with "no reference to what we all
know and as eloquently summed up by a member in
the audience: "...every frickin' defense platform
uses rare earths."
He continued:
I just returned home from the TREM
Critical Metals Summit [an industry confab
sponsored by the Technology and Rare Earth
Metals Center] about Washington's policy on rare
earths and it was "leaked" that a DC report was
forthcoming that would negate the need for
creating self dependence on rare earth supply
and would instead cite global interdependence
and the benefits of Chinese economics in
supplying cost effective REEs.
[10]
After some teeth-gnashing came
the dark conclusion:
What's the answer? One conclusion at
the TREM event was that no conclusion would
occur until after the Presidential election. So
we challenge the Presidential candidates to add
this relevant issue to their platform for
debate.
It is safe to say that in America's
toxically partisan political atmosphere the
worst venue for resolving any issue in a
constructive manner is the Presidential
campaign.Events in Asia will probably
outrun anger and opportunism in Washington and
anxiety in Tokyo.
The money statistic in
the August 2012 NY Times report cited above was
the estimate by Constantine E Karayannopoulos, the
CEO of Neo Material Technologies that by "the
beginning of next year", ie now, China will
represent 70% of global consumption.
Neo
Material Technologies (NMT) is the company that
was purchased by Molycorp, the company that
operates Mountain Pass and will supply Hitachi
Metals' US operation. NMT is also one of the
largest processors of rare earths in China. Since
the environmental and regulatory difficulties
involved in processing rare earth oxides into
metals in the US appear insuperable, it looks like
NMT's China operations will be processing the
Mountain Pass material and shipping it to
Hitachi's plant in North Carolina.
Recently, Karaynnopoulos addressed
advocates of a vertically-integrated,
policy-driven American rare earths solution in an
e-mail comment to RareMetalBlog and pointed out
that global corporations crave global supply chain
solutions, not nationalistic approaches to
resource control that ignore economic realities.
He wrote:
One of the things you and the rest
of the commentators miss is the fact that the
majority of the products we sell in China are
shipped to Japanese, US and European
manufacturers' plants in China. Any global RE
producer would need to supply these global
manufacturers everywhere they have a need for
REs, including China. Otherwise, it would be
extremely difficult, if not impossible, in my
view for any RE producer to develop the critical
mass and the necessary skill set to be a truly
global RE player. [11]
In March of
2011, Molycorp predicted that China could likely
become a net importer of rare earths by 2015 -
including, one can safely assume, of Molycorp's
rare earths - which will render the WTO export
quota and duty issue moot. [12] If this happens,
it would be an ironic twist on Deng Xiaoping's
statement that China has rare earths "like the
Middle East has oil," with the implication that
China should husband and exploit its resource
accordingly.
Instead, in an import
scenario, China and Japan will be competing for
the same rare earth resources…and the West will
have the potential to squeeze China on the supply
of another raw material.
And Obama, if he
wins another term, can consider turning his
attention to the most flagrant abuser of export
quotas, one that distorts the international market
for the most important resource on the planet, but
a group that the United States has never mustered
the will to confront: OPEC.
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