How the Great
Rare-Earth Metals Crisis Vanished
China's attempt to control the market for
materials essential to the tech industry is turning to dust.
By Joseph Sternberg in
the Wall Street Journal
There was a time, not
so long ago, when the world feared China was going to use its dominance of the
global rare-earth-element industry to crush Western economies and militaries in
a strategic vise. Those were the days. Recent developments highlight how wrong
those alarmist predictions were.
Rare earths are the
metals at the bottom of the periodic table that are exceptionally useful in
many high-tech applications, from lasers to solar panels to electric car
batteries to smartphones. China is the world's major extractor and only
processor of rare-earth ores.
Beijing aroused
worries in late 2010 when it apparently limited exports of the minerals to
Japan amid a territorial dispute. The episode stoked fears that China would use
its sole-supplier status for nefarious ends.
Except that it turns
out Beijing doesn't have the wherewithal to execute such a dastardly plan.
Consider the new plan Beijing unveiled last week to consolidate its rare-earth
industry into six large extraction and processing companies. As a start, Inner
Mongolia Baotou Steel Rare-Earth Hi-Tech Company (yes, that's its name) is
buying nine of its smaller competitors in the north, with more mergers and
acquisitions to come.
This is at least the
second time in roughly a decade that Beijing has attempted rare-earth
rationalization. The first foundered when faced by opposition that included the
local officials who so often sponsor projects away from Beijing's watchful
gaze.
The consolidation
drive is a sign of weakness, not strength. The impetus is Beijing's need to
resolve the problems its past interventions in the market have created.
Export restrictions
kicked in three years ago, officially justified by the need to reduce the
pollution caused by mining and processing. Global prices rose dramatically,
creating an incentive for new miners to start production, and an opportunity
for them to profit from circumventing export blocks via endemic smuggling.
Meanwhile, Beijing's
economic stimulus policies lowered the cost of credit, making it easier to fund
this investment. But once the global panic subsided and demand slackened,
rare-earth prices fell by as much as 60% from their 2011 peaks. Oversupply is
the new worry.
On a related note, the
export restrictions also have not helped Beijing mitigate the environmental
damage caused by the rare-earth industry. Processing the ores is messy work,
and Beijing seems to have hoped that whatever other mercantilist objective it
might achieve, limiting export quantities would also lead to a cleanup of the
industry at home.
Not so, because the
restrictions stimulated new mining by small, illegal operators with even worse
environmental practices than the big companies. Now lower global prices and the
resulting thinner profit margins make costly environmental compliance that much
harder.
Don't suppose for a
minute that centrally arranged consolidation will solve any of this, since
consolidation doesn't fix the underlying problem with China's approach to rare
earths: Beijing still steadfastly refuses to allow the market to operate. Just
ask yourself, when is the last time that politically allocated capital;
administrative controls on price, production, export or other disposition of an
output; and centrally determined corporate structures resulted in a rational
industry, in China or anywhere else?
For guidance on better
options, Beijing could look abroad. The other big rare earths story of the
moment highlights the extent to which Beijing's non-market machinations have
triggered helpful market responses elsewhere.
A Pentagon report
leaked last month noted that reliance on Chinese rare-earth metals, while still
high, is declining. New supplies for most rare-earths are coming online, as
uncertainty over China's reliability and a period of higher prices stimulated
investment in new mining projects elsewhere. Greenland and Russia both have
opened new tracts to rare-earths exploration in the past year. China's share of
global production now is down to as low as 80% from 95% in 2010.
This overseas
rare-earth industry is not so different from the Chinese version, insofar as
it's sustained, for now at least, by readily available capital thanks to the
post-2010 surge in investor interest. But what the foreigners do have is a
market mechanism for industry rationalization over time, as more profitable
miners prosper and others go bankrupt or merge into their healthier peers via
an organic process of consolidation.
Meanwhile, note an
especially piquant detail: Manufacturers are rethinking their dependence on the
metals as an input. One suspected goal of China's export restrictions was to
force foreign manufacturers to shift more of their high-value-added, high-tech
production into China in pursuit of more readily available domestic supplies.
Instead, foreign
high-tech companies increasingly invest in new recycling methods, or products
that rely less on rare earths. They have not weaned themselves off the metals
by a long shot. But the technology frontier is shifting ever so gradually away
from rare earths, and from China.
This does not add up
to a major industrial-policy victory for Beijing. It's safe now to put away our
smelling salts.
Mr. Sternberg edits
the Journal's Business Asia column.
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