China has begun a ferocious onslaught against the illegal mining of rare-earth metals in a six-month campaign that seeks to consolidate the industry in the hands of a few state-owned Chinese players.
The Times has learnt that at least ten foreign companies running rare-earth processing facilities in China have been forced to suspend operations in recent days as supplies have run dry.
Rare-earth metals are 17 elements with magnetic properties that have become essential to many forms of technology. For anyone outside China producing aircraft, cars, mobile phones, wind turbines, electric motors, lasers and many other technologies, Beijing’s move could trigger supply disruption or extreme price surges.
For military planners in Washington the outlook is, potentially, even more disturbing and could compel the US Navy to become a significant investor in rare-earth production.
Global rare-earth supply is expected to become an acrimonious battleground between Beijing and its trading partners, possibly arising this weekend as an issue at the G20 meeting in Toronto. Both the US and the EU are considering making WTO cases over rare earths, focusing on a range of harsh taxes and export restrictions unleashed by China.
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A report by the EU last week described the European trading bloc as “particularly vulnerable” to Chinese restrictions and suggested that future supplies of critical elements should be considered in similar security terms as oil and gas. Emerging economies, the report said, were using tax, quotas and subsidies to reserve their resource base for their exclusive use.
Senior industry figures warned that the world should quickly “wake up to the painful realities of Beijing’s rare-metal strategy”. Its 20-year campaign has concentrated control of the “technology metals” in China and fulfilled a dream of becoming to rare earths what Saudi Arabia is to oil.
The global supply of rare-earth metals is already 95 per cent controlled by China. Many other sources of the raw materials exist around the world, but only a tiny fraction is being exploited, and mines and processing facilities could take at least a decade to become operational.
By moving to take illegal supply off the market, one Japanese trading house executive said, Beijing will expose “a lot of complacency” among the largest consumers of rare-earth metals, which have grown used to securing supply on a black market that far exceeds the official — and shrinking — export quotas imposed by Beijing. And with China simultaneously slashing its official rare-earth export quotas, both the United States and Europe have, within the past few weeks, published assessments that betray rising panic over mineral supplies.
The American report acknowledges the grim truth that both its main battle tank, the M1A2 Abrams, and its Aegis AN/Spy-1 radar unit, depend upon minerals over which China has near complete control.
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Jack Lifton, an independent consultant on rare-earth metals, condemned the survey by the US Government Accountability Office (GAO) as “a perfect example of the lethargy of the state”, adding that such an assessment should have been written ten years ago.
“Nobody was ever concerned about the long-term consequences of relying entirely on China,” he said. “They just assumed, wrongly, that China would always sell what it produced for a market price.”
China’s dominance over rare earths arose from a combination of ambition and complacency. In its attempt to acquire a monopoly, China began undercutting every other rare-earth producer around the world from the late 1980s. Much of that price competitiveness arose from the generally low level of safety and environmental concern: rare-earth production facilities are dirty, radioactive places that would be significantly costlier to operate in, say, the US or Australia.
Faced with relentless competition, mines in the US, South Africa and elsewhere closed down, but consuming countries did not see a supply threat so long as China kept producing and selling. Even when China’s grip on exports tightened, a lack of capital — or urgency — stood in the way of production development outside China. The GAO report warns that rebuilding a US rare-earth supply chain could take 15 years.
One expected effect of the tightening of rare-earth supply — and the doubling of market prices in recent months — is a sudden explosion in proposed mining and processing operations outside China. A handful of companies, such as the soon-to-be-listed Molycorp, of California, have large, proven rare-earth reserves and a legitimate thirst for capital to restart mothballed production.
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Mr Lifton said that investors should be wary of hundreds of “wannabes” with no chance of producing rare earths, but a keen desire to raise large sums of money from a market on the lookout for the next big investment idea. Other countries have taken different approaches on supply. Japan, which is the largest consumer of rare earths outside China itself, will not be “looking for trouble” by joining any WTO action against Beijing initiated by the US.
Instead, Japan has begun an unprecedented number of exploration projects and rare-earth acquisitions outside China in its panic to secure future supply. Its resource lunge — heavily backed by the Government — has taken it to Vietnam and Kazakhstan in search of rare earths.