Why China's Rare Earths Control Isn't Going Away
And what the West is doing about it anyway
Hello fellow China Watchers.
It’s been an interesting week for China watching. First came the visit by the US senators to Taiwan, which is a sure sign that the Biden Administration are looking to ramp up the pressure on Beijing over its claims to the island. How will Xi Jinping respond? I’m sure it won’t be soon before we find out.
It has also been reported by Eric Olander, who runs The China Africa Project, that Nigeria is talking to China about importing a Chinese style firewall to restrict internet content as an escalation of Nigeria’s spat with Twitter.
This is an important step in global connectivity - as I have been saying for a while, China is intent on reimagining the internet to be more in its image, rather than America's version, which is rooted in Californian freethinking of the 1960s and 70s.
China has already approached the UN's ITU (the agency responsible for everything related to ITC technologies) with a new plan for the internet, written by Huawei. It's only a matter of time before we see this rolled out to nations across the world, and it looks like Nigeria may be one of the first. The era of split world connectivity is arriving very shortly.
In my newsletter today we’re going to look at another angle of Chinese global control, rare earths. These are the 17 metals that go into everything from mobile phones to F-35 jet fighters, and China basically owns the world supply chain on them. The West and its allies have finally woken up to this, but their efforts to break free of China’s grasp are proving to be not quite up to the mark.
Thanks to Alex and Aris from the consultancy AWR Lloyd for helping me with this, and to the Straits Times for publishing this article first.
I hope you enjoy it, and please remember to like, share, and subscribe to What China Wants.
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Why China's rare earths control isn't going away
(Straits Times, 2nd June 2021)
A profound potential weakness lies in the shift from fossil fuels to renewables, one that could see geopolitics stymie its success: the control of rare earths.
Rare earths are vital for the clean energy transition. They are needed for everything from wind turbines to electric vehicles, and in large amounts: according to experts, a typical electric car needs six times the mineral inputs of a conventional car.
Despite their name, rare earths aren’t particularly rare; what they are is difficult to produce. The refining process is expensive and highly polluting, and as such there aren’t many countries that have wanted to become involved in their output. The exception is China.
Beijing has made a concerted and highly effective effort to grow its rare earths industry. In 1993, 38% of world production of rare earth elements (REEs) was in China, but by 2010 this figure had risen to 97.7%.
Behind Beijing’s desire to control global rare earths is a desire for strategic control over part of the modern economy - as the former Chinese leader Deng Xiaoping once put it, “The Middle East has oil, but China has rare earths”.
Indeed, the West and its allies have redoubled their efforts to ‘de-Chinafy’ their supply of REEs, such as funding new mines. The problem is, creating a rare earth supply chain that is free of China’s influence is incredibly hard to do.
What are they?
Rare earths are a group of 17 metallic elements crucial to the modern economy. Most have names that mean nothing to anyone not an expert in chemistry, but their uses are very much part of our daily lives. The US Geological Survey estimates that rare earth elements (REEs) are required components in more than 200 products across a wide range of applications, from mobile phones to flat screen televisions, and they have a plethora of defence uses, too.
The demand for rare earths is exploding as the energy transition takes shape, and it is estimated that the current global production of 240,000 metric tonnes will need to increase seven-fold between now and 2040.
How has China gained control?
Through price. As a 2018 US Department of Defense report noted, China strategically flooded the global market with both legally and illegally mined rare earths at cheaper rates, to drive out and deter competitors.
This “China price” was achieved in part by excluding the heavy environmental costs of rare earth production, but also through direct government backing.
By contrast, state support elsewhere for domestic rare earth production was distinctly lacking, and companies and mines began to fold in the face of subsidised Chinese competition. This included, in 2002, America’s largest rare earths mine, Mountain Pass.
Then, in 2010, China decided to wield its power over the sector by abruptly slashing its rare earth exports by 37%. This left many countries struggling to obtain the commodities they needed, and as the price shot up thanks to limited supply, able to afford those rare earths still available.
Japan, which had clashed with China over a maritime dispute in the East China Sea, was particularly affected.
Although Beijing denied that it had used its rare earth dominance as a geopolitical tool, Tokyo was not convinced, and quickly launched a diversification strategy to prevent it being disrupted again by its neighbour’s resource nationalism. In 2011 Japan invested US$250 million (S$329 million) in the Australian rare earth miner Lynas Corporation, which now provides a third of the Asian country’s rare earth imports.
Other countries fared less well in the push for diversification. In the US, the Mountain Pass mine reopened in 2008, and its new owners, Molycorp, thrived in the higher prices that resulted from China’s export restrictions. But in 2013 China started to flood the market again, and in 2015 the company collapsed under a mountain of debt.
US vulnerability
This left the US almost entirely reliant on China for REEs for its industrial sectors, including renewable energy, and also its defence manufacturing. The new F-35 fighter, the cornerstone of American air power, is dependent on REEs: a US government report noted that each jet required 417kg of rare-earth materials.
America’s vulnerability was highlighted by China when, in 2019 and at the height of the US-China trade war, the People’s Daily warned that by “waging a trade war against China, the United States risks losing the supply of materials that are vital to sustaining its technological strength”.
This spurred the US government into action, and in the last few years, America and others have been opening up new deposits.
However, even as they do so, China looks to buy into them - the company behind the Mountain Pass mine is now 8%-owned by Chinese state-owned rare earths company, Shenghe. In February this year, Shenghe also signed a memorandum of understanding with Australian rare earths firm RareX, paving the way for Chinese investment in mining projects in Western Australia.
The situation in the processing part of the chain is even more in China’s favour. Almost all the world’s refining of REEs happens in China, including the entire output of Mountain Pass - meaning, of course, that the US is still wholly reliant on its strategic competitor for rare earths.
Where processing is opened up elsewhere, such as in Thailand in 2018, China often buys a stake to make sure that it can’t be cut out of the action. Even Western refining companies with Western investors have a link to Beijing. The Canadian company Neo Materials is one of the few non-Chinese processing firms, but as of March 2020, 80% of its total processing capacity was located there. Just 15% of global rare earth processing happens outside China.
Damage to environment
Western and developed world governments may baulk at this continued control by Beijing, but they shy away from pushing too hard to challenge it because of the environmental consequences.
A 2012 Chinese government report noted the environmental damage that REE processing had caused in China, including heavy pollution of surface water, groundwater and farmland, and the reduction of crop yields. An impact like this would be a hard swallow for Western public opinion.
Still, the US is investing in onshore processing. The Pentagon has partly funded the development of the first heavy rare earths processing plant at Mountain Pass, and it is backing a similar facility in Texas developed by the Australian firm Lynas.
There are also efforts underway to find newer, cleaner methods. In 2020, for instance, the US government gave a US$29 million grant to a Texan company that manufactures rare earths magnets by recycling electronic waste, and in Idaho there are moves to use potato peel to help refine REEs.
But with these facilities expected to take some time to come online, and representing only a part of global processing capacity, more is needed if the West and its allies want to break free from China’s control.
In the meantime, manufacturers that need rare earth components would be wise to fully understand the degree to which their supply chain is still under the influence of Beijing, given the acute potential for a further downturn in Chinese-Western relations.
Ironically, it is Western and developed-nation policy incentives to promote the clean energy transition that are driving the rise in demand for rare earths, a demand that only China so far can meet. More public-private action is needed if this can be met elsewhere, and in a way that doesn’t make ecological devastation the price to pay for trying to hit wider environmental ambitions.