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How China came to dominate the race for rare earths

How China came to dominate the race for rare earths

Katherine Ryder 2010年10月09日

????Amidst the latest flare-up in the centuries-old Sino-Japanese spat, Beijing made an unexpected move last month when it halted exports of a little-known commodity group, "rare earth metals," to Japan.

????Ostensibly, this was news affecting only an obscure sliver of commodities markets -- rare earths, a group of 17 chemical elements used in tiny amounts in high-tech products. But China's gambit sparked a swift response. The almost $2 billion rare-earth market went wild -- focusing government and investor attention on a stunning global imbalance in an underappreciated but highly significant market.

????Rare earths are essential to the production of many of the goods that are, in turn, essential to modern life. They are used to create the glossy screen on your flat-screen TV, for instance. They are also needed to produce many of the more important "green" technologies, from hybrid cars to wind turbines. And perhaps most notably, rare earths are used produce a variety of modern military devices and weapons, including guided missiles.

????Demand for these elements has grown at a remarkable clip over the past decade. The main beneficiary of this growth has undoubtedly been China, which has strategically positioned itself to control some 97% of the rare-earth market.

How China cornered the market

????Before the digital revolution and the green technology movement, rare earths were hardly a staple of modern industry. As recently as the 1980s, the sector was worth less than $100 million, and budding boom markets in rare earths were continually displaced by cheaper alternatives. That's why, when China ramped up its efforts to control the industry, other countries happily ceded the market. In 1992, Deng Xiaoping compared China's rare earths to the Middle East's oil. But no one paid much attention until last year, when prices really started to soar.

????The global market for rare earths has grown at an annual rate of about 8% to 11% over the last decade, according to the World Trade Organization, but this pace has spiked in the past twelve months. Consumers around the world -- particularly in China and emerging Asia -- can't buy new Apple (AAPL, Fortune 500) iPads or Toshiba flat-screens fast enough.

????Yet for the past five year China has been quietly imposing OPEC-style quotas, cutting exports by 5% to10% each year, and pushing up prices. In 2009 an index holding shares of 12 rare-earth miners rose by more than 600%. Countries like Japan, which depend on rare-earth imports in order to produce electronics, have been the hardest hit.

A global response

????Governments, to put it mildly, have taken note. In June, in light of inconsistent statements coming out of China about its rare-earth quotas, the European Commission issued a report saying it was imperative that a complete supply chain be developed outside of China. In July, China announced it was cutting exports by another 40%, and rumors swirled that it had nearly filled its export quotas by the end of August. In fact, some analysts say Beijing might have needed to slow rare-earth exports to Japan regardless of their diplomatic standoff, and that the timing of the move just happened to be politically convenient.

????In either case, the move has prompted a genuine rush to secure alternative supplies by companies and governments. "Japan was already aware of the situation," says Xiaomai Feng, an analyst with Macquarie Group in Tokyo. "But no one thought it could turn this political this fast."

????Over the weekend, Japan and Mongolia agreed to explore Mongolian rare-earth reserves together. Japan is ramping up efforts to figure out how to recycle rare earths from used electronics. Japanese car companies like Honda (HMC), Toyota (TM), and Nissan have long been trying to switch to lithium-ion batteries, which don't require rare earths, in electric cars. But experts say that rare earths are so widely used by advanced economies -- particularly in missile technology and wind turbines -- that they won't be easy to substitute for in existing industrial processes.

????"Even if China didn't have any restrictions on its exports, there would still be a shortage of rare earths around the world," says Dr. Steve Ward, CEO of Arafura Resources, a company developing its own rare-earth project in Australia, which hopes to open shop in 2014. "The challenge for the industry is whether they'll be able to supply enough."

????A bill to jump-start U.S. research and development passed the House of Representatives last week, a companion to a bill introduced in March to create the first U.S. stockpile of rare earths. Both the Pentagon and the Energy Department are slated to release reports within the next month about the future of the U.S. supply.

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