John SeamanResearcher at IFRI, specialist in the geopolitics and political economy of energy and natural resources in Asia
"China has a virtual monopoly over the production of the 17 “rare earth” elements, a family of rare metals that are essential in a number of technologies related to the energy transition and digital revolution."
The Paradox of Chinese Rare Earths
“Rare earths” have sometimes been referred to as the “oil of the 21stcentury” due to the significant role they now play in the digital and energy industries. The question is whether China, which produces these elements in huge quantities, will be able to harness this “geopolitical weapon”. In this article, John Seaman, a Research Fellow at the French Institute of International Relations (IFRI), provides a thorough analysis of this often controversial issue.
China has a virtual monopoly over the production of the 17 “rare earth” elements, a family of rare metals that are essential in a number of technologies related to the energy transition and digital revolution. For some ten years now, industrialized countries have sought to prevent their Chinese partner from taking advantage of this situation. But, paradoxically, the measures taken by these countries have tended to make it more difficult to open new mines outside China.
This surprising situation can be explained if we reexamine the timeline of events and understand the close interdependence of the economic phenomena at play.
- Act I: Rare earths were already used in certain industrial sectors in the 1970s, although to a lesser extent than today, with production mostly confined to the United States, particularly the Mountain Pass mine in California. In the last decade of the 20th century, growing concerns over the environment in California, coupled with accidental pollution at the mine, resulted in stricter legislation that increased production costs. The Mountain Pass mine closed down in 2002, just as global demand was rising.
- Act II: Taking advantage of the abundance of resources underground and a lack of environmental regulations, hundreds of small Chinese operators began mining for rare earths in a chaotic, Wild West-like manner that caused major environmental damage. Supply was easy to ensure and global prices low.
- Act III: In 2006, the Chinese government decided to bring a little order to the situation to guarantee long-term supply to its own booming industries. The authorities also wanted to “move upmarket” in the rare metals industry, so as to be more than merely a commodities producer. In addition, the emerging middle class put pressure on the State to take a more sustainable path to development, with closer attention paid to air, water and soil pollution. In response, the government began setting up a half-dozen structured companies and introduced operating rights, checks, taxes, and production and export quotas, which became binding in 2010. As a result of these measures, prices soared on the international markets.
- Act IV: Industrialized countries, led by Japan and the United States, grew concerned about rising prices and the risk of shortages, which could put some of their industrial sectors in danger. They criticized China for charging higher prices for exports than domestic use and for encouraging offshoring by making international companies come there instead of promoting open international trade. In response, a case was brought against China at the World Trade Organization (WTO), measures to conserve rare earths were encouraged and projects were supported to launch mining operations outside China in Australia, Canada, Kazakhstan, Vietnam and India. Mountain Pass was even reopened in 2012.
- Act V: The international pressure led China to ease its policy of taxes and quotas, which in turn resulted in sharp price drops. This trend turned off investors, who questioned the business sense of committing capital to an industry with low quantities of materials and volatile markets. If prices fell, there would be no guarantee of recovering the significant investment needed in the mining industry. Doubt set in and projects struggled to get off the ground. Following the bankruptcy of its operator, Molycorp, Mountain Pass was sold in 2017 to a consortiumA consortium is an association of individuals, companies, organizations, governments ... of international investors… including Chinese mining giant Shenghe. This same company also invested in a major mining project in Greenland, which has considerable rare earth reserves. The world realized that Chinese quotas actually stimulated production outside the country…
Developments continue to this day. Reserves are still abundant following the discovery by Japan and the United States of vast deposits offshoreRefers to sea-based oil exploration and production operations, as in "offshore license" or "offshore drilling". . However, the market remains small, and if it were flooded with huge amounts of materials, as is typical for mining operations, the prices would discourage producers. Fears of “geopolitical weapons” aside, rare earths are doubtlessly strategically important, but not as essential as oil was and still is today given the sheer magnitude of production and the size of its market.
John Seaman is a specialist in the geopolitics and political economy of energy and natural resources in Asia, with a focus on China and Japan. He has worked at the French Institute of International Relations (IFRI) since 2009. John holds a Master’s degree in international affairs from Sciences Po Paris and a Bachelor of Arts in International Economics from Seattle University in the United States. He has also studied at the Beijing Center for Chinese Studies and was a visiting researcher with the Energy and Environment Program of the Canon Institute for Global Studies (CIGS) in Tokyo.