EDITOR: | November 3rd, 2013 | 5 Comments

China’s REE export policies and America’s needs: is it time for a total rethink?

| November 03, 2013 | 5 Comments
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rbreeart1Yes to the first; maybe to the second. We are, of course, referring to the expected ruling against China over its rare earth trade restrictions.

Sure, you can understand why Beijing is trying to smother the World Trade Organization panel report on the complaints from the United States, Japan and the European Union regarding China’s rare earth export tactics. The China Daily report on the move by the Ministry of Commerce (the full text is in the InvestorIntel news feed) says that while the WTO report has found against China, that finding should not be made public at this stage. Sounds like a delaying tactic because China will lose in the appeals process, if it goes that far.

But one astonishing passage in the China Daily report is the suggestion that Beijing should try and get around the WTO ruling by offering to “remove the export quotas on light rare earths but keep ones on medium and heavy rare earths, which have smaller production volumes compared with light rare earths“. Well, as it will soon be the case that non-China end users will be able to get ready supplies of elements such as lanthanum and cerium then the export quotas on those will become irrelevant. Where the problem will be is with the heavy end.

But, as the National Mining Association points out, perhaps the U.S. should rely less on the WTO and cases against China and more on reforming the system that now delays development of America’s own resources — in rare earth metals and other critical ones. (And just look what happened when the shale guys were given free rein.)

The obvious point in response to this case is that even with a new ground rules, North America may not be the answer to REE supplies. But perhaps there is another vital role it could play. More on that below.

Even though no one has seen the WTO report, the general import is out in the marketplace. Now China’s Ministry of Commerce says it strongly opposes disclosure of the interim WTO report. But surely Beijing can be under no allusion as the state of the final report, and which way the appeals panel of the WTO would go if China were to take the matter that far. In late January 2012 that appeals panel backed the early WTO ruling that China had to dismantle its system of export taxes and quotas concerning exports of bauxite, zinc, yellow phosphorous, coke, fluorspar, magnesium, manganese, silicon carbide and silicon metal.

The WTO has in this latest case determined that with rare earth tactics China has again broken trade rules. The procedure by which the report is finalised is unlikely to change that.  (And, remember, the case involves not only the 17 rare earth elements; tungsten and molybdenum were also included the case brought against China.) The complaint was filed in March 2012.

The Ministry of Commerce says the Chinese position is really just about protecting resources and the environment for sustainable development. Yes, that can be conceded as being part of the case; there is no doubt that Beijing is concerned about its environment and it also wants to conserve its natural resources. But the next sentence in the ministry’s statement is something more of a stretch: “It has no intention of favouring domestic industry through distorted trade”. It was interesting that, just at the time last year when this REE complaint was being lodged, the European Bicycle Manufacturers Association was seeking an investigation by the European Commission into alleged subsidies that China was using to enter the bicycle European market.

reeartrb2But there were two quite interesting comments included in the report in China Daily. One was from Tu Xinquan, deputy director of the China Institute for WTO Studies at the University of International Business and Economics, who said that China had little hope of winning the case, and the government would have to stop rare earth export tariffs.

The other comment quoted came from Gao Wei, general manager of Shanghai Huaming Gona Rare Earth New Materials, who said he welcomed the removal of the current tariff and quota systems that had weakened Chinese rare earth competitiveness in terms of pricing. Chinese products are priced higher than their foreign rivals because of the tariff and quota systems.

Yes, but it is only in the light REE where that could potentially apply. As the J.P. Morgan report on Molycorp (published here on Investor Intel) shows, there is going to be a surplus of some of the lights. But what about the heavy rare earths? Chinese buyers as we know pay far less than Japanese, Korean or other customers for REE exported from China. And Gao added: “The lifting of the quota and reduction of tariffs will help domestic producers digest their massive volumes of rare earths and bolster the production of medium and heavy rare earths,” Gao said.

How does that square with the conservation and environmental argument?

The article concludes with quoting Du Shuaibing, an analyst with Baichuan Information, that China might remove the export quotas “on light rare earths but keep ones on medium and heavy rare earths, which have smaller production volumes compared with light rare earths”. Yes, but much, much higher values. It seems unlikely that would be taken seriously by the WTO.

But while we wait for the outcome of this WTO process, probably the most sensible comment came on Thursday in a letter-to-the-editor in The Financial Times. Hal Quinn, president of the Washington-based National Mining Association, welcomed news of the WTO ruling but, as he pointed out, this was no panacea to solving the U.S.’s mineral supply chain woes. American companies were still 100% reliant on China for supplies of REE and other minerals “but not for lack of resources beneath our soil”.

“Despite the U.S.’s $6.2 trillion worth of mineral and metal reserves, critical raw materials remained locked underground and out of domestic manufacturers’ hands as the nation’s duplicative permitting process for new mining projects staves off investment and keeps new mines offline,” he wrote. Those delays — and he said these could drag on for a decade — have helped to lower the U.S. share of global mining investment dollars from 21% to 8%. The answer was for the U.S. to address its own mineral shortages rather than rely on international bodies to ensure that American firms can get the metals they need.

Well, maybe. Sure it is possible to find some quantities in the U.S. But here is a much wider point: why not look downstream. There are a myriad of projects in Africa, Australia, Canada and elsewhere. If even half of these projects get up, we’ll have a reasonably secure non-China supply.

What America can do is invest in the downstream end  — after all, it was a processor once upon a time. It could be so again. So far, many of the REE projects around the globe have secured financial backing from Chinese, South Korean or Japanese interests. How many projects have U.S. backers?

Perhaps that would be a starting point. Japan is clearly aiming to end its reliance on China for REE supplies for its downstream industries. Perhaps rather than joining the long line of exploration companies looking for rare earth deposits, the strategy for America would be to provide the downstream money and technology.


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Comments

  • Daniel McGroarty

    When Robin writes: “What America can do is invest in the downstream end — after all, it was a processor once upon a time. It could be so again. So far, many of the REE projects around the globe have secured financial backing from Chinese, South Korean or Japanese interests. How many projects have U.S. backers?”
    That last question just hangs in the air…. At the level of “grand policy” — my companion concept to “grand strategy” — the U.S. is still sleeping as the ROW pursues its resource needs. Thanks for ringing the alarm, Robin.

    November 4, 2013 - 7:29 AM

  • Bill Keenes

    the problem with the US I believe is that it has high profile self confessed experts in rare earths – or should we say critical metals – that from what I have seen are simply nothing more than “guns for hire” – meaning if a company (rare earth explorer) pays them consulting fees then they will make a public case in support of that companies project

    and the public case the consultant makes it appears is just so convincing, that the US is unlikely to wake up until it’s too late

    it’s called capitalism and free enterprise and the consultants will fill their own pockets in the process

    the U.S. is still sleeping as the ROW pursues its resource needs … Robin you may have rung the alarm bell bu-

    November 4, 2013 - 11:30 AM

    • Bill Keenes

      Robin you may have rung the alarm bell but the US is not listening to you

      November 4, 2013 - 11:32 AM

  • Hiwayman

    Robin,
    Another well researched gem.America is so short sighted these days,so busy looking for quick returns,that bad judgement has
    clouded the historic HRE opportunities that are staring them in
    the face. Especially in an age of rapid advances in society and
    technology.

    In business there is plan “A” and plan “B”. But there is no ‘Planet
    B’. And it would be in Australia’s best interest to fast forward our
    HRE drilling and discovery phase–stockpile the product and JV
    with corporations, willing to share their separation and production
    skills and establish R&D’/ Magnet production on our shores.

    Abbott could step in and make it law to stockpile HRE as China
    has done. And why not? However,one thing is certain..the HRE story is yet to be fully told.

    November 4, 2013 - 11:02 PM

    • Veritas Bob

      And while he’s at it, Abbott could dispense with the Queen and declare Australia to be a People’s Republic, with himself as Chairman of the Communist Party. Would that make you happy?

      Or perhaps Mr. Abbott would prefer to allow some economic decisions to be made by the free market. Oh, the horror.

      November 5, 2013 - 8:31 AM

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