Excessive pollution challenges the entire Chinese industrial system to reform
Air purifiers and protective masks against pollution might just be China’s biggest selling consumer items these days. It has become impossible, in fact, to escape the thick fog that has enveloped Beijing in recent weeks. The Chinese Ministry of the Environment said that has the heavy smog now spread over an area of 1.3 million square kilometers, or 13 percent of China itself (the size of Central Europe), too large an area to control to affect the current air quality index values.
s new national pastime, everybody checking the daily number, which has varied from 300 to 500 micrograms per cubic meter. These statistics are impossible to ignore considering the World Health Organization recommends a threshold of 25 micrograms. s hospitals are full of residents complaining of suffering from ailments as basic as a headache to major respiratory disorders, which they all attribute to the pollution. And nobody can blame them considering the air is literally yellow. In recent years, the pollution problem has become one of the leading political issues.
In 2012, the US embassy started to monitor the air quality (or lack thereof), which eventually forced Beijing to take note and do something about it. The Air Quality Index (AQI – based on pollutants in the air with negative effects to health including NOx, CO, sulfur compounds and any number of particulates) in Beijing was said to be hovering at 200 according to the US Embassy with average levels in 2012 of 145. To understand just how high this is, consider that major North American cities like NY City or Toronto typically range in the low twenties or below. Children, elderly and the sick were advised not to go outside. However, the situation has deteriorated since then, having now been euphemistically dubbed the ‘airpocalypse’. The government has promised to solve the problem, and the Chinese citizens are adamant that solutions be taken. The government understands that air pollution is no longer an issue that it can bury under the proverbial carpet – or the smog if you will – the people are fed up and are even starting to turn to violent protest in some cases. According to official data, one sixth of China was trapped under the pollution last month. Satellites photographed an enormous cloud of pollution in the north – which happens to be a very important industrial and mining area.
One Chinese citizen sued the City of Beijing for failing to reduce pollution. Government agencies are, uncharacteristically, frank with their assessments. The Academy of Social Sciences published a report declaring Beijing to be “barely livable” for humans. The Government’s climate change adviser, Li Junfeng , said that pollution had reached an “intolerable” level, comparing its effects to those of a chain smoking, warning that exposure to cancer risk is very high. Pollution has created an actual legitimacy problem for the Chinese government, which has even resorted to media censorship to contain the problem. Indeed, pollution is directly related to the Chinese economy, the weight of investment in heavy industry and the lack of a proper opposition to challenge the various levels of government. The issue of pollution, therefore, extends beyond the environment and raises questions about the Chinese system’s long term survival and its ability to reform or adapt.
How will pollution affect energy generation and mining?
The government has intervened to control pollution enforcing traffic controls, forced factory stops – famously shutting down rare earth production at various plants last year – and other measures to no avail. People are demanding a ‘Clean Air Act’ even as they reach for the nearest hospital to get treatment for respiratory and cardiovascular ailments. The number of cars has doubled in the past five years alone, with a similar jump predicted to occur before the end of this decade, meaning that such measures have little to no effect whatsoever. To make a dent in pollution, authorities have suggested shutting down over a hundred factories, but even this will have very little impact.
The reason for China’s unbearably high pollution is that China is the world’s largest consumer of coal-by far, using 50% of the world’s total production. More than 70% of China’s energy derives from coal generated power. Coal consumption had increased annually by an average of nine percent for the past decade. Nevertheless, there is increasing pressure for change at all levels of society. Coal has fueled China’s tremendous economic growth, but if such growth levels are to be sustained, energy production must change. The Chinese government has already started to increase its nuclear energy generation capacity, expected to quadruple by 2030. Sales of electric vehicles in China have also increased and this week, Tesla Motors announced it would start selling its luxury all electric ‘S’ model. This change should affect the global production and distribution of rare earths. Such cars, hybrids or full electric, need dysprosium, neodymium and lanthanum, to mention a few of the rare earths. While domestic production fell in 2012, demand for rare earths will increase to the point where China will soon start to import these minerals.
The government cannot hold back any longer on addressing environmental degradation of which air pollution is one of its most notable effects. China will have to devote more resources to innovation to address the problem because it has become a major issue of social and political concern. Chinese citizens are no longer content to be ‘mute’; they have taken quite well to protesting to express discontent and demand for changes. Many of the recent protests have addressed environmental degradation and the lack of standards. Chinese authorities have certainly become concerned by the events known as ‘the Arab Spring’ and they seem well aware that if political and democratic rights are denied, they will have to take action.
Demand for environmental protection – a phenomenon contributing in no small part to the closure of some Chinese REE production facilities in 2012 an 2013 – and higher wages can only point to the inevitability of China losing its low-cost wage advantage and the price of its export goods will increase in accordance – no doubt leading to the emergence of new cheap labor workshop countries and, more likely, a gradual increase of the prices of many consumer goods. Xi Jinping, China’s president clearly outlined that one of his government’s priorities will be to tackle environmental degradation. The recent crackdowns to curb illegal rare earth mining has reflected this trend, sending a signal to the West that it is becoming risky for China to absorb the environmental and socio-economic risks associated with low cost industrial practices. China itself has to change and become less price competitive with the unavoidable rise of labor and regulatory costs, resulting from stricter emissions, tougher industry entry obligations or even energy consumption.
All of this suggests that China should see a surge in internal demand for green technology solutions. This means that China will need more rare earths, despite the lower output reported by such Chinese rare earth producers as the Baotou Group (IMBREHT). The lower production of rare earths in the past year, caused by consumer reluctance and global economic uncertainty – in China as elsewhere – has already started to reverse toward a more bullish direction. About 90 percent of all currently mined rare earths come from China. With its pricing policy, the country has displaced almost all competitors from the market. The USA, Canada and Australia have been challenging this market dominance, and new mines and processing facilities are being developed. There is no risk of market saturation because when the new mines come on line, China’s experience with coal suggests that it will become a major importer of rare earths.
China used to be a major exporter – as well as user – of coal. However, with the tremendous pace of its industrialization, domestic consumption limited the amount of coal available for export, as the mineral was needed to fuel steel plants and power generation. It has not taken long for China to become one of the largest importers of coal in the world. Rare earths may well meet the same fate – and one that is approaching at rapid pace. Domestic concerns – environmental ones in particular – will boost internal demand, limiting the amounts available for export. Ten years ago, China has consumed about 25% of domestically produced rare earths; even in the slower growth scenario of 201, China’s domestic rare earth consumption has risen to 65%. Today, 80 percent of the magnets, and 70% of the world’s manufactured phosphors originate from China. Domestic supplies of rare earths will not be sufficient to sustain such a rhythm of production and Chinese government agencies will have to seek other products to maintain this dominance, forcing it to seek supplies elsewhere. China’s pollution is encouraging news for the newly emerging rare earth plays.
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