China has gradually and meticulously

developed a strategy of mining and refining

so-called rare earth. Domestic mines located

in Inner Mongolia and foreign ones in Africa

and Central Asia have seen Beijing become

the world’s dominant exporter of minerals that are a fundamental part of the world’s high-tech

and environmental industry. But as the world’s appetite has grown, China’s willingness to sell

has slacked off, creating newfound tension in a vital sector that few take the time to discuss.

ith considerable delay, major industrializedcountries are starting to pay attention to China’salmost total monopoly position in the extrac-

tion, refining and sale of rare earth, the world’s precioussmall-quantity minerals for high-tech products. In ahigh-level meeting last August, Japanese Economics andTrade Minister Masuyaki Naoshima told his Chinesecounterpart about Japan’s need for a steady supply of rareearth to maintain the vitality of his nation’s electronicsindustries.

Rare earths include 17 of the 92 naturally occurring el-ements (from scandium to lutetium) and their oxides.They’re the basic components for superconductors andopto-electronics. High-tech products, ranging from mo-bile phones, catalytic converters, and new green tech-nologies (batteries for the machines, accumulators ofwind turbine blades), depend on these substances. Rareearth-based products are also used to produce state-of-the-art military applications, including weapon systems,fiber optics for the inertial guidance systems of “intelli-gent” missiles, and UAVs (Unmanned Aerial Vehicles) .

For more than two decades, China has adopted a strat-egy of strengthening and monitoring the harvesting ofrare earth within its borders (mostly near Inner Mongo-lia) as well as overseas, largely in Africa and Central A-sia. This policy had helped Beijing control of almost 90percent of world production of rare earths. For some el-ements, such as lanthanum and neodymium, China pos-sess as much as 97 percent of the world’s supply.

At the same time, China’s industries and productionconsume only about 60 percent of what it mines. Follow-ing China’s latest unilateral cut in the export of rareearths, industrialized countries have started pressing forincreased supply. Beijing’s cap on export quotas (65 per-cent) caught both the United States and Japan off guard.For the world’s leading importers of rare earth substance,

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76 . east . europe and asia strategies number 34 . february 2011 . 77

the restrictions came out of the blue. The lack of any pri-or inkling that China was about to change its tune on ex-ports left high-tech and strategically-oriented nations ata loss and worried.

The shortsightedness of the highly industrialized na-tions regarding the obtaining and storage of reserves ofrare earth is due not only to economic miscalculation, s-ince China was selling them at a fraction of the cost, butalso in failing to factor in the intense pollution generat-ed by the extraction of the minerals themselves.

Mining rare earth creates large quantities of pollutantssuch as sulfates, acids and ammonia. Until Beijing’sabrupt quota change it was easy to turn a blind eye to theworking conditions and health reversal endured by Chi-nese workers involved in the extraction process, as wellas the irreparable damage caused to groundwater areasnear the mines. Since most of extraction and refiningprocess is concentrated in remote areas of Inner Mongo-lia, few even bothered paying attention.

The Inner Mongolia choice was neither by chance ornew. In 1992, China’s State Council approved the cre-ation of specific regional areas charged with develop-ment of rare earth research and refining, moves linked tothe Deng Xiaoping era. The same policy of strategic pro-curement of raw materials was then pursued by his suc-cessor Zhang Zemin and now underpins the country’slatest five-year economic development plans that hopesto make rare earth monopoly into a financial bonanza.

ccording to official Chinese sources, cutting ex-port rates is a direct result of the country attempt-ing to comply with demands made by the Kyoto

Protocol. They say China is trying to rein in the disper-sal of highly polluting substances. But such substancesare indispensable adjunct of separation process neces-sary to produce the oxides. The U.S. disagrees. It com-plained to the World Labor Organization that China’snew limitations on the export of rare earth didn’t mirrora parallel reduction in production, neutering Beijing’senvironmental claim.

According to Washington, Beijing decision to cut quo-tas was part of a focused larger effort to ensure foreignhigh-tech factories were transferred to Chinese soil. Tomaintain continued access to rare earths (and to help

China: Once Upon a Time, a “low cost” Empire

Mountains overlook the town of Morococha, Peru.

The Aluminum Corp. of China, known as Chinalco,

a Chinese state-owned mining company, plans to demolish

the Toromocho mountain peak in Morococha to tap the $50 billion

deposit of copper ore underneath the 102-year-old mining town.

It will also relocate the town and its 5,397 residents,

many who are reluctant to go.

A

The Rare Earth Race

by Alessandro Arduino

DOSSIER

feed China’s increasing domestic needs), foreign compa-nies appeared ready to transfer technology to China,movement that inevitably means revealing patentedprocesses.

This in turn gets to the underlying problem faced byforeign businesses operating on Chinese soil, namely theprotecting of intellectual property and business secretsfrom local firms, to Chinese national advantage. Chinahas a lax interpretation of trade secrets. The availabilityof rare earth at very reasonable prices on Chinese domes-tic market also would in turn help local companies cutcosts and strengthen the position of Chinese rare earthrefiners and exporters on an extremely promising foreignmarket. Yet again, Beijing would use the global appetitefor products and resources to its own advantage.

It’s no coincide that the recent rise in the value of gold,which has always been seen as safe haven uncertaintyof financial uncertainty, immediately attracted thegreedy attention of Beijing, which in 2010 acquired 220metric tons. China’s voracious appetite for raw materi-als and its blatant behavior in the case of gold can beused as a model to predict how Beijing will act in con-nection with the world’s need for other elements. As

with rare earth, China is now the leading global furnish-er of gold. It’s domestic market protected by state mo-nopoly and continues to grow. At the same time, thecountry’s central bank recently created a special fund,dedicated solely to foreign-market, linked to the acqui-sition ETFs in the gold market sector.

So far, the global rise in gold prices hasn’t led to Chi-na being singled out by other countries as the source ofdisturbance in the economic equilibrium. Instead, thefocus has been on rare earth. But both cases demonstrateChina’s king-making role in political and strategic terms.In addition to Beijing’s majority ownership in America’s

78 . east . europe and asia strategies number 34 . february 2011 . 79

vast public debt, it now has leverage in the rare earth is-sue.

If, as some contend, the financial tsunami of 2009 ac-celerated the process of the transferring of economichegemony from West to East, how China uses limitationsin the exports of rare earths will be test case for Beijing’ssoft power, or the influencing of global affairs through e-conomic adjustment and pressure.

Until 2008, Beijing had successfully managed to sep-arate the economic sphere from the political one, includ-ing foreign direct investment, the trade imbalance andthe revaluation of the Yuan. But Beijing’s position on rareearth quotas casts a new shadow on the strategic impli-cations of the country’s manifold (and state-controlled)economic expansion.

A first sign of the power wielded by China came inSeptember, in the form of a one-month embargo of rareearth elements destined for Japan. The move came fol-lowing Tokyo decision connected to the disputedDiaoyutai Islands, known as the Senkaku Islands inJapan. That month, a Chinese trawler collided with aJapan Coast Guard patrol boat, leading the Japanese ves-sel to hold the Chinese vessel and crew for two days. The

incident disrupted official and non-official exchangesand activities between the two countries. Political and e-conomic motives collided.

ut since there have been similar cases in recentmonths, it’s premature to define Beijing’s deci-sion a formal demonstration of a new weapon in

an ample national security arsenal. At the same time, thedecision to cut out Japan for 30 days raises serious ques-tions for those nations that depend on China for theirsupply of strategic materials. Their behavior will now beunder scrutiny.

An initial response from the U.S. came in the form ofgovernment incentives to reopening of rare earth mines,while attempting to be mindful of environmental protec-tion legislation. The reopening of American mines nearLas Vegas, and in Australia near Mount Weld, could rep-resent the creation of a renewed balance in the manage-ment of rare earth production.

But reaching such a balance, given China’s head start,would take at least five years, or the time it takes tomount an efficient production system. Just enough timefor a new Five Year Development Plan by Beijing, which

China: Once Upon a Time, a “low cost” Empire

LEFT A model stands beside a Toyota Motor Corp.

Prius hybrid vehicle at last December’s

China International Automobile Exhibition in Guangzhou.

CENTER Workers are busy on the production line of photovoltaic

board at the plant of Tianwei Yingli Green Energy Resources Co.

RIGHT Bulldozer scoop soil containing various rare earth

to be loaded on to a vessel docked in Lianyungang,

in east China’s Jiangsu province. The material is bound for Japan.

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no doubt, beginning in 2011, will contain a new roundof quotas and taxes on the export of rare earth minerals.

Ironically, the survival of new green technologies in-tended to abate pollution are based mainly on the use ofsolid rare earth oxides. The engine of a hybrid ToyotaPrius hybrid engine needs10 kilos of rare earth-relatedproducts while the neodymium magnets in permanentwind turbines requires two tons.

80 . east . europe and asia strategies

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A general view of the solar modules of a newly installed

100 megawatt photovoltaic on-grid power project in Dunhuang,

in China’s northwest Gansu Province. The government is tendering

for bids to develop 13 solar projects with a combined capacity

of 280 MW in the western regions. The Chinese government

has set ambitious solar energy targets that it hopes to achieve 2020.

Moreover, in addition to the environmental protectionneed, there’s a defense industry component that requiresconstant updating. Expert analysis suggests the worldwill need some 150,000 tons of rare earth each year, withChina expected to contribute 40,000 tons of the total. Per-haps awareness its increasing dependence on China forthe obtaining raw materials will bring the West to gener-ate more long-term-oriented economic policies. It couldstart with silicon, fundamental to the manufacturing so-lar panels since 2008 and considered a national interestpriority by Beijing.

For now, the free market put the onus on China to boostits domestic production of silicon. The result has beenpredictable. In two years, China has become the suppli-er half of the world’s solar panels. .