Major Economies to Meet in Washington over Rare Earth Restrictions

19 September 2011

The EU, US, and Japan have agreed to meet in Washington early next month to find ways to reduce demand for China's rare earth exports. The plan comes in the wake of China's recent decision to halt production of the minerals at three major mines in Jiangxi province, a move that is expected to cut global supplies and raise global prices. In addition to considering the means by which the three bodies can reduce demand and ensure rare earth supplies, observers say they are likely to discuss their next move against China at the WTO.

The US and Japan are the largest importers of China's rare earth metals, which are critical ingredients for the manufacture of many high-tech, strategic, and green industrial goods. However, the EU is perhaps more critically threatened due to environmental restrictions it has imposed that may prevent it from opening up new domestic supplies. The EU responded to China's mine closures last week by developing a plan to work in concert with the US and Japan to reduce global demand for the minerals.

Next move at WTO?

Each of the major economies is considering a range of responses to counteract China's supply restrictions. The EU has promised to raise the issue in two major meetings with senior-level Chinese officials in October and December. The EU has also mimicked earlier moves by the US, Japan, and South Korea to stockpile the metals and augment future supply restrictions. In the upcoming meeting, the EU, US, and Japan will discuss increasing domestic production, reducing industrial demand, increasing imports from other international suppliers such as Canada and Australia, and finding new ways to substitute for the rare earth ingredients in the production of high-tech goods.

In addition, the EU, US, and Japan are almost certain to discuss WTO litigation of the issue in the October meeting - each has previously considered taking legal action and China's latest move has only stoked the fires of the dispute. China justified its mine closures by citing concerns over the environmental damages that result from production of the rare earths. However, similar justifications for export restrictions of other raw materials were summarily rejected by a WTO dispute settlement panel in July in a dispute brought against China by the US, EU, and Mexico (DS394, 395, 398). China appealed the case in late August (see Bridges Trade BioRes, 5 September 2011).

China is the world's leading producer of rare earth minerals, supplying 97 percent of the metals to companies around the world (for a list of major producers of rare earth elements and other raw materials, see the British Geological Survey's Risk List 2011). China began stockpiling rare earths in 2010 and reduced global exports by 40 percent by June 2011. Two-thirds of China's production of rare earths originates in Inner Mongolia, where in February the state-controlled Baotou Steel Rare-Earth (Group) Hi-Tech Co. began building 10 warehouses to store the minerals in response to government stockpiling initiatives.

Prices continue to surge

China's actions have had a severe short-term impact on global rare earths prices. In August, prices peaked as hedge funds and other speculators anticipated large price hikes. The price of one rare earth element, europium oxide for example, increased over 1200 percent from last year, according to General Electric. Others have surged by as much as 2000 percent. Prices eased in September, but they will remain high in the medium-term as the US, EU, Japan, and other major rare earths importers struggle to find alternative supplies and to reduce demand for rare earth metals.

Foreign companies say they worry that state-controlled producers such as Baotou will further consolidate China's control over the global rare earths industry. According the New York Times, the Chinese government has made a concerted effort to close 31 private mining companies and force four others into mergers with Baotou, making it the overwhelming giant of rare earth extraction in northern China.

Similarly, Beijing is consolidating producers in Jiangxi province where the remainder of its production takes place. Foreign firms say they fear that discrimination by Chinese companies will restrict their supplies of the critical raw materials and favour Chinese industrial producers. Foreign governments are similarly concerned that China's actions will distort international trade, a primary motivation for the EU, US, and Japan as they consider taking legal action.

ICTSD Reporting; "China Moves to Strengthen Grip Over Supply of Rare-Earth Metals," WALL STREET JOURNAL, 7 February 2011; "Rare earth prices soar as China stocks up," FINANCIAL TIMES, 19 June 2011; "China halts rare earth production at three mines," REUTERS, 6 September 2011; "EU to develop rare earth substitutes with US, Japan," REUTERS, 7 September 2011; "US, EU, Japan To Discuss Rare Earths In October," REUTERS, 9 September 2011; "EU wants rare earth clarity from China: trade chief," REUTERS, 14 September 2011; "China Consolidates Grip on Rare Earths," NEW YORK TIMES, 15 September 2011.

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