China Restrictions on Rare Earths Prompt EU, US, Japan Gathering

21 September 2011

Officials from the EU, US, and Japan have agreed to meet in Washington in October to find ways to reduce demand for China's rare earth exports, according to both reports from the US Department of Energy and a recent EU proposal. 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 exploring options for reducing demand and ensure rare earth supplies, observers suggest that officials are likely to discuss their next move on the subject 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 threat to the EU might be the most critical, due to environmental restrictions it has imposed that may prevent it from opening up new domestic supplies. EU officials have already made clear their disappointment with China's announcement in July that it would further tighten its rare earth quotas (see Bridges Weekly, 20 July 2011).

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 stop: 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. Brussels 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 are expected to 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, observers expect the EU, US, and Japan to discuss WTO litigation of the issue in the October meeting, given that each has previously considered taking legal action on this issue. 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 submitted an appeal to the global trade body in late August (see Bridges Weekly, 7 September 2011).

China is the world's leading producer of rare earth minerals, supplying over 95 percent of the metals to companies around the world. 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 ten warehouses to store the minerals in response to government stockpiling initiatives.

Prices rapidly on the rise

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 prices of some rare earth elements have surged by as much as 2000 percent, according to General Electric. 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 have expressed concern that state-controlled producers, such as Baotou - also known as Bao Gang Rare Earth - might further consolidate China's control over the global rare earths industry. According to the New York Times, the Chinese government has made a concerted effort to close 31 private rare earth processing companies and force four others into mergers with Bao Gang, 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; "Rare earth prices soar as China stocks up," FINANCIAL TIMES, 19 June 2011; "China Consolidates Grip on Rare Earths," NEW YORK TIMES, 15 September 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; "EU wants rare earth clarity from China: trade chief," REUTERS, 14 September 2011; "US, EU, Japan To Discuss Rare Earths In October," REUTERS, 9 September 2011; "China Moves to Strengthen Grip Over Supply of Rare-Earth Metals," WALL STREET JOURNAL, 7 February 2011.

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