Policymakers Panicked as China Rare Earth Ban Extends to the West

China for months has blocked shipments of rare earth metals intended for Japan in retaliation for a regional dispute. Now, China appears to have expanded its rare earth embargo to include Western countries – a move that has U.S. and European authorities scrambling to formulate a backup plan.

Rare earth metals are essential to the production of high-tech devices like computers, display screens, smart bombs, and hybrid-car batteries. And despite their name, rare earth metals aren't particularly rare. However, they are difficult to produce and many rare earth production companies have moved their operations to China to capitalize on cheaper extraction costs and the nation's commitment to growing its alternative energy sector.

China, which has one-third of the world's rare earth deposits, accounted for 97% of global production last year. Of course, the near-total monopoly China wields over the sector wasn't a major concern until just a few months ago when the country cut its production and export quotas.

China cut export quotas for rare earth elements by 72% for the second half of this year, capping foreign shipments at 7,976 metric tons, down from 28,417 tons for the same period in 2009.

The stiff reduction in rare earth exports was highlighted by a territorial fracas with Japan. Japanese authorities had detained the captain of a Chinese fishing boat that collided with a coast guard vessel in disputed waters. China retaliated by withholding shipments of rare earth metals destined for Japan.

Japan released the captain, but the Chinese rare earth embargo remains in place. This development has alarmed Japan, which accounts for 65% of China's rare earth exports. But what's more alarming is that the rare earth embargo appears to have been extended to the United States and Europe.

A number of industry officials in the United States and Europe told the New York Times that restrictions on China's rare mineral exports to the West went into effect on Oct. 18.

"The embargo is expanding," said one of the officials. All of The Times' sources insisted on anonymity for fear of business retaliation by Chinese authorities.

Still, it's unclear why.

"Materials are still being held up in customs and shipments are delayed," Jeff Green, president of J.A. Green & Company LLC in Washington, who represents miners and users of the elements, told Bloomberg News. "Many believe rare-earth quotas for the second half of 2010 are exhausted, leaving materials unavailable for sale."

Other industry chiefs said that China is trying to leverage its rare earth monopoly to persuade multinational companies to move their production facilities to the Mainland.

"Rare earth exports from China could fall even further, even by 30% next year," Ulrich Grillo, the chief executive of chemicals company Grillo-Werke, told The Times. "So what the Chinese are telling us, directly or indirectly, is that if we want access to their rare earth material metals we should invest in China."

However, Grillo said Western technology companies are reluctant to move production to China because they're afraid of losing their intellectual property rights.

"China needs our know-how and machines, but we need protection for our technology," he said. "We don't want these problems to turn into China bashing."

Like the situation with Japan, China's move to extinguish rare earth exports to the West coincided with a political dispute. U.S. trade officials on Oct. 15 said they would investigate whether or not China is violating World Trade Organization (WTO) rules by subsidizing its clean energy exports while limiting its imports. The probe also will determine whether or not reductions in China's rare metal export quotas and taxes qualify as illegal attempts to coerce Western technology companies into investing in China.

China invested $34.5 billion in clean energy technologies last year, according to Bloomberg New Energy Finance. The United States spent $18.6 billion.

White House spokesman Robert Gibbs responded to reports that China has clamped down on exports on Tuesday.

"We're monitoring to see whether or not what is happening on the ground is reflected in those reports," he said.

"I think we are likely to see [Chinese] President Hu [Jintao] on the trip at the G20," Gibbs added, referring to the Group of 20 meeting scheduled to take place next month in Seoul, South Korea. "If it is something that the security and economic teams think is important… certainly, we wouldn't hesitate to bring it up."

Congress is considering legislation that would provide loan guarantees for the re-establishment of rare earth mining and manufacturing in the United States, The Times reported.

Policymakers in Europe are equally dismayed by reports that China is restricting exports of rare earth metals to maximize profits boost its domestic tech companies.

"[It] hints that China is developing an industrial policy aiming at transferring as much as possible production to China," European Union trade commissioner Karel De Gucht told a high-level conference in Brussels on Tuesday. "It's obvious that we cannot continue being completely dependent on China."

An American executive at the conference said the United States and Europe should work closely together to develop their own resources.

"It is up to us to solve the problem," said Gary Litman, the U.S. Chamber of Commerce's vice president for Europe. "The U.S. has the resources and together with our EU partners we can produce anything we want."

Still, it would take years to bring rare earth metal production online in the United States.

U.S. Representative Mike Coffman, R-CO, told Bloomberg that U.S. rare-earth mining isn't likely to resume until at least late 2012 at a mine in Mountain Pass, California.

 "It's pretty frightening that there may be a gap where U.S. industry pays an extraordinary price," he said. "The administration needs to join with other countries and have a unified front to tell China this is not appropriate."

Like the United States, European authorities hope to address China's rare metal export ban at next month's G20 meeting. The German government has asked France, which will preside over that meeting, to put raw materials at the top of its agenda.

China denies that any embargos are in place, and that it is merely attempting to protect its environment.

"China will continue to supply rare earth to the world," the Commerce Ministry said last week. However, "to protect exhaustible resources and ensure sustainable development, China will continue to implement restrictions on the mining, production and export of rare earth."

News and Related Story Links:

• Money Morning:
  Japanese Economy Threatened by China Rare Earth Metals Ban
• Money Morning:
  China Using Government Muscle to Turbo Charge its Auto Industry
• NY Times:
  China Said to Widen Its Embargo of Minerals
  
• NY Times:
  U.S. and Europe Urged to Join Forces on Rare Earth Metals
  
• Bloomberg:
  Rare-Earth Prices Soar as China Quotas Hit Manufacturers Abroad

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