Industry Market Trends

Does the WTO Need to Resolve the Rare-Earths Dispute?

Aug 09, 2012

The World Trade Organization recently agreed to establish a panel to look at complaints lodged by the U.S., E.U. and Japan regarding China's restriction of access to rare-earth mineral resources. But market forces might be well on their way to solving the issue ahead of any decision from the WTO.

Rare-earth minerals (e.g. lanthanides, scandium and yttrium, as well as associated metals molybdenum and tungsten) are critical for producing high-tech items such as cell phones and other popular consumer electronics, batteries, defense systems and missiles. Access to rare-earth resources has become politically sensitive in recent years, as China, which has the world's largest available supply of rare earths, continues to impose limits on exporting these crucial materials.

China imposes numerous export restraints, such as export duties and quotas on rare earths, "as well as many intermediate products processed from these raw materials," according to a statement from the United States trade representative dealing with the matter, who is asking the WTO to ensure "fair and equal access to raw materials like rare earths that China specifically agreed to when it joined the WTO."

For its part, the European Union charges that China's export restrictions "significantly distort the market and create competitive advantages in favor of China's manufacturing industry to the detriment of foreign competition," according to Forbes.

The Chinese government contends that large-scale mining to extract such commodities is harmful to the environment and claims that it's simply concerned about protecting the nation.

The WTO has agreed to establish a panel to hear input from all concerned parties.

In response to the WTO's establishment of the panel, Zhu Hongren, chief engineer of China's Ministry of Industry and Information Technology, said at a press conference in Beijing in late July that "the Chinese government will surely provide reasonable protection for rare-earth resources and ensure environmental protection and sustainable development while making use of the resources," China's official news agency Xinhua reports.

The dispute is both a geopolitical and an economic issue. After undercutting world prices for rare-earth minerals in the 1990s, leading to the discontinuance of extraction in other countries, China now controls about 95 percent of world production, despite having just over 20 percent of the world's proven reserves.

Zhu alluded to this fact, saying "some countries with rich rare-earth resources have not mined their own land for environment protection or other reasons, but made groundless accusations against China and repeatedly ignored the widely-known pollution caused by rare-earth exploitation in the country."

The WTO case might be a moot point when and if a decision is ever handed down. Ironically enough, not only did China recently ease restrictions somewhat for companies exporting rare-earth resources after those companies met new environmental standards, but much of the allotted quota is going unused due to a drop in world demand, the Wall Street Journal reports.

"Only about half of last year's 30,184-ton quota was used," the Journal notes, citing Beijing-based rare-earth consulting firm Baichuan Information. Moreover, "major rare-earth exports in March this year fell more than 70 percent compared with a year earlier."

In fact, for the first quarter of 2012, "China exported about 2,773 tons of rare-earth metals, just 26 percent of the initial quota for rare-earth exports."

Given that global demand for rare earths has dropped, due partly to the worldwide economic slowdown, China's initial tightening of export restrictions can be seen as a classic supply-and-demand response to try to keep prices up, similar to OPEC's oil production quotas, which are intended to keep prices high.

Tim Worstall, an expert on scandium, told Forbes that "the market itself is already working around the Chinese restrictions: indeed, is well on the way to making them entirely irrelevant."

For example, mining company Molycorp is reopening operations at the Mountain Pass mine in California, once the world's top producer of rare earths but mothballed for the past 10 years due to cheaper Chinese production. Meanwhile, mining firm Lynas is opening the Mount Weld location in Australia as well, which contains vast proven reserves of rare earths.

The long-term supply of rare earths is not the primary concern - in addition to many proven reserves around the world, last month Japan announced the discovery of huge deposits of rare earths under the sea within the Japanese economic exclusion zone - but limited access to rare-earth resources is likely to have immediate negative economic effects, particularly for industries that rely on these resources for production.

Until a new, non-Chinese rare-earths supply is up and running, the rest of the world will find it difficult to gain affordable rare-earth minerals necessary for production, and this may drive up costs for finished products. In the meantime, countries like the U.S. see WTO action to resolve the dispute as the most effective path to cheaper, more readily available rare-earth resources.