RARE EARTHS: IS THERE A CASE FOR GOVERNMENT INTERVENTION? - David Uren October 2019
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RARE EARTHS: IS THERE A CASE FOR GOVERNMENT INTERVENTION? David Uren October 2019
Table of contents
The United States Studies Centre at the University of
Sydney is a university-based research centre, dedicated Executive summary 01
to the rigorous analysis of American foreign policy,
Introduction 02
economics, politics and culture. The Centre is a national
resource, that builds Australia’s awareness of the dynamics
What are rare earths? 04
shaping America — and critically — their implications for
Australia. The rare earth weapon 06
The Centre’s Trade and Investment Program examines
The 2010 market squeeze and its 10
trends, challenges and opportunities in the trade and
aftermath
investment relationship between Australia and the United
States. It places the Australia-US economic relationship in Australian prospects in 14
the broader context of Australia’s relations with the rest of
a difficult market
the world and promotes public policy recommendations
conducive to the growth and integration of the Australian, Strategic responses of Japan 17
US and world economies.
and the United States
United States Studies Centre
Australia’s interests as a producer 20
Institute Building (H03)
The University of Sydney NSW 2006 The environmental problem 22
Australia
Phone: +61 2 9351 7249 Endnotes 24
Email: us-studies@sydney.edu.au
Twitter: @ussc About the author 25
Website: ussc.edu.au
This report may be cited as:
David Uren, “Rare earths: Is there a case for
government intervention?,” United States Studies
Centre at the University of Sydney, October 2019.
Research conclusions are derived independently and authors represent
their own view, not those of the United States Studies Centre. Reports
published by the Centre are anonymously peer-reviewed by both
internal and external experts.
Cover: Neodymium (Getty Images)
Executive summary
Chinese authorities have hinted that they may use The Australian government is considering its response
their dominant position as a supplier of rare earths and to the US push for non-Chinese sources of supply.
associated manufactured goods to retaliate against Australia has at least half a dozen rare earth projects
US restrictions on high technology exports to China. ready for development but needing commitments
China is responsible for between 80 and 90 per cent of from potential customers
processed rare earths and products such as powerful and financiers. Neither
rare earth magnets. banks nor equity markets
will finance them. The Given the intensity of the US-
It is not in China’s interests to impose an embargo — Australian government China trade war, the Trump
the result would be the stimulation of competitive rare could, at a stretch, use
earths production and substitution. China’s rare earths administration has resolved that
the “national interest
companies are aware of the risks of pushing prices account” at Export Finance it is a national security priority to
too high, because they’ve done it before in 2010. Australia to assist. The eliminate the dependence of the
It seriously damaged the market. Total sales took a Commonwealth, rather US military on Chinese supplies of
decade to recover, and for some rare earth elements, than the agency, would
the damage has been permanent as substitutes have assume responsibility
critical minerals, particularly rare
been found. for any losses. The earths and derivative products.
government has already
While rare earths have lots of promise, with the shift
used that account to
to electric cars and the continuing rollout of wind farms
establish A$3.8 billion facility to support its military
driving demand, there are good reasons why it has
equipment export program. However, it would have to
been hard to get rare earth projects developed. There
go into any such commitment with its eyes open to the
are no transparent prices, separating the elements out
possibility of losses to the taxpayer — rare earths have
of the host rock is technically difficult, often yielding
often been in over-supply with poor prices.
radioactive waste, and the applications for rare earths
are subject to unpredictable technological change. It may be that the most promising source of
Also, any investor in a non-Chinese rare earth project commercial finance for developing Australia’s rare
must make a calculation about the response from its earth deposits comes from China, which is forecast
giant Chinese competitors. to become an importer over coming years as growth
in demand from its rare earths manufacturing
The Japanese government decided in 2010 that these
outstrips supplies from its own mines. Chinese
risks justified government intervention. Australia’s
investors already have substantial stakes in some of
Lynas, which now accounts for 8 per cent of global rare
the most promising Australian developments. The
earth production, was a key beneficiary, with Japanese
Foreign Investment Review Board should remain
government funding supporting its development.
open to Chinese participation in Australia’s rare earths
The United States has preferred to leave it to the market industry.
but given the intensity of the trade war, the Trump
administration has resolved that it is a national security
priority to eliminate the dependence of the US military
on Chinese supplies of critical minerals, particularly
rare earths and derivative products. The president has
committed to provide financial assistance under the
Defense Production Act, although the sums advanced
under this are typically too modest to support a
resource project development.
1
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RARE EARTHS: IS THERE A CASE FOR GOVERNMENT INTERVENTION?
Introduction
Chinese authorities have made veiled threats that of non-Chinese production and substitution that would
they will use their dominant position in the rare earths ultimately weaken China’s strong position in the
industry to withhold supplies to the United States in market.
retaliation for moves by the US administration to ban
sales of high-technology goods to China. The 1973 oil embargo by OPEC provides a lesson. On
the eve of the crisis the OPEC nations were producing
Building a dominant position in rare earths and their 1,500 million tonnes of oil a year while the rest of the
downstream products has been a strategic objective world’s output was 1,400 million tonnes. Within a
for the Chinese state ever since the mid-1980s. China decade, OPEC annual production had dropped to 850
is currently responsible for roughly 70 per cent of million tonnes while the rest of the world’s output had
global mine production, soared to 2,000 million tonnes.2
85 per cent of the initial
The Chinese rare earths industry is aware of the risk of
If Western governments are processing of them into
pushing prices too high, making it unlikely that Chinese
oxides and 90 per cent of
uncomfortable with leaving the authorities would attempt any repetition of the 2010
the production of metals,
sourcing of rare earths and their alloys and magnets.1
squeeze on global supplies. However, it is possible
shipments to US customers could be disrupted in a
downstream products to market
But do these strengths give deteriorating trade conflict.
and/or Chinese forces, there are China the ability to bring
many entrepreneurs eager to China’s longer-term interest is better served by
the western technology
continuing to build on the comparative advantage it has
develop rare earth resources if companies that depend
already achieved in this high-technology niche of the
only they could obtain the finance upon supplies of rare earth
resources industry.
materials to their knees?
and committed customers. When China exercised its If Western governments are uncomfortable with
market muscle in 2010, leaving the sourcing of rare earths and their
curbing shipments to Japan, Europe and the United downstream products to market and/or Chinese
States with export quotas, export tariffs and an forces, there are many entrepreneurs eager to
informal embargo, it sent global prices for key rare develop rare earth resources if only they could obtain
earth compounds skyrocketing. the finance and committed customers.
US, Japanese and European authorities were It was the provision of concessional debt finance
shocked and embarked on strategic reviews of their backed by Japanese authorities and a sales agreement
vulnerabilities. Over the past nine years, China’s share with Japanese buyers in the wake of the 2010 crisis that
of mine output has been diluted as Australian and made possible the development of Lynas’s rich deposit
United States production has been brought on stream, at Mt Weld in Western Australia. It now provides 8 per
alongside smaller increases in output elsewhere in cent of global rare earth mine output and operates a
Asia, Africa and Latin America. large processing plant in Malaysia. The US government
is taking tentative steps to deliver financial support to
Many more projects are in various stages of
the rare earths industry.
development. But the continuing high dependence
on China for rare earth processing and derivative However, governments would have to go into any rare
manufactured goods has Western governments earths ventures with their eyes open to the possibility
worried once again. They are reviewing their strategic of losing money. The history of rare earths is that they
options. are often in over-supply with low prices leaving many
operators struggling to make a profit.
This report argues that any attempt by China to impose
an export embargo on rare earths or downstream Australia’s government policy should be flexible.
products would be the catalyst for the development Australia is mindful of the concerns of its ally, the
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RARE EARTHS: IS THERE A CASE FOR GOVERNMENT INTERVENTION?
United States, about the security of its supplies and has The rapid development of electric motor vehicles
established a taskforce under the Department of Prime and wind farms holds out the promise of strong
Minister and Cabinet to prepare Australia’s response. It growth in demand for rare earths for magnets.
should be ready to match any US initiatives to source However, the rare earths market carries high risks:
supplies in Australia with tangible support.
There is no transparent market pricing,
However, it should also be aware that China’s
manufacturing of products incorporating rare earths is The technology for processing rare earths can be
about to outstrip its own supplies, which would lead to unreliable,
China becoming a net importer. It may be that the best
Demand for rare earths can swing dramatically
prospect for financing the development of Australia’s
with technological change, and
incipient rare earth projects rests with China, a
possibility that the Foreign Investment Review Board The dominant participants in the market are
needs to consider. Australia’s national security is not Chinese enterprises — some state owned —
jeopardised by Chinese participation in Australia’s rare that may not respond to market signals.
earths industry, any more than by its participation in
iron ore or coal sectors. The fourth section compares the strategic
responses of Japan and the United States to China’s
This report is organised as follows: dominance of the rare earths industry. Japan,
with a long history of resource vulnerability and
The first section puts the current threats to use rare
state economic intervention, has found it easier to
earths as a weapon in the trade war between the
marshal resources for both financing new supplies
United States and China into the context of China’s
and research into substitution and recycling. The
previous use of trade restrictions as an instrument of
United States has preferred market-based solutions,
foreign policy. It argues that a formal trade embargo
however, in the context of rising geopolitical
on rare earth exports to the United States is unlikely
tensions, the United States now sees breaking its
but that some disruption to shipments is possible.
dependence on China for rare earths as a national
The second section examines the consequences security priority.
of China’s squeeze on rare earth global supplies
Finally, Australia’s national interest is to see its rare
in 2010. Soaring prices encouraged widespread
earths projects developed ahead of competitor
substitution and efficiency drives by consumer
projects in other parts of the world. Under existing
industries that slashed global demand which, for
industry policy, the most important government
some rare earth products, has never recovered. It
contribution is ensuring an efficient approvals
also led to the development of non-Chinese supply,
process for project development and supporting the
including a decision by the Japanese authorities to
provision of infrastructure. If development of projects
finance the development of the Mt Weld deposit in
is made a national security priority in the context of
Western Australia, owned by Lynas. The effect of
Australia’s alliance with the United States, there
slumping demand and a surge in supply was that
is potential to use the Export Finance Australia’s
prices crashed.
special ‘national interest’ account. Any such move
There are more than half a dozen listed Australian would have to be in the context of firm customer
companies with proven rare earth deposits that contracts and would carry the risk of taxpayer
are chasing customers and finance to develop their loss. Australia’s Foreign Investment Review Board
projects. The third section highlights the hopes and should also be open to further Chinese involvement
difficulties they confront. in developing rare earth projects.
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What are rare earths?
Rare earths — a set of 17 metal elements — have a wide Each of these applications uses only small quantities of
range of high technology applications, from making rare earths. The total global production is only around
powerful magnets, to separating petrol and plastics 170,000 tonnes or roughly half the output of tin, and
from oil, the treatment of kidney disease, making the total value of the market is only about US$4 billion
coloured or optically clear glass, raising the melting globally. Although the United States is dependent
temperature of turbine blades and generating white on imported rare earth compounds, its purchases of
phosphor for LED lights and screens. Their unusual rare earth oxides are only around US$150 million a
chemical properties stem from their ability to give year, which is almost a rounding error in the context
up and accept electrons. Military applications include of US imports in excess of US$2 trillion. US imports
missile guidance systems, lasers that penetrate water, of manufactured goods containing rare earths are
night vision goggles and electronic communications much higher than imports of the oxide raw material.
systems that are impervious to jamming. The special qualities rare earths bring to manufactured
goods can be difficult to replace.
Two scientists use an illuminated periodic table of elements as they discuss the element holmium at the University of California, Berkeley
Photo: Getty
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While the spread of applications is remarkable, it is Geologically, rare earths are relatively common — on
the use of two of the 17 elements — neodymium a par with nickel or tin. About half the economically
and praesodymium — to make powerful permanent recoverable reserves of rare earths are in China (while
magnets that accounts for as much as 90 per cent of around 3 per cent are in Australia). Only a minute
the total market by value.3 An NdPr magnet is about portion of reserves is mined — Australia’s reserves
seven times more powerful than a simple iron magnet. could supply the world’s needs for decades.
Electric motors work with either electric (copper coils)
or permanent magnets, but the latter are lighter and The rare earth elements are found in rock, mineral
favoured by most makers of electric motor vehicles sands and clays, with most of the 17 elements (which
and wind turbines. Both electric cars and wind turbines are actually metals, not earths) bound in the same
are markets with strong growth prospects. mineral structure. Separating the diverse elements is
difficult, expensive and, depending on the orebody, can
produce large volumes of toxic and often radioactive
waste. With the total market relatively small, they are
hard to develop profitably.
Table 1: List of rare earths and their applications
RARE EARTH ATOMIC APPLICATION
ELEMENTS SYMBOL
Lanthanum La Cracking catalysts in petroleum refining, lasers and green phosphors.
Cerium Ce Glass polishing, catalysis and component in phosphors.
Praesodymium Pr Pigment (yellow), optical properties in fibre and magnets.
Neodymium Nd Permanent magnets, lasers and filters in welding goggles.
Samarium Sm Permanent magnets, lasers, and optical and microwave devices.
Europium Eu Phosphors.
Gadolinium Gd Phosphors and scintillation agents, and Co medical X-rays.
Terbium Tb Phosphors, lasers and magneto-optic recording systems.
Dysprosium Dy Additive to Nd magnets to improve temperature properties.
Holmium Ho Strong magnetic and microwave properties — niche scientific uses.
Erbium Er Phosphors, fibre-optics and lasers.
Thulium Tm Lasers, magnetic and microwave uses.
Ytterbium Yb Silicon photocells and strain gauges.
Lutetium Lu X-ray phosphors and X-ray detectors.
Yttrium Y Phosphors and microwave generators.
Source: CSIRO
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The rare earth weapon
There is a long history to the use of trade embargoes the permanent magnet manufacturer’s commitment
for political ends. The US embargo on oil shipments to to scientific research while recognising its efforts at
Japan in 1941 was one of the catalysts for Japan’s Asian environmental protection. He did not mention the trade
war, while France attempted to impose an embargo war. The simple fact of his visit was sufficient to draw
on trade between Europe and the United Kingdom everyone’s attention to China’s potential to use its
in 1806 in an effort to force a British surrender in the dominant position in rare earths and their downstream
Napoleonic wars. More recently, the Arab oil exporting products to retaliate over Huawei.
nations embargoed oil shipments to nations seen to
have supported Israel in the Yom Kippur war in 1973, The key economic planning body, the National
while Russia has, on several occasions, suspended Development and Reform Commission (NDRC), made
gas shipments to Ukraine. the threat more explicit a week later, distributing a
bulletin quoting an unnamed official in a scripted Q&A.
In contrast to this history, China’s use of trade
“Will rare earths become China’s counter-weapon
embargoes as a foreign policy weapon has been
against the US’s unwarranted suppression? What I can
ambiguous, with neither clear threats nor objectives.
tell you is that if anyone wants to use products made
President Xi Jinping’s tour of east Chinese provinces from rare earth to curb the development of China,
in late May was a long time in the planning and his then the people of the revolutionary soviet base and
whistle-stop tour of the JL Mag Rare Earth Company the whole Chinese people will not be happy.”4 In other
Getty Images
in Jiangxi had likely been on the schedule well before words, if the United States was going to ban the export
US President Donald Trump signed an executive to China of technology that used Chinese rare earth
order effectively barring US technology exports to products, then the United States could not expect
Huawei a week earlier. The Chinese leader praised China to continue supplying them.
Table 2: Rare earth production by region ('000 tonnes), 2010-2018
REGION 2010 2011 2012 2013 2014 2015 2016 2017 2018
Africa - - - - - - - 0.01 0.70
Asia (excl. China) 0.5 0.5 0.5 0.5 0.5 0.6 2.1 2.0 2.0
Australia - - - 1.1 7.2 10.5 13.8 17.3 19.1
China 176.9 185.4 174.4 171.0 156.5 148.2 137.4 132.8 127.9
Europe 1.5 1.4 2.1 1.4 2.1 2.3 2.5 2.8 2.8
North America 3.0 3.7 2.5 3.6 4.8 4.0 - - 5.2
South America - - - - 0.1 0.1 0.6 1.0 2.5
Total 181.9 191.0 179.5 177.7 171.2 165.7 156.4 155.8 160.2
Source: Roskill
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The People’s Daily editorialised that the United States However, China is holding its options open. When,
should not underestimate China’s ability to fight the in late July 2019, the United States announced it
rare earth trade war saying, “don’t say we didn’t warn would impose 10 per cent tariffs on all remaining
you”. The nationalist daily, Global Times, explained Chinese imports, the Rare Earths Association
that “those familiar with Chinese diplomatic language released a statement declaring that the industry would
know the weight of this phrase”. It was used by the “unswervingly” support China’s counter-measures
People’s Daily ahead of China’s 1962 war with India against the United States and was fully aware of the
and before its 1979 war with Vietnam.5 implications of exporting rare earth products.
But, as is often the case in China, the threats were There was similar ambiguity the last time China was
vague and qualified. The foreign ministry’s spokesman tempted to use its economic power in the rare earths
Lu Kang said Xi Jinping’s visit to the permanent magnet market. It is widely accepted that China imposed an
factory was routine. “Inspection by China’s state
embargo on rare earth exports to Japan in the middle
leaders to relevant industries is very normal. Please do
of a heated dispute over the sovereignty of disputed
not read too much into it,” he said.6
islands in September 2010. Japan’s industry minister
The NDRC did not follow up with any specific threats. Akihiro Ohata reported he had heard from trading firms
The trade conflict was not mentioned at an NDRC that Chinese exports of rare earths had been halted.7
conference on rare earths a week later. An official there China’s premier Wen Jiabao emphatically denied any
canvassed the introduction of export controls, but the official embargo with commerce minister Chen Deming
focus was on curbing illegal rare earth operations and telling a sceptical media that trading companies may
environmental quality control, rather than gaining an have independently chosen to suspend exports to
edge over the United States. Japan. However, the idea of an embargo took hold, with
Figure 1: Rare earth exports Figure 2: Rare earth imports
(tonnes), 2018-2019 (tonnes), 2018-2019
Other
6,259
Russia
United States
6,258
16,498
Other
24,361
China
33,242
Germany
Malaysia/Lynas
7,757
19,795
Japan China
6,058 9,051
Source: Roskill Global Trade Tracker
7UNITED STATES STUDIES CENTRE | TRADE AND INVESTMENT PROGRAM
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New York Times columnist Paul Krugman declaring An analysis of shipments through the four main
“the incident shows a Chinese government that is Japanese ports in September, October and November
dangerously trigger-happy, willing to wage economic of that year shows the flow of rare earths was volatile
warfare on the slightest provocation”.8 — shipments of cerium compounds soared through
Osaka in September but plunged in Yokohama.
The US government was more equivocal. Secretary of
Although shipments overall were lower in October
State Hillary Clinton commented: “The Chinese claim
than in September, there was an increase for about a
that they did not in any way interfere with the delivery
fifth of the various rare earth lines that China sells to
and the continuing exporting of rare earth minerals.
Japan.10
Whether or not their motivation was as they describe
it or as the Japanese fear it, the fact is they control the Although this may seem like a historical detail,
vast majority of the supply. That’s not healthy. So, in the pattern of the 2010 incident may be a guide to
effect, the Chinese action was a wake-up call to the future action by China. There may be no overt ban
rest of the world. Now you see Japan and Vietnam on shipments of rare earth related products to the
cooperating; you see Australia moving forward; the United States, but importers may find they become
United States is looking at our potential deposits. I less reliable and take longer, particularly if there are
think that’s a good outcome of what may have been an specialised products with narrow uses in defence
inadvertent effort to send a message to Japan.”9 related applications.
Figure 3: Japan's rare earth imports during the 2010 'embargo'
200,000
Tokyo
Cerium compounds (kg)
150,000
Osaka
Yokohama
100,000
Kobe
50,000
0
t
r
er
r
r
us
be
be
be
ob
g
em
em
em
Au
ct
O
ov
pt
ec
Se
N
D
Month in 2010
Source: Japan Ministry of Finance, cited in "How new and assertive is China's new assertiveness?" Alistair Johnston, International Security,
vol. 37, no. 4, 2013.
8UNITED STATES STUDIES CENTRE | TRADE AND INVESTMENT PROGRAM
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In a similar manner, Australian coal exporters have Chinese shipments of rare earths to Europe and the
been frustrated by delays in landing at China’s ports United States also slowed in September, October and
since February 2019. While there have been official November of 2010. Some saw political motive in this —
Chinese denials of any politically motivated bans, many was the United States being punished for launching an
in the coal industry believe the purchases of Australian action in the World Trade Organization (WTO) against
coal were deliberately slowed as an expression of China’s imposition of increasingly tight export quotas
Chinese disappointment with Australia’s stance on a and steep export tariffs on rare earths?11
range of bilateral issues.
What was unarguably at work from the mid-2000s
There are other cases of China deploying informal was a strategy to limit exports of lightly processed rare
trade restrictions as an arm of foreign policy. Chinese earth compounds in favour of building the country’s
imports of Norwegian salmon collapsed in 2011 domestic manufacturing capability. The story of
following the award of the Nobel Peace Prize to a embargoes on Japanese rare earth imports hit an
Chinese dissident in 2010, while tourism to South already tight market because of China’s export curbs.
Korea plunged following the sighting of US missiles When businesses and governments sought to guard
near the North Korean border. Philippine banana and against future disruptions by stockpiling supplies, they
pineapple exports to China were also targeted in the sent prices soaring. The threat, as much as the reality,
wake of a United Nations Law of the Sea ruling in the of an embargo can be the trigger for a reaction if the
Philippines favour in 2016. market believes it is serious.
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The 2010 market squeeze and its aftermath
The few years following the global financial crisis The scramble for supplies sent prices for the various
were a period of extraordinary turmoil in resource rare earth elements up between three and nine-
commodity markets generally with prices soaring, fold. The elements used for magnets jumped from
driven by China’s phenomenal stimulus efforts and the around US$40 a kilogram to about US$500. Another
slashing of global interest rates. Copper, which had rare earth, dysprosium, used for magnets that have
spent most of the previous 15 years hovering at around to operate at high temperatures, leapt from US$170
US$1 a pound shot to nearly US$4 in 2010 while a kilogram to US$1,600. Even cerium oxide, which
gold was on its way to its 2011 zenith of US$1,900 is one of the most abundant of rare earths and used
an ounce. There was a widespread belief, shared at for polishing glass and as a phosphor in lighting and
the time by Australian policymakers, that resources screens, rose more than threefold from US$30 to
were headed for a period of long-lasting scarcity as US$100 a kilogram.12
the industrialisation of emerging nations, led by China,
outstripped the capacity of the resources industry to Consumers started hunting for substitutes. The cerium
respond. market has never recovered. Glass manufacturers
switched to zirconium as a polishing agent while
China had been gradually lowering its rare earth export the replacement of fluorescent tubes by LED lights
quotas which came down from 51,000 tonnes in 2005 decimated its other major market. It now sells for
to 45,000 tonnes by 2007. The objective was to favour around US$2 a kilogram and Chinese research and
local manufacturers. The export quotas then started development institutes expend significant efforts
to be squeezed much more aggressively, dropping to trying to find viable commercial uses for it. Magnet
31,000 tonnes in 2009 and just 24,000 tonnes in 2010. makers also found they could use less rare earths,
Figure 4: Neodymium oxide price (US$ per tonne), 2009-2019
China internal price Export price
400,000
350,000
300,000
US$ per tonne
250,000
200,000
150,000
100,000
50,000
0
1
1
1
1
1
1
1
1
1
1
1
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
09
10
11
12
13
14
15
16
17
18
19
20
20
20
20
20
20
20
20
20
20
20
Source: Roskill/Asia Meal
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Figure 5: Global rare earth magnet demand ('000 tonnes), 2010-2026
150
120
Thousand tonnes
90
60
30
0
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Source: Roskill
while technology for recycling rare earth products the European Union. Although the WTO treaty was
advanced. Alternative magnets were developed, primarily about lowering barriers to imports, it included
although with compromises on properties such as a bar on the use of export quotas. Exceptions were
weight or strength. Production of rare earth magnets allowed for the preservation of natural resources, and
dropped from 85,000 tonnes in 2010 to 60,000 by China argued this point, saying the export restrictions
2013 and did not recover until 2016.13 It was not until were designed to protect the environment. However,
2018 that total world demand for rare earths matched the WTO found they were effectively an industry
2010 levels. protection policy favouring domestic users of rare
earths. China appealed but lost in 2014, and was
The lesson from the 1973 oil crisis was clear, ordered to remove both its export quotas and tariffs. In
introducing to the advanced world a new ethos a victory for the WTO dispute settlement mechanism
of energy efficiency. In the United States, petrol and the force of its trade rules, China abided by the
consumption per person has dropped by a third, while finding rather than court retaliation. The WTO’s
programs initiated in the 1970s ultimately contributed authority is being challenged by the trade conflict
to the research that led to breakthroughs in drilling between the United States and China, but it continues
and fracturing shale deposits. to provide a vehicle for disciplining the use of export
quotas.
While consumption was falling, China’s efforts to
restrict supply were not going so well. The WTO action Supply responded to the price shock of 2010, with the
initiated by the United States was joined by Japan and biggest boost coming from China itself, where illegal
11UNITED STATES STUDIES CENTRE | TRADE AND INVESTMENT PROGRAM
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Figure 6: Global rare earth oxide production, 2005-2018
China official China illegal Rest of world
250,000
200,000
150,000
Tonnes
100,000
50,000
0
05
06
07
08
09
10
11
12
13
14
15
16
17
18
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Source: Roskill/Paterson
production leapt from an estimated 66,000 tonnes in The following year, Japanese conglomerate Sojitz and
2008 to around 95,000 tonnes by 2011, at which point Australian rare earths developer Lynas announced a
it outstripped China’s official production.14 deal, financed by JOGMEC, in which low-interest debt
totalling US$250 million would be provided to fund
While the squeeze on rare earth supplies affected development of a mine at its Mount Weld deposit in
consumers in the United States and Europe, it was Western Australia and processing plant to be located
the Japanese who responded most forcefully. The in Malaysia, with Japanese rare earth customers
government funded the state-owned resources guaranteed an offtake of a minimum 9,000 tonnes.
company, Japan Oil, Gas and Metals Exploration Offers of Japanese funding were also extended to rare
Corporation (JOGMEC) to support the development earth developments in Vietnam, Kazakhstan and the
of rare earths mines. The Japanese government set United States.
aside US$1.25 billion to mitigate future disruptions,
with US$490 million allocated towards technological The mothballed Mountain Pass mine in the United
innovation for recycling and improved efficiency and States had been sold in 2008 to an investment
US$370 million to supporting offshore rare earth group which assembled funding to restart mining
mining ventures.15 and processing, with a supply agreement to deliver
rare earths to a US firm that supplied catalysts for
Australia was a key target, with foreign minister Seiji the oil refining industry. Sumitomo and Mitsubishi
Maehara visiting shortly after the crisis with China. both offered funding to support the development
“Australia stands ready to be a long-term, secure, but withdrew when they could not line up Japanese
reliable supplier of rare earths to the Japanese economy customers, however the mine recommenced
in the future,” Prime Minister Kevin Rudd told him.16 operations in 2012.
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By 2014, both Molycorp and Lynas had helped lift China had a monopoly on supply, and
non-Chinese production from 4,500 tonnes to 14,000
tonnes. China was still dominant. As the country lost It had the institutional capacity to impose an
its fight before the WTO, it increased its domestic embargo.
production quotas and, combined with the illegal The experience in the wake of the 2010 crisis is that
Chinese production, the reduced global market was substitution was widespread, alternative supplies
heavily oversupplied and prices crumbled. were developed, and China in any event was unable
Molycorp was forced into bankruptcy by 2015 and to control market supplies of illegal production.18 Any
suspended operations while Lynas was only kept alive attempt to target just the United States could be readily
by the steadfast support of its Japanese financiers circumvented by diverting supplies to customers such
who were determined to preserve a non-Chinese as Japan.
source of supply. Chinese producers are mindful of this experience. The
Some suggest the Chinese engineered the surplus to deputy secretary general of China’s Rare Earth Society,
crush competitors, but with the collapse in demand, it Zhang Anwen, set out the tensions in rare earths
was not until 2016 that its exports surpassed the level pricing in a recent TV interview. “If the price is too high,
of 2009, while the surplus was fed by illegal production the downstream enterprises can't afford it, and they
that Chinese authorities were demonstrably trying to will switch to other substitutes.”19
control. Having lost the case before the WTO and been Zhang’s aspiration is for a price which captures the costs
forced to remove export quotas and tariffs, it was not of environmental protection and taxes while providing
surprising that exports rose and prices fell. a decent profit margin for miners, processors and
A constant complaint in China’s academic economic manufacturers, but he acknowledges that competition
literature is that the country has been unable to extract from black-market producers remains a problem.
economic rents from its dominant position in the rare China’s focus is on downstream processing.
earths market. In the Chinese rare earth industry, Increasingly, it is not just producing the permanent
the saying is that the international market delivers magnets, but also the electric motors and other
“cabbage prices”.17 devices that use them. There is a similar priority given
Rare earths mining has been barely profitable for to producing lasers, MRI scanners, lighting and the
most of the major Chinese producers over the past multitude of other manufactured goods using rare
nine years. A share index of 50 Chinese companies earths. In China’s state-directed economic model, rare
with rare earths interests boomed along with the earths and their downstream products are seen as a
rest of the Chinese sharemarket in 2015, but was in point of comparative advantage in a high technology
decline and below 2014 levels until earlier this year, niche. With a substantial investment in research and
significantly lagging the market index, when the development, China has been filing more rare earths
Chinese government acted to stop imports of rare related patents than the rest of the world combined
earths from Myanmar, most of which was illegal since 2011.
Chinese production being reimported. This supported Although Chinese producers are increasing their
domestic Chinese rare earths prices. production, the UK-based specialist resource
An analysis by Perth USAsia Centre’s Jeffrey Wilson consultancy Roskill anticipates the country will be
argues the 2010 crisis and its response shows China a consistent net importer of rare earths by the early
does not have the capacity to impose an effective 2020s. Chinese investors already have stakes in rare
embargo. To do so would require that: earth ventures in other countries, including in Australia.
They are likely to be a source of support for the
Demand was inelastic, development of new mine supplies.
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Australian prospects in a difficult market
The rare earths price boom of 2010-2011 sparked a only non-Chinese producer of heavy rare earth
rush of investor excitement with one count reaching oxides. A range of Chinese investors have minority
400 listed companies around the world with rare earth stakes in the company. (Market value A$155 million)
prospects.20 Of these, only Lynas has gone through the
Hastings Technology Metals: Aiming to produce
transition from hopeful to significant producer, while
6,700 tonnes of NdPr rich oxides by 2022 from its
the Mountain Pass mine in the United States, which
Yangibana deposit in Western Australia. It has non-
had been mothballed since 2002, was brought back
binding offtake agreements with both Chinese and
into production. There are still 30 to 40 listed companies
German buyers, and is targeting German finance for
with ambitions to bring on rare earth prospects around
the A$430 million capital investment. (Market value
the world, with around a dozen in Australia.
A$140 million)
Australia has a substantial history of rare earth mining
Arafura Resources: Is seeking A$1.1 billion to
— Geoscience Australia records that the first rare
finance mine and processing for NdPr rich deposit at
earths mine in the country was established in 1913
Nolan’s Bore north of Alice Springs in the Northern
near Marble Bar in the Pilbara, at a time when the main
Territory. The project would produce 4,400 tonnes
applications were making flints and mantles for gas
of NdPr oxide. Although targeting non-Chinese
lanterns.21 Australia was the world’s leading producer
markets, it has a non-binding offtake agreement
of monazite — a rare earth rich host mineral — in the
with a Chinese permanent magnet maker. Chinese
mid-1980s, but production came to a halt in 1995 when
resource industry investors have a minority stake.
the French company which was processing it, Rhone
(Market value A$72 million)
Poulenc, could no longer obtain permits in France for
storing radio-active waste. Alkane Resources: Alkane has approvals in place
to develop a zirconium and rare earth deposit near
Geoscience Australia estimates that Australia has
Dubbo in New South Wales and is seeking A$808
resources equivalent to 3.2 million tonnes of rare
million in funding for the first stage development.
earth oxides that could be economically developed.
It has non-binding offtake agreements for the
The global total is 115 million tonnes of which half is
zirconium. (Market value A$192 million)
in China. With total world production of just 170,000
tonnes, it is obvious the problem is not the availability An Australian listed company, Peak Resources has an
of resources, but rather bringing those resources advanced project in Tanzania while another, Greenland
profitably onstream. Minerals, is working to develop its huge Kvanefjeld
deposit in Greenland. China’s Shenghe Resources has
Of the Australian listed hopefuls, there are four with
a 45 per cent stake in Greenland and a non-binding
reasonably advanced Australian projects that are
offtake for its entire output.
actively seeking funds to implement them.
Well established mineral sands miner, Iluka (market
Northern Minerals: Has an unusual deposit of
value A$4.6 billion), is planning to develop a deposit of
“heavy” rare earths (a high atomic weight) including
rare earth rich monazite in Victoria’s Wimmera district.
a high concentration of dysprosium, an element
Monazite is one of the most plentiful sources of rare
used in magnets which need to operate at high
earth, but is difficult to manage because it usually has
temperatures. It became Australia’s second rare
a high content of radioactive thorium.
earths producer last year, commissioning a A$70
million pilot plant at its holdings in the Browns Australia’s share market has long supported small
Ranges in Western Australia to prove the resource resource exploration companies as has Canada’s,
and is raising funds for a separation plant. It currently which has a similar spread of rare earth prospects on
ships concentrates to China for separation. It is the its lists.
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Figure 7: Global rare earth oxide production ('000 tonnes), 2013-2023
250
China
Australia
200
Europe
Thousand tonnes
Rest of world
150
100
50
0
13
14
15
16
17
18
19
20
21
22
23
20
20
20
20
20
20
20
20
20
20
20
Source: Roskill
All tell the same story of demand for permanent from 18,600 tonnes in 2018 (from Lynas and Northern
magnets expected to surge over the next six years Minerals) to a capacity of 50,100 tonnes by 2025 with
as the motor industry switches from petrol to electric production from Lynas, Northern and another two
drives while demand from wind turbine makers is producers.22
expected to remain strong. The British consultancy
It may happen, but it is a big jump for a company with a
Roskill is the main source of industry data and
market value of around A$100 million to finance capital
it expects demand for the NdPr oxides used for
development of anywhere from A$500 million to A$1
permanent magnets to rise by an average of 6 per cent
billion. The Australian companies mentioned above
a year between now and 2030. Roskill predicts that have all had well defined projects for at least the last
China will become a net importer of NdPr by the early five years and are still on the launch pad, waiting for
2020s as the enforcement of environmental guidelines lift-off.
brings a reduction in Chinese production. Roskill thinks
there will be a big enough gap between supply and It can be argued that if shortages of rare earths became
demand to lift the nominal NdPr price by 40 per cent sufficiently acute, prices and market capitalisation of
(26 per cent real) over the next six years. these projects would rise to a point that they could be
financed. But investors would have to be satisfied that
It expects new Australian projects will help to plug high prices, in an industry subject to booms and busts,
the gap, with total production of rare earths rising were going to be sustained.
15UNITED STATES STUDIES CENTRE | TRADE AND INVESTMENT PROGRAM
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It is a big risk for an investor when the real operating Rare earths are in many ways more like the chemical
costs of a difficult processing mill can only be guessed industry than mining: the heart of the business is the
at and the market has frequently been oversupplied. processing. Wesfarmers, which has a substantial
chemical business, made a takeover bid for Lynas,
Of the two major projects responding to the 2010 but withdrew it after the company was only able to
crisis, Mountain Pass went back into Chapter 11 get a temporary extension of its operating licence in
bankruptcy in 2015 as prices slumped, while Lynas Malaysia.
only survived because of the steadfast support of its
Japanese financiers. Mountain Pass has recently been Ultimately, the most likely source of finance is either
resurrected by a consortium of investors, with China’s from an enterprise with a big balance sheet like
Shenghe Minerals holding a minor non-voting 10 per Wesfarmers which is making a bet on the future of
cent stake. It is selling its concentrates to China for batteries and electric motors and wants to get into
processing but is working to restart its US separation production of the raw materials, or else it will come
plant in 2020. from a major customer which wants to secure its
supplies. It would not surprise to see funding for
The biggest challenge for prospective producers rare earths projects emerging from the motor vehicle
in Australia and elsewhere is that projects are not and energy industries, but it is not there yet. Those
bankable: banks will not lend to a project when the customers could be Chinese.
pricing is as opaque as it is with rare earths. Equity
markets are similarly unprepared to deliver the capital There are risks to both supply and demand. On the
required to bring these projects to life. supply side, China may decide to develop its abundant
reserves of monazite, which is not currently mined
A Chinese metals exchange which traded rare earths because of concerns around radioactive waste. On
collapsed amid widespread fraud in 2015. Since then, a the demand side, technological development is
number of research houses post public prices based on unpredictable. Tesla had long preferred ‘induction’
surveys of traders, mining companies and consumers, electric motors (which use copper coils rather than
but there is no futures market or any forward pricing permanent magnets), but recently adopted an
that could be used to secure finance. The reality is that innovative electric motor that uses much smaller
prices are hammered out in private negotiations of amounts of rare earths than the standard permanent
long-term contracts with customers. Rare earths are magnet motor and retains copper coils. Were the new
not generic commodities but are mostly produced to Tesla design to become an industry standard, it would
the specification of individual customers. sharply reduce future growth for magnet materials.
There is a chicken and egg problem: potential financiers Relative to more mature resource sectors such as the
would want to see binding take-off contracts before gold industry, the rare earths industry suffers from a
committing, but potential customers will not commit series of information gaps. There is no open pricing,
until they are sure the project can deliver the volume and the cost and efficiency of a processing plant is highly
quality or purity of the material they require. Because uncertain with each orebody imposing unique demands
of the technical difficulty in separating many rare earth and the end market use is vulnerable to unpredictable
ores, a pilot plant cannot provide that assurance — technological change.
potential customers need to see the output from the
full-scale plant before they are ready to sign a binding Perhaps the biggest uncertainty facing potential
contract. developers of rare earth projects is the unpredictable
actions of China, the dominant producer.
16UNITED STATES STUDIES CENTRE | TRADE AND INVESTMENT PROGRAM
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Strategic responses of Japan and the United States
The approaches of Japan and the United States to trade database, compared with less than 20 per cent
China’s dominant position in the rare earths market are in 2010. (There are few accurate figures for a trade
an illuminating contrast, with the Japanese government characterised by secrecy and smuggling.)24
much more focussed on alleviating its national
The United States chose not to direct public funds to
economic vulnerability while the US administration’s
ensure an independent supply of rare earths. Its only
greatest concern is ensuring self-sufficiency for its
rare earths mine at Mountain Pass has twice been
military.
mothballed because of poor profitability, although it is
Japan’s dependence on imported resources has now back in business.
been a dominant feature of its history, motivating
Efforts to legislate government debt guarantees for
its imperialism in the 1930s and 1940s, particularly
rare earth production in the wake of the 2010 crisis
following a US embargo on oil and steel shipments.
were unsuccessful. There is a strong view in the United
Japan was also severely exposed to the 1973 OPEC
States that allowing corporate failure is the process of
oil embargo and reacted with a major government
natural selection that makes its capitalism so strong.
led strategy to reduce dependence on oil in favour of
natural gas and nuclear power while also encouraging However, the vulnerability of the military to Chinese
energy efficiency. supplies is keenly felt and in 2017, President Donald
Trump issued an executive order that the Departments
In 2005, as the commodities boom was just beginning
of Interior and Defense
to gather steam, Japan began work on a strategy to
should develop a strategy
secure supplies of non-ferrous metals and in 2007,
to reduce the country’s
during the first administration of Prime Minister The approaches of Japan and the
dependence on foreign
Shinzo Abe, the Ministry of Economy, Trade and critical minerals. United States to China’s dominant
Industry released a paper focused on rare earths. It position in the rare earths market
called for the use of public funds, including overseas The United States has
development assistance, to help Japanese firms maintained a strategic
are an illuminating contrast, with
acquire mining interests abroad. It also urged greater stockpile of resources the Japanese government much
government stockpiles of critical materials. Funding for deemed necessary for more focussed on alleviating its
the development of non-Chinese supplies would be military preparedness
national economic vulnerability
made available through the government-owned Japan since the late 1930s and
Oil, Gas and Metals National Corporation (JOGMEC), has, since 1973, had laws while the US administration’s
which provides finance and guarantees as well as prohibiting the use of greatest concern is ensuring
geological and technical support to Japanese minerals foreign specialty metals self-sufficiency for its military.
and energy companies. in US weapons systems
although these did not refer
In rare earths, it has worked with a trading company specifically to rare earths until last year. A Reuters
Sojitz to secure long-term supply agreements and joint investigation showed that in 2012, suppliers to the
ventures in Vietnam, Kazakhstan, India and Mongolia, F-35 strike fighter program had to obtain waivers from
as well as its most successful rare earth venture, this legislation to include Chinese-made permanent
backing Lynas. JOGMEC’s refinancing of Lynas debt magnets in the aircraft’s radar system and landing
this year means, as one commentator remarked, gear.25
it enjoys “some of the cheapest debt in corporate
Australia”.23 A review of the Department of Defense management
of rare earths by the US Government Accountability
As a result of government interventions, non-Chinese Office in 2016 found there was no systematic
sources now account for roughly 60 per cent of collection of data about what rare earths were used
Japan’s spending on rare earths according to the UN with knowledge confined to specialists in particular
17UNITED STATES STUDIES CENTRE | TRADE AND INVESTMENT PROGRAM
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weapons systems. This meant there was no overall His declaration says that in the absence of government
management of risks to supply. It was critical of the intervention, US industry cannot reasonably be
strategic stockpile, saying many of its materials were expected to provide production capability for separating
not in a useable form, with the United States lacking light or heavy rare earths, or manufacturing rare earth
the commercial capability to process them.26 magnets.
The response to President Trump’s executive order, The act was devised in 1950 to ensure the military
a strategy to “ensure secure and reliable supplies of was adequately supplied during the Korean war and
critical minerals” published by the Department of the Cold War. It enables the Department of Defense
Commerce in June, highlighted the fact that the erosion to make loans or offer loan guarantees, with or without
of United States manufacturing capability is as much of interest.
an issue as the lack of a secure supply of raw materials. Generally, the amounts involved are not large —
“Increasing mining without increasing processing and congressional approval is required for advances of more
manufacturing capabilities simply moves the source of than US$50 million. Larger sums can be advanced
economic and national security risk down the supply with a presidential waiver and congressional approval
chain and creates dependence on foreign sources for for defence projects is rarely a problem. In practice
these capabilities,” it said.27 most loans and guarantees offered under the scheme
have been below the US$50 million threshold. The
The report included several concrete recommendations,
Department of Defense will not take overall project
such as improving the funding for the strategic
financing responsibility. The intent is that access to
stockpile, streamlining mining approvals, easing land
early stage funding may help companies in reaching
access requirements and improving collaboration
their investment decision. It is still assumed that
between the US Geological Survey and its peers in projects would have offtake agreements lined up and
allied countries, particularly Canada and Australia. would be essentially commercial in their nature.
It also highlighted the need for greater federal support The most prospective direct Australian response to US
for research and development in rare earths and defence needs is a plan by Lynas to establish a heavy
downstream products and for stimulating private rare earths separation plant in Texas, in joint venture
sector investment in production capacity. In both these with US chemicals business Blue Line Corporation. The
cases, however, it did not articulate strategies but cost and funding of the plant has not been disclosed,
rather suggested they should be developed. with Lynas suggesting it will be funded from internal
resources. It would likely qualify for assistance under
It said options to support the private sector included
the Defense Production Act. Lynas chief executive
investment tax credits, capital gains tax exemptions,
Amanda Lacase highlights that there is no significant
low interest loans and guarantees, workforce training capacity to separate heavy raw earths outside China.
support, trade assistance and policies for domestic Lynas has a very clear market positioning as a non-
sourcing and small business procurement. Chinese supplier with no major Chinese shareholding.
This makes it attractive to US rare earths users. Lacase
President Trump has taken a significant step to stimulate
cautions it can take many years to progress from
investment in rare earths processing by invoking
investment commitment to first production.
the Defense Production Act, which empowers the
Department of Defense to provide financial assistance In the United States, MP Materials’ profitability has
to ensure critical supplies are available. It also gives the been hit by the imposition of 30 per cent tariffs on its
government the power to order private companies to exports of concentrates to China in retaliation for US
meet the needs of defence-related contracts before tariffs. The company is working on a US$200 million
they satisfy their commercial demand. plan to reopen its mothballed separation plant next
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