China has much to gain from rare earths fight

March 14, 2012

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

A challenge before the World Trade Organization may put China on the defensive over rare earth minerals, used to make essential components in everything from iPads to military gyroscopes. But the case could drag on for years, and Beijing’s policy should play well at home in the meantime.

The U.S., Europe and Japan have a legitimate gripe with Beijing. The Middle Kingdom may be dependent on imports of iron ore and crude oil, but it accounts for 97 percent of the world’s rare earths’ production. Beijing’s 2010 move to block exports to Japan after a diplomatic spat showed it isn’t afraid to use its dominant position as a political and economic cudgel. China’s export controls are also distorting global prices. In February, rare earth spot prices were $104 per kilogram outside China, more than double the domestic price, according to Deutsche Bank.

China may back down in the end. But the country’s leaders may be in no rush to settle. Among other things, lower domestic prices amount to a backdoor subsidy for China’s electronics manufacturing sector, one of the country’s biggest employers.

Then there is the environment. Beijing says export restrictions are a necessary part of a broader move to clean up rare earths production. Extracting and processing rare earth ores is a nasty business that produces large amounts of toxic, often radioactive, waste. That side-effect could be ignored a decade ago, when China cemented its dominance of global rare earths production. Then China’s lax environmental standards were a competitive advantage, forcing mines in more demanding jurisdictions to close. Now, though, the pollution is a domestic political liability. Mining has become emblematic of the country’s environmental ills.

This is a good time for China to play its near-monopoly card. Eventually, some combination of WTO remedies, higher Chinese production costs and increased production elsewhere will erode its grip on the rare earths market. Indeed, high prices are already working. Molycorp recently resumed production of rare earths at the Mountain Pass mine in California’s Mojave Desert – formerly the world’s biggest – for the first time in a decade.

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