Rare earths and automation technology - part 4

The role of China with rare earths

Production of rare earths in China.

China is less the main problem rather the main competitor

The conflicting tensions regarding rare earths are reduced in general by the media to the thesis that China as a 95%-supplier is pulling the plug on rare earths with its export quotas and its restriction of production. So the media deliver the background music for the complaint against China in front of the WTO because of “unfair competition”, submitted by the USA, Japan and the EU in March 2012.1


What is the background in China for this development? What is China’s share of the tensions regarding rare earths?

At first the USA as world market leader in production of rare earths

From the 1950s up to the 1980s the USA were world-leading in the production of rare earths particularly with their deposit at the Mountain Pass in California.2 It covered the demand of the USA to 100% and supplied a third of the world-wide exports.3 In 2002, however, the USA closed this solely production plant „particularly as a result of low price competition by China“.4


In China substantial changes had taken pla

State capitalism in China after Mao Zedong as starting point for dominance over rare earths

1976 Mao Zedong the leader of China’s socialism died. Shortly after his death the political direction changed as Wikipedia put it: „After 1976 Deng Xiaoping became the successor of Mao leading to politics of reform and opening, a substantial break with Mao’s principles in China.”5

Monument for rare earths in China.
A monument to rare earths in Damao, China, which reads: "Home of rare earths welcomes you". Foto: Reuters/David Gray


Under the influence of Deng Xiaoping socialism was replaced by a kind of state-led capitalism, quite similar to the change in the Soviet Union under Khrushchev since the midst of the 1950s. The Chinese Internet-Publication „China Internet Information Center CIIC” calls this political change as „transfer of planned economy to market economy”.6 Since then „the companies are self-responsible for profits and losses. The prices of most goods and services are determined by the companies according to market conditions“.7


The politics after Mao Zedong directed China to enforced economic growth causing increased need of rare earths. The Chinese government took care in such a way that the production of rare earths could massively be increased by an annual rate of 40%.8


That rise exceeded the increasing own needs of rare earths while the surplus was exported world-wide at low prices. 2002 the USA threw the towel as the exploitation at such low prices was not profitable any longer. The mine at the Mountain Pass was closed down, as mentioned.


In the course of time the Chinese government added to the exportation of goods the exportation of capital, i.e. direct investments in rare earths deposits abroad. The Deutsche Rohstoffagentur DER stated 2009: „China aims to take part in all important RE projects abroad in order to control world-wide the supply of RE.“9


Pushing world-wide exports at low prices, increasing of the world market share to 90% and higher (at present 95% to 97%), exportation of capital in order to control further deposits abroad, such politics are aiming to a dominating position regarding the world market.


Such ambition to dominating positions we can notice in other countries with products such as oil, chemistry, pharmacy, steel, grain trade, automobile, computers and electronics, telecommunications etc. China now adds the rare earths to this listing becoming the main competitor for all companies and countries using rare earths.

China is aiming to a more stable basis for its dominating position in rare earths

Two years after the US had closed their rare earths deposit, China enacted export quotas for rare earths. These export quotas were reduced in small steps from 4% to 6% since 2006, 2009 by 12% and 2010 by 40%. Since 2010 the export quotas have been providing less than half the export volume in comparison to 2004.10


Background is the ambition of the Chinese government to stabilize the production of rare earths by two measures.


The first one is trying to consolidate the rare earths industry. This industry is currently still „highly fragmented“11 in China. There are many small producers, some of them operating without license, i.e. illegal. This „non official production“ consists of estimated 15% of the total rare earths production.12 The target is building up three market-dominating large enterprises, which are state-controlled with Baotou Steel Rare Earth Hi-Tech Co as core.


The second one is aiming on more environmental protection. Therefore strict regulations for environmental protection are to be mandatory for production of rare earths. Production licenses are to be combined with the regulations’ compliance.13


This restructuring is deliberately combined with a drop in production as Lin Donglu, the secretary of the Chinese Society for rare earths explains: “Rare earth output will definitely be reduced.”14 This reduction of production serves in turn as reason for the export quotas’ restrictions.


The shortage of supply of rare earths is connected with higher prices. The price explosions in 2011 were speculations since then prices have been easing, however, are still higher than before 2011 as outlined in thesis 5. Secretary General Lin Donglu indicates the Chinese interest in higher prices saying: „Prices of gold, oil and other commodities are all high. Why should the cost of rare earths not be high, too?“15


In fact, higher prices for rare earths are reasonable as far as they reflect the costs of environmental protection. However, from higher prices based on a dominating position in world market only the beneficiary of that position is profiting. As Baotou Steel Rare Earth Hi-Tech Co, China’s biggest producer of rare earths with a share of 40%,16 could quadruple its net profit from 2011 to 2010 on $552 million,17 one can review to what extent is being invested for environmental protection. The same criterion applies e.g. to BP, responsible for the major environment oil disaster in the gulf of Mexico two years ago and whose net profit added up to $23.9 billion in 2011, that are 2,000 million US Dollar per month.18


Finally higher prices of rare earths from China are split into higher export prices and lower domestic market prices. So the Chinese government is also trying to boost the further settlement of foreign manufacturing plants in China.19


Among all these different influencing factors the use and stabilization of its dominating world market position of rare earths remain the primary interest of Chinese policy.



Part 1: Rare earths: Extraction and structural problems

Part 2: Supply and demand until 2016

Part 3: Price problems with rare earths

Part 4: The role of China with rare earths

[1] Fight against China on rare earths. In: Financial Times, March 13, 2012
Levkowitz L., Beauchamp-Mustafaga, N.: China’s Rare Earths Industry and its Role in the International Market. In: U.S.-China Economic and Security Review Commission Staff Backgrounder, p. 2
[3] ibid.
[5] Wikipedia: Mao Zedong
Von der Planwirtschaft zur Marktwirtschaft. In: Informationen aus China über China, China Internet Information Center (CIIC) www.china.org.cn
[7] ibid.
Levkowitz, L. Beauchamp-Mustafaga, N.: p. 2
Liedtke, Maren, Elsner, Harald: Seltene Erden. In: Commodity Top News, Nr. 31, p. 5
DERA informiert: Welthandel bei Seltenen Erden eingeschränkt. In: Pressemitteilung vom March 14, 2012
Hook, Leslie: Rare earths: high prices boost Baotou. In: Financial Times, March 27, 2012
D.J. Kingsnorth, Meeting the Challenges of rare Earths Supply in the Next Decade, Presentation for The Hague Centre for Strategic Studies, December 1, 2010
Hook, Leslie: Chinese rare earth metals prices soar. In: Financial Times, May 26, 2011
[14] ibid.
cited according to Hook, Leslie: Chinese rare earth metals prices soar. In: Financial Times May 26, 2011
Hook, Leslie: Largest rare earths producer halts output. In: Financial Times Ocktober 18, 2011
Hook, Leslie: Rare earths: high prices boost Baotou. In: Financial Times March 27, 2012
BP sieht sich nach Milliardengewinn wieder in der Spur, 07.02.2012, www.news.de
Bradsher, Keith: China Tightens Grip on rare Minerals. In: The New York Times September1, 2009

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4 parts and 2 interviews