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Trade war

History offers lessons in escaping China's rare-earth dominance

Industry response to earlier export cutoff can show policymakers how to react

China accounts for around 70% to 80% of the world's production of rare-earth ores.   © Reuters

TOKYO -- Chinese exports of rare-earth metals are once again a subject of international scrutiny, nearly ten years after the country last restricted shipments. In its report on securing access to the chemical elements, the U.S. Department of Commerce unveiled a policy aimed at increasing domestic production of these resources, some of which are used in sophisticated products, such as high-performance magnets.

The move comes as China has started making noises about restricting rare-earth exports amid escalating trade friction with the U.S. China accounts for much of the world's output of these metals. In thinking of ways to ease the impact of any Chinese moves to throttle exports, it is useful to look at the steps Japan took after it suffered its own supply shock in 2010.

There are 17 rare-earth elements, including neodymium and dysprosium, which are used to make lightweight, high-performance magnets. Rare earths are used in a wide range of products, including electric motors, hard disk drives, drones and home appliances.

Japan and China accounted for about 90% of total demand for rare earths, according to a September 2014 report by the Japan Oil, Gas and Metals National Corp., or Jogmec. The latest statistics show the U.S. and Europe are not big contributors to global demand, which totals about 180,000 tons annually.

However, rare earths are essential inputs for missile guidance systems, lasers and communications systems. Advanced fighter jets cannot be built without them. The U.S. government is thus rightly worried about potential Chinese restrictions on shipments of rare earths.

Neodymium magnets are used in a wide range of products, including motors for electric cars. (Photo courtesy of Hitachi Metals)

It was not always so. The U.S., with its Mountain Pass mine, was once the world's largest rare earths producer, along with Australia. Then, in the 1990s, China expanded exports. It designated the metals as strategic resources and stepped up production to build its foreign exchange reserves. In the face of increasing Chinese output, U.S. and Australian rare-earth mines shut down. This left China with 70% to 80% of global production of rare-earth ores.

Since 2006, China has shifted toward ensuring supplies for its domestic industry, controlling exports through tariffs and quotas. And its position as the world's main supplier gave it political leverage. After an incident in which a Chinese fishing boat collided with a Japan Coast Guard patrol ship near the Senkaku Islands, which China claims and calls Diaoyu, China virtually halted exports of rare earths to Japan.

The abrupt supply disruption came to be known in Japan as the "rare-earth shock." Prices soared and stayed high until the summer 2011, reaching several dozen times their previous level. This dealt a serious blow to Japan, the world's largest consumer.

In 2012, Japan, the U.S. and the European Union filed a complaint with the World Trade Organization over China's export controls. After a WTO panel found in 2014 that the restrictions and export taxes violated WTO agreements, Beijing scrapped them.

After China's shipments returned to normal, prices plunged. As a result, many Japanese companies suffered losses on inventories, which they had built up to fend off potential supply disruptions, and on concessions they purchased in resource development projects.

Even absent China's erratic behavior, the market for rare earths is prone to wild fluctuations due to its small size. New technologies also have the potential to wipe out demand.

Further complicating matters is a recent increase in speculation by Chinese investors. The price of neodymium, which fell to less than $40 per kilogram due to speculative selling, jumped to $45-$50 after Chinese President Xi Jinping called rare earths a strategic resource. The comments, which Xi made during a recent visit to the southeastern city of Ganzhou, a major rare-earth production center, were apparently aimed at pressuring the U.S.

It is unlikely that China will reintroduce the export restrictions previously ruled illegal by the WTO, but it could still limit supplies, citing a need to manage the market. Although the total volume of rare earths demanded by industry is small, any sharp rise in prices would be a blow. It is therefore important to take steps to diversify sources of supply, reduce consumption and develop recycling technology.

In the wake of the rare-earth shock, Hitachi Metals, a big manufacturer of neodymium magnets, began working harder to reduce waste in the fabrication of magnets and to cut its consumption of dysprosium. That effort succeeded in halving, on average, the amount of dysprosium -- an additive used to improve magnet performance at high temperatures -- in its products, according to a company representative.

Another factor that helps reduce consumption is the shrinking size of electric motors. Smaller motors need less neodymium. Although Japan makes more electric and hybrid vehicles now than it did a decade ago, demand for the metal, including alloys, fell by about 30% from 2008 levels to 4,900 tons in 2018, according to the Japan Society of Newer Metals.

Finding suppliers other than China is also essential. In addition to increasing imports from Australia, Japanese manufacturers in Vietnam have increased recycling of rare earths from waste. Vietnam became Japan's largest supplier of rare earths in 2017, with shipments exceeding 3,800 tons, compared with 3,735 tons from China.

A Toyota Tsusho subsidiary in India set up to curb the company's heavy reliance on China started full-scale production of neodymium and three other rare earths in 2016. "Apart from direct imports from India, we import a large volume of rare earths processed in third countries," said Masaharu Katayama, chief operating officer for metal resources SBU.

China's huge production capacity means it will continue to play an outsized role in the market for rare earths. But developing technology to reduce consumption and diversifying sources of supply can deter China from restricting exports.

There's also a need to learn from the previous supply shock to ease the risk of sudden price fluctuations hurting specific companies. Jogmec has stopped disclosing its rare earths stockpiles, and the government needs to maintain stocks to ease the burden on private businesses. Sharing information about reserves with counterparts in the U.S. and Europe is also vital.

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