Thursday, March 15, 2012

Rare earths elements- the next oil....

Rare earths elements- the next oil....
By Elliot Brennan

Former Chinese president Deng Xiaoping recognized the importance of rare earth elements (REEs) almost two decades ago. "The Middle East has oil and China has rare earth," he said in 1992. His foresight was impressive.

Today, REEs are used in most high-tech products predominantly in the form of heavy-duty batteries and magnets. They are pivotal in defense technology - lasers, radars and electromagnetic weaponry - as well as green technology. It is therefore not surprising that China's near monopoly of their production has industry and government worried.

Several governments have begun fast-tracking new policy to increase production. Backroom debates over whether to stockpile the strategic resource have been taking place for several years now, most notably by the US Department of Defense. These debates, prompted by recent Chinese export restrictions, have culminated in the US, European Union and Japan filing a joint case against China to the World Trade Organization - the first such cooperation by the three powers. Yet this official complaint is a latecomer to a dispute that has been playing out for several years in China's favor.

In rare abundance
The name, rare earth element, is a misnomer. The elements are far more abundant than many precious minerals. Yet their dispersion means they are rarely found in economically viable quantities. There are 17 REEs - 15 lanthanides, and scandium and yttrium. The 15 lanthanide elements occupy atomic numbers 57 to 71 on the periodic table. The similarity of their chemical properties, demonstrated by their close proximity on the table, makes them very difficult to separate. Their extraction is capital- and skill- intensive.

In 2011, the US Geological Survey (USGS) updated its global reserve-estimate data of rare earth elements as it narrowed its definition of recoverable minerals. The result saw reserve estimates in China rise from 36 megatons (Mt) to 55Mt - exactly half of the world's reserves. US estimates remain at 15Mt; the Commonwealth of Independent States (Russia and former Soviet republics) are reported to have reserves of 19Mt; while estimates of Australia's reserves declined from 5.4 to 1.6Mt.

Yet the untapped reserves of the resource mean little; it is the production that counts. And it is China that is a clear leader supplying 95% of world production.

Driving recent policy initiatives is the upsurge of global demand for REEs. According to the USGS, demand is increasing 10% annually. Demand is similarly rising in China - the country's consumption of the resource has quadrupled since 2000. The growing domestic demand has been cited as the reason for sharp declines in export quotas, cut by 37% in 2010 and 35% cut in the first half of 2011.

China's near monopoly on production, and its subsequent reductions in exports, have seen prices of REEs increase 10-fold on 2010 per kilo prices. Just as worrying has been China's predatory pricing, which has run other REE mines and companies out of business, or at least into the red.

The curbing of exports has similarly forced high-tech manufacturers to relocate to China to ensure adequate supply, thereby harming the growth of high-tech industry in many other countries such as Japan, South Korea and Europe. In doing so China appears to be creating a high-tech industry almost overnight.

A strategic resource
End uses for REEs are varied. Figures cited by the USGS noted that in the US in 2009 the distribution of rare earths for end use was largely for chemical catalysts (22%), petroleum refining catalysts (21%), automotive catalytic converters (14%) and approximately 40% was for battery alloys, ceramics and magnets (sectors which are growing 4% to 10% annually).

The extent to which REEs are used in defense technology is such that without their production modern warfare - fighter jets, drones, and most computer controlled equipment - would not be possible. A sovereign production monopoly of such a resource is therefore a serious concern for any nation. The next generation of warfare, in which the US government continues to invest significantly, is heavily dependent on REEs.

Electromagnetic weapons minimize human casualties and are therefore considered better weapons for military interventions and vessel defense. Such technology is emerging as the future of defense; as such, REEs will be crucial to this future. It is therefore not surprising that the US is scrambling to implement new policy to secure the resources.

It was this state of urgency to secure reserves that saw the US propose the 2011 RESTART (Rare Earths Supply-Chain Technology and Resources Transformation) Act. The measure would promote greater research and innovation within the REE sector. Also included in the Act is the proposal to start a national stockpile of REEs within the US Department of Defense to supply the defense and technology industry in the event of future shortages.

The US is not the only country boosting exploration and production. Economic assessments to determine the viability of mining have recently taken place in numerous locations across the US, Canada, Australia and Malawi amongst others. Sweden has also returned to the fray, beginning a significant exploration and production program.

In the past 12 months REE mines have been opened in the US and Australia, which may ease the dependence on Chinese resources. However, given the previous several years of uncertain supply, many factories have already relocated to China, leading many to believe that this move is too little, too late.

In May 2011, China expanded the definition of REEs to include iron alloys containing more than 10% of REEs. As a result they became subject to the same export quota. This expansion of the quota was to curb the export of the elements under different guises such as in alloys. The practice, according to sources, had become very common in order to avoid the quota.

In 2010, China halted shipments of REEs to Japan for two months following a diplomatic crisis. China's move scared the Japanese, whose industry is vitally dependent on REEs. In February 2011 a trade official announced that Japan would try to reduce its dependency on Chinese REEs by cutting consumption by 10,000 tons annually over the coming years. Almost half a billion US dollars would be paid in subsidies to support the initiative.

In July 2011, Japan reported the discovery of significant deposits of REEs in the mud of its sea bed. While the finding is important, it does not change the playing field in the short-term, given the difficulty of recovering the elements.

At the end of last year, Japan's Trade Minister Yukio Edano met his Chinese counterpart, Chen Deming. Edano was the first minister in the recently inaugurated Noda cabinet to meet Chinese leaders. On the top of Edano's agenda was a request to China to ensure a stable supply of REEs and address their price differences in the country and abroad. It has also been revealed that Japan has initiated REEs trade talks with Myanmar. In its attempts to diversify its supply chain, Japan plans to jointly, with Myanmar, develop REEs and other natural resources.

Towards a sustainable future
REEs have become an economic and diplomatic power for China to wield. Just as oil is used as a coercive instrument of foreign policy in other parts of the world, similarly China will try to use REEs to its advantage. Indeed, they have played their cards well, now it is time for other governments and industry around the world to try and catch up.

This in itself may prove a long process. While substitutes are available for most applications of REEs, they are usually less efficient and undesirable. In our modern-day race for more efficient high-tech devices and the greater government spending in high-tech weaponry, REEs look set to become "the new oil".

It will be increasingly important for governments to secure national reserves of rare earth elements to support local high-tech industries and prevent future conflicts over the resource.

Elliot Brennan is Editor at the Institute for Security and Development Policy (ISDP), Stockholm, Sweden.

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