Jan 12, 2013

Asia - The Next Oil?: Rare Earth Metals

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Rare earth metals are quickly becoming the next important strategic resource. For many countries in Asia, the stakes are big.

Rare earth metals (REM) are increasingly becoming a critical strategic resource. The 17 elements can be found in most high-tech gadgets, from advanced military technology to mobile phones. China currently holds claim to over 90 percent of the world’s production. As global demand increases, Beijing’s export reductions in recent years have forced high-tech firms to relocate to China and forced other governments to pour money into their exploration and production. An emergent India is among those concerned about China’s control of rare earths. In the past 12 months, the geopolitics of rare earths has become evident. REMs are becoming a strategic resource over which the two emerging giants are competing in Asia. Indeed, one might say rare earths are fast becoming “the next oil.”

The name, rare earth metal, is a misnomer. The metals are, in fact, far more abundant than many precious minerals. Yet their dispersion means they are rarely found in economically viable quantities. The similarity of chemical properties of the 17 REMs, demonstrated by their close proximity on the periodic table, makes them very difficult to separate. Their extraction is capital- and skill- intensive. End uses for REMs are varied but recent figures cited by the U.S. Geological Survey noted that in the U.S. the end use was predominantly for battery alloys, ceramics and magnets, sectors that are continuing to grow to cater for high-tech industry. The extent to which REM’s are used in defense technology is such that without their production modern warfare—fighter jets, drones, and most computer-controlled equipment—would have to undertake a lengthy process of redevelopment. A sovereign monopoly of such a resource is therefore a serious concern for any nation.

Two decades ago, Deng Xiaoping, the former leader of the Communist Party of China, noted the importance of REMs, “The Middle East has oil and China has rare earth,” he said in 1992. His foresight was impressive. China holds half of the world’s deposits of REMs, 55 megatons (Mt), according to the U.S. Geological Survey. Not counting countries comprising the Commonwealth of Independent States (CIS), the U.S. holds the next largest national reserves with approximately 13Mt. India, on the other hand, has a mere 3.1Mt of estimated reserves. Continued cuts in China’s exports have led to a scramble for production, as other countries realize their reliance on China’s resources. Propelled by increasing demand and a need for self-sufficiency to provide for growing industry demands, India plans to triple its output by 2017.

In 2010, China halted shipments of REMs to Japan for two months following a diplomatic crisis, crippling high-tech manufacturing in the country. A trade official announced that Japan would try to reduce its dependency on Chinese REMs by cutting consumption by 10,000 tons annually over the coming years, noting that almost half a billion U.S. dollars would be paid in subsidies to support the initiative. Tokyo, the largest REM importer in the world, has also moved to diversify its REM suppliers, inking deals with Lynas Corp from Australia and Molycorp in the U.S, among others. Most recently, in November 2012, India and Japan signed a Memorandum of Understanding in which Japan, the world’s largest REMs importer, pledged to purchase as much as 20 percent of its REM imports from India.

Tensions between China and India are nothing new. The two BRICS countries remain deadlocked on issues such as the border dispute over Arunachal Pradesh and Aksai Chin, Chinese naval activity in the Indian Ocean and Sino-Pakistani relations. Economically, the two emerging giants are also stamping their influence on Asia, often stepping on each other’s toes in a delicate half-wrestle, half-waltz—a race for influence in which China is often more proactive.

Asian countries, many of which are increasing military spending, have bound together in an effort to stave off dependence on China’s REMs.  The most unlikely of these alliances has been on the Korean Peninsula. North and South Korea met in November 2011 to discuss joint exploitation of Pyongyang’s rare earths, which some estimates put at six trillion dollars. Yet investment in heavy industry in North Korea has been less than attractive for even Pyongyang’s closest allies, as demonstrated by the failed venture of Chinese firm Haicheng Xiyang Group. Meanwhile, Japan has also engaged in talks to jointly develop Myanmar’s REM deposits.

In recent years, South Korea and Japan have collaborated to stockpile and share energy resources to ensure the security of energy imports. Such resource sharing agreements may very well be applied for rare earth minerals in the future. In 2011 Rep. Mike Coffman (R-CO) introduced the RESTART (Rare Earths Supply Chain Technology and Resources Transformation) Act into the U.S. House of Representations. The Act, which wasn’t passed during the just concluded session of Congress, included a provision that called for creating a national stockpile organized under the U.S. Department of Defense, a proposal which has been floated a number of times over the past few years. After years of foreign reports, in July 2012 the state-owned China Securities Journal said that China had begun stockpiling REMs, without specifying when the initiative began.

India, however, isn’t in a position to stockpile the resources. Instead it has begun to boost production and exploration to try and meet domestic demand. In Orissa, a new 10,000 ton REM processing plant is expected to be operational by early next year. The U.S. $25 million plant is expected to process 4 percent of global production of Monazite. Much of this will be used to meet domestic demand.

India and China have both begun offshore exploration for REMs. Production from deep-sea mining is still years away, some estimates say 2030-2040, if it is viable at all. Many experts liken the idea to trying to mine a moving asteroid. Despite the inherent and costly problems, China paved the way for such exploration and won exploration rights from the International Seabed Authority to a 10,000 sq kilometer block in the Southwest Indian Ocean. India followed suit. New Delhi is spending U.S. $135 million to buy a new exploration vessel, hoping to complement its small onshore resources with offshore mining. A cross-disciplinary team, including space and nuclear energy engineers, will develop India’s offshore mining capacity. According to India’s Minister for Earth Sciences, Ashwani Kumar, the program will address the country’s “critical and strategic needs.” Kumar was quoted by local media as saying that, "Countries like China have taken to deep-sea mining with a strategic purpose." India, for its own strategic purposes is forced to do the same.

While prices of REMs have dropped since their earlier peak, a bullish outlook remains. KPMG believes that 75 percent of companies will close in the next 24 months due to current low prices. If such a major collapse of the industry in fact occurs, the industry will consolidate into the hands of a few. Government-owned Indian Rare Earths Ltd will no doubt be propped up by New Delhi. Similarly, China’s new fund to “restructure” its rare earth industry, as announced in a November press release, will likely centralize and consolidate the industry making it smaller and more manageable for Beijing.

Despite countries such as the U.S. and Australia pushing investments forward in REM production, their viability as profit-making enterprises is dubious given the high costs of labor and the difficulties in meeting environmentally-friendly regulations. Jack Lifton, founder of Technology Metals Research, told Reuters in 2011 that he believes only 4 percent of ventures will prove profitable. With estimates like this, India’s expensive entry into production and exploration of REMs, when prices have bottomed out, demonstrates the strategic importance of the resource for New Delhi. Low labor cost countries with REMs, such as Myanmar, Mongolia and possibly North Korea, will be courted by developed countries, and, of course, India. Regardless of increased production from countries other than China, Beijing will remain the largest producer and likely the cheapest.

The fact remains that the commercial viability and spillover politico-environmental costs make production of REMs too expensive in developed countries. China has more leeway in such issues and the lion’s share of current production. Prices will remain largely controlled by Beijing’s propensity to export. India has similarly cheap labor costs and, while actual reserves are low, boosting production is more viable there than in the U.S. or Australia. New Delhi wants to balance China’s influence in the region in order to expand its own. Japan and South Korea are among the countries more than willing to begin importing Indian REMs, while India’s growing domestic demand leaves little choice but to secure more domestic reserves. The geopolitical battle for REMs is well underway between China and India, and across the world. Indeed, rare earths look likely to become the next crucial strategic resource, the next oil.

Elliot Brennan

Elliot Brennan is editor and project coordinator of research in resource security at the Institute for Security and Development Policy, Stockholm, Sweden.

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