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Busting The Lithium Bubble Myth

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How China Threw Its Rare Earths Monopoly Away

How China Threw Its Rare Earths Monopoly Away

Rare earth elements (REEs) are a group of seventeen elements with exotic names like neodymium and yttrium that are key ingredients in many high-tech products, many important for national defense. Imagine the consternation of Western officials when they woke up one morning in September 2010 to learn that China held a near-monopoly in the production of these vital materials. In retaliation for the collision of a Chinese fishing boat with a Japanese Coast Guard vessel near a group of disputed islands in the East China Sea, China threatened an embargo. Prices of REEs soared.

How did China become the world’s leading producer of REEs? Did the 97 percent market share it held in 2010 represent a true natural monopoly? At the time, I wrote that its hold on the market was more fragile than it appeared. The erosion of China’s dominance of REEs holds important lessons for all supposed natural monopolies.

The first clue should have been that rare elements are not really rare. All seventeen rare earth elements are more abundant in the earth’s crust than gold, and some of them are as abundant as lead. The thing that makes them hard to mine is the fact that they do not occur in highly concentrated deposits like gold and lead. Even the best REE ores have very low concentrations. On the other hand, such ores exist widely throughout the world. Until the 1960s, India, Brazil, and South Africa were the leading producers. From the 1960s to the 1990s, the Mountain Pass Mine in California was the biggest source. China began to dominate REE production only in the late 1990s. Related: Some Good News From This War-Torn Nation’s Oil Industry

Ownership of natural resources turned out to be only one factor that led to China’s big share of the REE market. Yes, it had good ore deposits, but not uniquely good. It also had low labor costs, which helped China’s REE mines just as they help its toy factories. A further consideration may have been most important of all: Mining of REEs can produce very nasty waste products. For years, Chinese authorities were willing to turn a blind eye to environmental devastation caused by primitive, often illegal, but low-cost small-scale mines. Meanwhile, environmental problems were a major factor leading to the shutdown of the Mountain Pass Mine. Following a big spill of radioactive waste, U.S. authorities demanded new environmental safeguards. Already facing low-cost Chinese competition, the mine closed rather than undertake the needed investments.

Still, even if China never had a true natural monopoly, it did have considerable short-run market power. In the short run, supply of REEs is much less elastic than in the long run. Any short run increase in supply can only come from mines that are already open or, to a very limited extent, come from “urban mining”—that is, recycling of REEs from scrapped computers and the like. Related: 3 Ways Oil Companies Can Survive Low Prices

Short-run demand is also inelastic. Once high-tech production lines are set up to produce hybrid cars or computer hard drives using REE-dependent technologies, it is not possible just to substitute nickel for the neodymium in a magnet and expect it still to do its job.

In the long run, though, elasticity of both supply and demand turned out to be much higher, as Eugene Gholz of the University of Texas notes in a recent report from the Council on Foreign Relations. After the 2010 run-up in REE prices, the U.S. mining company Molycorp quickly obtained a permit to reopen California’s Mountain Pass Mine, using newer, cleaner, and lower-cost technology. By 2013, it was filling market orders. Australia’s Lynas Corporation began developing an operation in Malaysia at about the same time. Other ventures in Kazakstan, South Africa, and Canada soon followed. Related: Who Is The Biggest Player In Energy?

On the demand side, REEs turned out to be not quite as irreplaceable in high-tech products as it seemed at first. At least in many cases, producers use REE-dependent technologies not because they are the only way to do something but because they are a good way to do it given reasonable prices and reliable availability of the raw materials. Japanese, Korean, and U.S. companies soon began to develop alternative technologies like magnets that used only a fraction of the amount of the REE dysprosium as they had used before.

The bottom line: China still has a large market share—around 70 percent, Gholz estimates—but its apparent natural monopoly proved illusory. Its attempts to turn REEs into an economic weapon by exploiting low short-run elasticities only accelerated the development of alternative sources and new technologies.

By Ed Dolan

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