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Monday 21 Aug 2017 | 03:51 | SYDNEY
Monday 21 Aug 2017 | 03:51 | SYDNEY

What\'s a REE, and why does it matter?



19 October 2010 08:30

A while ago, I gave a talk on the return of geo-economics. One factor I thought was contributing to this return was an increased international focus on resource security. My argument (elaborated here) was that resource scarcity issues lend themselves to zero-sum thinking, and hence to viewing economic or commercial exchanges from a more 'strategic' perspective.

In my talk, I used the example of so-called rare earth elements (REEs) to illustrate this point. Events over the past month have made it an even better example.

I'll discuss these developments in a later post. But first, some background. REEs comprise the seventeen elements from the periodic table beginning with lanthanum (element #57) up to lutetium (element #71), along with yttrium and scandium, which share similar properties. They serve as inputs into a variety of commercial applications, including cell phones, iPods and hard drives, as well as a series of green technologies including hybrid cars and wind turbines. REEs are also important inputs for a bunch of military applications, including precision-guided munitions, lasers, avionics and night-vision equipment.

REE production is extremely concentrated, geographically. According to the US Geological Survey, for example, last year China accounted for almost 97% of total production of rare earths. For some of these elements, China's share of production was even higher (99% or above). Famously, China's relative wealth of REEs once prompted Deng Xiaoping to declare that while the Middle East had oil, China had rare earths. 

So although deposits of REEs are geographically diverse, the ability to process these deposits into finished materials is virtually all located in China. The most important  producer is the state-controlled Baotou Rare Earth Company, located in Inner Mongolia. Much of the rest of Chinese production comes from small, sometimes unlicensed, mines in southern China.

The US used to be the key global producer of REEs, but a combination of environmental concerns and low-cost competition saw Chinese production almost completely displace US production over the course of the 1980s. For a while, few people took much notice of this shift. But starting around 2006, China began to tighten its policy on REEs exports. 

In particular, export quotas were cut for three consecutive years. Export taxes were also levied, and domestic production quotas squeezed. By last year, analysts were paying attention to the major implications of this 'China squeeze' for prices. Then, this year, China's Commerce Ministry, citing environmental concerns, announced that total exports would be capped at just under 30,300 metric tons, down 40% from last year. Prices of some REEs jumped six-fold.

Interpretations of China's actions have varied. Ministry officials have said that China aims to consolidate the industry and clean up what can be an environmentally-damaging process. Some observers view the export quotas as a tool of industrial policy: by making it harder for international companies to access REEs outside of China, the policy encouraged them to shift production to inside China and hence help the country move up the value chain. 

Others note that domestic Chinese consumption already accounted for about two-thirds of Chinese production. With some projections suggesting domestic demand will account for all of China's output within the next few years, these observers reckon the authorities were trying to ensure resource security at home. Still others, perhaps with that Deng Xiaoping quote in mind, think about the equivalent of a Chinese OPEC for REEs. Finally, there was the possibility that China could seek to use its control of the market for strategic ends.

This last theory suddenly became very topical last month, when international politics intervened. More on that in my next post.

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