Rare earths – Cause of next world war or end of high-tech civilisation?

Monday, 27 June 2011 00:14 -     - {{hitsCtrl.values.hits}}

Modern civilisation is categorised as a high-tech civilisation built – and increasingly dependent – on electronic devices of every description. These devices are found to be in use everywhere, easing the life of mankind and bringing them the comfort of life.

From a simple remote controller to a complicated space shuttle, mankind uses electronic devices practically 24 hours a day today. Over the years, the prices of these electronic devices have declined sharply, making them accessible to even the low income groups in poor countries.

One good example is the mobile phone, which has helped people to get and remain connected with each other irrespective of income levels. This is in fact one area where the true inclusive development, delivering the fruits of high-tech civilisation to everybody, has taken place in modern societies without the conscious efforts of governments or concerned policymakers.

But, that is not going to be so any more. One essential raw material used in manufacturing electronic devices is going to be scarce in the market, not because of the dictates of nature, but because of a strategic, but mostly myopic, market intervention by a single producing country which holds monopoly power over this raw material at present.

That country is China and the essential raw material is what is commonly known as ‘rare earth minerals’ or ‘rare earth elements’ or simply ‘rare earths’.

China’s rare earth shock

China, which supplies about 97 per cent of the world’s requirement of rare earths, started to impose a production cut on itself and a reduction in export quota by 72 per cent from around October 2010.

Since then due to market shortages, their prices started to surge in the world markets. Though China says that its objective is to conserve this valuable raw material, critics charge that China is using the production restrictions as a political weapon against Japan, US and the European Union.

The last announcement made in March 2011 which coincided with a fishing boat dispute with Japan probably would have contributed to the critics’ charge. Strangely, though the two issues would have been independent of each other, within days of the announcement of a production cut, Japan released the captured fishing boat together with its crew, confirming the charge.

Last week, after a fresh announcement by Chinese authorities of a further production cut and a further reduction of the export quota by 35 per cent, the prices of all rare earths more than doubled, and in some cases, nearly tripled in the world markets.

Had there been a similar price increase in crude oil, the world nations would have panicked to the point of shaking the very foundation of the global economy. Yet, no such public reaction has taken place in this case. There could be two reasons for this observed public apathy. One reason is the ignorance of the public. The other reason is the long time lag in these price increases getting reflected in retail prices of electronic devices.

Though the public has been silent over the manmade rare earths crisis, it has caused ripples of panic among the electronic device manufacturing countries throughout the globe.

What are rare earths?

Rare earths are 17 different types of minerals or elements found in the ordinary earth and processed by using sophisticated processing systems. They are called ‘rare’ not because they are rare in quantitative terms, but because of the difficulty in finding thick concentrations of commercially viable rare earths deposits and the intricacy of the technical processes to be used for refining the same.

Environmental journalist Tim Folger writing to the June 2011 issue of National Geographic under the title ‘The Secret Ingredient of Everything’ does not exaggerate when he says that ‘even a handful of dirt from your backyard would probably contain a smidgen (of rare earths), maybe a few parts per million’. According to him, even the rarest of the 17 rare earths is nearly 200 times more abundant than gold.   

According to the cyberspace encyclopaedia, Wikipedia, rare earth minerals are found in the Periodic Table, ‘a tabular display organising the 118 known chemical elements by selected properties of their atomic structure’.

A period does not refer to any period in the calendar, but a horizontal row in the table which presents chemical elements by their atomic numbers. Hence, rare earths are minerals with atomic properties that could be used in many industrial applications.

Magic of the 17 rare earth minerals

The names of the 17 types of rare earth minerals are difficult to pronounce and difficult to spell because of the tongue-twisting chemical names given to them.

Tim Folger in the above mentioned article in National Geographic has identified the pervasive applications of rare earths in electronic devices used in five different major areas of modern life: military, medical, energy, consumer products and transportation.

Some rare earths like neodymium and terbium are used in all the five applications. Five others, namely, dysprosium, lanthanum, samarium, yttrium and praseodymium, are used in four applications, medical, energy, transportation and consumer products being the most common ones.

All others, namely, scandium, cerium, promethium, europium, gadolinium, holmium, erbium, thulium ytterbium and lutetium, are used in one to three major applications of modern life. Hence, no one today, including those who read this newspaper printed by laser printers, can claim that he or she is not using rare earths though many may be unaware of the fact.

These chemical names and economic terms may still be puzzling to ordinary laymen, but they are everywhere when it comes to electronic devices. The list of such electronic devices is practically unending: Compact Fluorescent Lamps or CFLs, hybrid cars, smart phones like Blackberries, iPhones and iPods, plasma televisions, navigation systems, lasers, light emitting diodes or LEDs, sophisticated medical equipment like Magnetic Resonance Imaging or MRI machines and ultrasound scanning machines, laptops, iPads and many more.

In the energy sector, they are used in wind and solar turbines and in the military sector in the air defence missiles and night vision goggles. Since the rare earth magnets are more powerful, smaller in size and lighter in weight than the conventional magnets, they are being increasingly used in motors that have to amplify magnetic power but be shrunk into a smaller space.

Global rare earths supply

Rare earths were identified as oxidised minerals in the late 18th century, but their use in industry was started in mid to late 20th century when the world was hit by the modern high tech revolution. In early 1980s, USA which was the major user of rare earths managed to produce about 60 per cent of its annual requirements. The balance was produced by China, Australia and France in that order.

But by mid 1980s, massive deposits of rare earths were found in China’s Inner Mongolia region and in the Southern regions. At that time, China did not have technology to process them and therefore could not produce rare earths to meet the world market demand. However, with US technology, China stepped up the production of rare earths, about two thirds by legal means and about a one third by illegal mining.

The oversupply of rare earths in this manner by China sent the global prices down. The result was both the US and Australian mines producing rare earths becoming unprofitable due to low market prices and high costs of production. By early 2000s, the US mines were closed because the only mine there operated by Molycorp, Inc since 1950, could not compete pricewise with cheaper Chinese products.

Thus, without any formidable competitor, China emerged as the largest supplier of rare earths, accounting for about 97 per cent of the world supply, to the high tech industry in the US, Japan and the EU.

The world as well as the high-tech industry benefited from China’s super production of rare earths. The prices of almost all high tech products came down in the market, benefiting the consumers.

At the same time, the countries which had concentrated on high tech industries, including China, saw a rapid economic growth unparalleled in economic history. The sideline beneficiaries were Singapore, Malaysia and India, which also had moved into high-tech industries.

So, all was well and comforting up to that point. But unknown to the world nations, a high-tech bubble was building in the world’s major economies. This bubble burst in the US, EU and Japan by late the 1990s, driving the major global economies into an unprecedented economic recession.

China continued to fly high on the bubble due to its low cost labour, the availability of raw materials at its doorstep and the foreign technology it could attract through increased foreign direct investments. But it appears that China is on a mission to self-prick its high-tech bubble now.

The price surge

How does China self-prick its own bubble? By allowing the prices to surge in the world markets through production and export cuts.

After the market intervention by China, all the prices of rare earth minerals started to rise in the market. According to web site www.upi.com (available at: http://www.upi.com/Business_News/Energy-Resources/2011/06/23/Rare-earth-minerals-prices-skyrocket/UPI-76601308849756/), the prices of europium oxide used in the production of CFLs, plasma TVs and smart phones have nearly tripled from $ 1,260 a kilo three weeks ago to $ 3,400 by mid June, 2011. Similarly, dysprosium and neodymium used in computer hard drives and wind turbines have increased in prices from $ 720 a kilo to $ 1,470.

Australia has been a side beneficiary of the current price surges because the prices of the rare earths produced by its Mt Weld Project have increased from $ 93 a kilo to $ 204 recently. So there has been a general increase in the prices of all types of rare earths beginning from early 2011.

This process is continuing because in addition to the industry demand, China is stockpiling rare earths, equivalent to its annual production of 200,000 tonnes according to some experts, to meet any future contingencies of its own industries. Thus, China may assure an uninterrupted supply through stockpiling at its own door step, but that would be at a huge cost of both high acquiring prices and maintaining uneconomic stocks.

Therefore, China’s industry too may experience the cost increases as any other high-tech producer in the world and face a shrunk demand curve for its output in the future. This does not augur well for its planned economic advancement and creating wealth and prosperity for its citizens.

The law of unintended consequences

When the price of an essential raw material increases, the economic reaction to it takes a set pattern. The world underwent a similar experience when the crude oil prices were raised by the Organisation for Petroleum Exporting Countries or OPEC in 1973. It appears that a repeat of 1973 is going to take place in 2011 in the case of another essential raw material, in this case, rare earths.

The first reaction to a price increase is the economising of the use of the product by consumers. In this case, the manufacturers of high-tech products will curtail the use of rare earths in their manufacturing processes, thereby reducing the global demand for rare earths.

Subsequently, when the retail prices of these products go up in the market, the consumers of these products hit hard on the manufacturers by curtailing their consumption. Accordingly, the industry demand curve for rare earths will shrink, reducing the profit opportunities of rare earths producers.

The second reaction is by the other countries which have rare earth deposits and have not been into the production due to the low prices. Of the known global rare earth deposits, China has only one third and the balance is spread across USA, Canada, Australia, France and Russia.

With high prices in the market, these countries will find it profitable to mine rare earths and since all these countries are technologically-advanced countries, they would be able to refine rare earths at lower costs than China. Thus, the world supply of rare earths will increase, denting the monopoly power which China is maintaining at present.

Already, the previously closed down US mine by Molycorp, Inc has started mining and Australia’s Mt. Weld is going in a large way into rare earths mining. On top of this, the US Congress is under pressure to relax mining regulations relating to rare earths mining and processing because it has been a widely held perception in the US that the undue dependence on China would be a risk to its military industry.

The third reaction is discovering new rare earth deposits in other countries. The high market price is an incentive for the other countries to conduct the costly geological surveys involved.

If Inner Mongolia and Russia have rare earth deposits, there is no reason why Mongolia proper does not have such deposits. Up to now, no attempt was made to discover them because of the low prices. But with China’s allowing the prices to rise in the market, these countries will have incentives to discover new deposits.

The fourth reaction is the recycling of the used rare earths. This was not economical with low market prices of rare earths in the past. But, now with higher prices and quantity limitations, research on recycling would be stepped up.

It has been reported that Japan’s Osaka Prefecture University has perfected an economical method for extracting used rare earths from discarded high tech products and converting the same into a usable raw material. In the future, universities in USA, Canada and Australia could be expected to go into this field as a top priority of their research programmes.

Thus, imposing production and export cuts and allowing the prices to rise in the market are not sound economic policies. China will not be able to stop the illegal mining which already takes place on a massive scale there. As OPEC learned its bitter lesson of losing monopoly power in crude oil production within a decade of raising the crude oil prices in 1973, China too will find that it has self-hurt by pricking its own high-tech bubble.

A third World War?

Japan went for World War II in search of raw materials for its industries. Similarly, some have predicted that China’s unilateral move to impose production and export cuts will drive raw material hungry big nations to go into war with China.

The recent US-Viet Nam joint military exercises in the South China Sea and the US augmenting its military forces in South Korea have been interpreted by some as its way of exerting pressure on China. Many feel that the Philippines’ renaming of the South China Sea as the West Philippines Sea has been done by that country with the blessings of its long-term ally, the US. So, to many, it appears that China is being surrounded by hostile forces.

But, this will not happen due to two reasons. The first one is economic and the second one is military. The economic reason is that China is not the only country which has rare earths deposits. It has only a third of the global known deposits. The world can increase physical production of rare earths by developing deposits in other countries. The military reason is that China has the atomic bomb and its neighbours, especially, Japan, South Korea and Taiwan, will not approve of a confrontation with such a military giant.

Hence, a third world war appears to be improbable.

End of high-tech civilisation? Definitely not

The world’s high-tech industry has been adversely affected by China’s production and export cuts of rare earths. But, in this case, China is hurting itself more than it hurts others.

It will not only lose its monopoly power over rare earths but also impose an effective limit on the growth of its high-tech industries. The market mechanism will take care of this manmade scarcity of rare earths by promoting alternative sources, economical use and recycling and in the long run, developing completely new alternatives.

But in the short run, there could be a temporary slowdown in the growth of the world’s high-tech industries.

(W.A. Wijewardena can be reached at waw1949@gmail.com )

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