Strategic Metal Report

The US, EU and Japan Take China's REE Export Policies to the WTO

In the first WTO case to be filed jointly by the US, EU and Japan, the three industrial powers will argue that China's REE export restrictions are not in accordance with the coutries obligations under its accession to the WTO. 

Following the WTO Dispute Settlement Panel's decision last year regarding Chinese restrictions on numerous other raw materials, including  bauxite, fluorspar, silicon carbide, coke and zinc, which found Chinese export and licensing systems not in compliance with their WTO requirements, many were expecting a complaint regarding REEs to follow.

For more on the WTO and China's raw material export regulations, click here.

For more coverage on the REE WTO complaint:

• BBC News: US, EU and Japan challenge China on rare earths at WTO
• Reuters.com: U.S., EU, Japan take on China at WTO over rare earths
• Bloomberg Editorial: Obama’s Rare-Earths Case With WTO Won’t Ensure Security

Looking Back: The Evolution of the Rare Earth Industry (2009-2011)

The precipitous decline of rare earth prices since September seems to, at least temporarily, have put a damper on the hype that had been building over the past few years. The relative calm provides a good opportunity to reflect on the recent evolution of the rare earth element (REE) industry and, as I see it, some prevailing misconceptions that have been driving the industry since 2009.

Background: Enter Investors and the Media

REE's entrance into the investment community's spotlight brought with it previously unthinkable levels of media coverage. What was once a colloquial industry quickly became the topic for resource investors, as the drastic cuts to China's rare earth export quotas caught the attention of not only business reports, but also political analysts and technology reports. Even National Geographic couldn't turn away from the story of REEs, which formed a 'perfect storm' of high trending news topics: geopolitical confrontation, China, national defense and green technologies, energy dependency and, of course, investment opportunities.

Chart c/o Metal-Pages.com

Unfortunately, the sudden influx of interest in REEs created a void of persons with expertise in the elements themselves. Global production having, in effect, completely moved to China during the three decades prior, few in the West were knowledgeable of both the production (supply) and end-uses (demand) to effectively comment on and analyze the developments. The media was left wonting for information and, so, turned to any individuals and companies with involvement in the industry; traders, investors and exploration and development companies.

The major problem with this was that the vast majority of players within these groups had vested interests in promoting the demand potential for REEs, as well as the supply side risks of Chinese REEs. There was - and continues to be - little incentive to dispel sensational reports that China will cut off all supply of REEs to the West or that REEs are the battlefield for a geopolitical war over green technologies.  

The herd of investors and commentators has grown daily over the past two years, while the few balanced analyses produced during this time have been lost amongst more alluring headlines calling for REE stockpiles, national REE 'strategies', subsidies for domestic production and REE self-sufficiency; common nationalistic responses that have been seen in other resource industries suffering from supply shocks, but which have been proven more or less ineffective in actually impacting long-term supply constraints.

The WTO and China's Raw Material Export Restrictions: What's Next?

As those following the rare earth element saga are now aware, the WTO Dispute Settlement Panel (DSP) made recommendations on July 7 regarding US and EU complaints about China's use of export restrictions on a number of raw materials. Although the list of raw materials submitted by the complainant countries did not include any REEs, many have equated the DSP's conclusions with a judgment on China's REE export restrictions.

The DSP found China's application of export duties and quotas on various raw materials inconsistent with both the country's obligations under its accession to the WTO as well as with Article XI of the General Agreement on Tariffs and Trade (GATT). However, details of the DSP decision highlight the fact that export restrictions are not entirely precluded by the WTO, only that China's methods of application were not in accordance with the country's WTO obligations. The DSP's recommendations - along with China's response - may be the best indicator of what export policies are to come, not only for REEs, but also for many other strategic and minor metals, including antimony, indium, tungsten and germanium.

Theories on Rare Earth Diplomacy

I was surprised to see rare earth splashed across the front page of the China Daily when I picked up the paper this morning, with the headline claiming that “Rare earths ‘will not be (a) bargaining instrument’”. A reference to statements made yesterday by Zhu Hongren, spokesman for the Ministry of Industry and Information Technology. Most readers of the daily may have been confused about what rare earths are and why they were Friday’s headline story, while those in the know were left scratching their heads, trying to figure out the Rubik’s cube of recent statements by Chinese officials regarding rare earth.

There have been countless attempts by media to try to make sense of China’s export embargo against Japan and consequent statements by various government officials and ‘unnamed sources’, as well as the current availability of export quotas. Well, now it’s my turn:

Coverage from Minor Metals & Rare Earths 2010 - Xiamen, China [Part I: Rare Earths]

Also posted on RareMetalBlog.com

Having just arrived back in Beijing to find that winter has arrived early, I should thank Metal Pages Ltd. for holding their annual Minor Metals and Rare Earths conference in Xiamen this year. Located on the Taiwan Straight, Xiamen is known for its temperate climate as well as for being the heart of China’s tungsten industry. But most of the attention at this year’s conference was – not surprisingly – focused on rare earths. Held between Oct. 18th and 21st, the conference included rare earth producers, end-users, traders and representatives from relevant government departments.

Measuring Chinese Rare Earth Export Restrictions

China’s rare earth element export restrictions are not limited to the oft-cited export quotas, but also include various export taxes. The OECD has recently published reports on global export restrictions of strategic materials and their impact on trade and global supply (link below). The following graph uses data derived from the most recent report in order to measure increasing export restrictions as well as global dependence on Chinese rare earth production.

Environmental Defense of Rare Earth Export Quotas May Invite WTO Action

Also published on RareMetalBlog.com

The China-Japan economic dialogue concluded last weekend in Beijing with Japan raising concerns over the impact of China's rare earth export restrictions on the global economy. As noted in the London REE report on Tuesday, the complaints were dismissed by China’s Minister of Commerce Chen Daming, who reiterated that decisions to limit production and export of rare earths are based on concerns about environmental protection and not contradictory to WTO rules. It is looking increasingly likely that we will soon find out whether the WTO agrees with China’s claims.

In my previous post, I discussed the relationship between the raw materials case currently under review by a WTO dispute settlement panel and the current rare earth situation. In the raw materials case before the WTO, China has also defended its export controls by claiming that they are necessary to protect against environmental degradation. As China further entrenches its defense of rare earth export controls behind environmental principles, the forthcoming decision on China’s raw materials export controls becomes ever more relevant.

Most outside of China believe that the environmental protection argument holds little credibility in the defense of export controls, which only serve to create distinct price advantages for domestic end-users and manufacturers. However, production controls, which limit the annual amount of rare earth production and are also currently applied by the Chinese government, do not create the same unequal economic conditions as export controls and have been recognized in other industries as acceptable under the WTO. Assuming the dispute settlement panel does find China’s export controls to not be in accord with WTO rules, it is very likely that China will shift towards greater reliance on production controls. Such a change would satisfy the WTO by creating a more level playing field for domestic and international purchasers and allow China to escape financial penalties or the imposition of countervailing duties. It would also allow China to maintain control over the primary supply and global prices for many raw materials, including rare earths. However, without WTO involvement and the threat of financial penalties against Chinese industries, international manufacturers will have to continue to compete against manufacturers with subsidized raw material and rare earth resources.  

China, Resource Protectionism & the WTO

Also published on RareMetalBlog.com

Rare earth market watchers will want to pay attention to a report from the World Trade Organization on China’s export restrictions due out later this year. A WTO dispute settlement panel is scheduled to report its findings on whether China’s raw material export restrictions are in accordance with WTO regulations by the end of October. Although the case against Chinese export controls currently under review by the WTO does not make direct reference to China’s rare earth export restrictions, the implications are significant.