China's New Export System Colours 2012 Rare Earths Outlook
China last month introduced new environmental grounds as a basis for its controversial rare earths quota reductions by emphasising that export licences will only be given to companies that are in compliance with 2011 environmental protection measures. After a year of heated debate among WTO member states on the measures’ WTO compatibility, the move could shed more light on China’s 2012 rare earths strategy. The announcement was released in the midst of an ongoing dispute closely linked to the rare earths discussion. An appeal report in China-Raw Materials is expected to be shared with the public on 30 January.
“Law and order in rare earth exploration and production and environmental protection are taking a turn for the better,” China’s Ministry of Commerce said of the 2012 policy.
Beijing says the new conditions are a reaction to China’s concerns over the environmental impact of its massive rare earths production facilities. But with the materials being essential to advanced manufacturing and necessary components for modern technologies like hybrid car batteries, lasers, wind turbines, and guided missiles, critics contend that Beijing is also interested in keeping global prices high and protecting domestic access.
Countries with advanced industries have been particularly vocal about the export restrictions. The EU, Mexico, and US have already taken similar Chinese restriction measures on raw materials to WTO dispute settlement where China’s claim for an exception on environmental and resource conservation grounds was unsuccessful in front of the panel (see Bridges Weekly, 6 July 2011). As the appellate report in this case (China - Raw Materials) is pending, rare earths importers will soon have some insight into how such environmental measures will fare under WTO law.
Unprecedented price fluctuations in 2011
China supplies over 97 percent of the world’s rare earths, with one company - Baotou Steel Rare Earth Hi-Tech - singlehandedly responsible for more than half of this. China is also the lone source for all of the most precious “heavy” rare earths.
When Beijing in 2010 slashed the export quota of rare earths from 45,490 tonnes to 27,449 tonnes, major manufacturers dependent on the exports voiced concern (see Bridges Trade BioRes, 8 November 2010). In response to the limited quota and other global events, prices rose until summer 2011 when they reached an all-time high.
But since mid-2011 prices have been plummeting due to decreased demand brought on by the lasting economic crisis, slowed industrial production after the Japanese Tsunami, and China’s decision to release rare earths stockpiles. Baotou Steel - which is state owned - even stopped production for one month in order to ease the market (see Bridges Trade BioRes, 31 October 2011).
The impact of the newly-released 2012 quota is expected to be less severe as it provides for increasing quotas throughout 2012. However, according to data reported by the Financial Times, the quota for the first half of 2012 is down 27 percent with almost two-thirds of allocations pending approval because of the new environmental compliance rules. Baotou Steel, for example, is not yet in compliance.
Thus, much depends on the companies’ reactions as exports will shrink if industry fails to meet environmental regulations.
Dominance in rare earths is not a matter of geological coincidence. For example, China is gifted with only 37 percent of the world’s known reserves. China gained its large market share by consistently having the cheapest product at a time when strict environmental regulation over rare earths mining and refinement was driving up costs in other countries. But China has been signalling to the world in recent years that it is willing to make tough decisions to tackle its environmental problems. With rare earth mining and refinement being a toxic, even radioactive, process the move is not completely out of line with its declared ambitions.
The green side of the debate
The new quota has been interpreted by many experts as evidence that China is willing to take steps toward a more sustainable rare earths industry by requiring compliance to get quota. In 2010, the country’s Ministry of Environmental Protection conducted a crackdown on illegal rare earths mining. Last year, the Ministry restricted new rare earths projects to those companies listed as passing an environmental protection check. Now, Beijing says the new measures offer more oversight over environmental degradation by withholding quota allocation for failure to meet recent regulations such as the Standards on Pollutant Discharge of the Rare Earth Industry.
While Beijing insists that their policy is environmentally driven, rare earths importers point to the fact that a tight quota has potential benefits for Chinese business. Lower exports can keep commodity prices high, provide a stable supply for domestic users, and entice foreign manufacturers - along with jobs and investment - to relocate to China for easier access.
Further complicating the issue is the fact that China’s 2012 policy also distinguishes between more accessible light rare earths and the highly coveted heavy ones, giving only about 15 percent of the entire quota to the latter.
Thus, even if China’s quota has a genuine environmental objective in part, importers will likely continue to struggle with Beijing’s 2012 rare earths policy. However, by conditioning quota allocation on environmental compliance, China’s rare earths system already shows higher environmental considerations than what it does for other raw materials. The upcoming Raw Materials appeal will serve to inform whether these measures qualify under what members can and cannot do in managing natural resources even if the decision does not translate into a WTO dispute on rare earths.
ICTSD Reporting; “MOFCOM Answered Questions by Reporters Concerning First Batch of Rare Earth Export Quotas in 2012,” Ministry of Commerce, People’s Republic of China, 30 December 2011; “After China’s Rare Earth Embargo, A New Calculus,” The New York Times, 29 October 2011; “The Battle over Rare Earth Metals, Journal of Energy Security, 12 January 2010; “China Rare Earths Move Unlikely to Buoy Prices,” Financial Times, 29 December 2011.