Focus On The Japan vs China Rare Earths Saga Misses The Point

by Gareth Hatch on September 29, 2010 · 17 comments

in China, Japan, News Analysis, Rare Earths

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It’s all so utterly predictable.

Every man, woman and canine following the rare earths space will be aware of the ongoing saga of China’s alleged unofficial ban on rare earth exports to Japan. We’ve been told that China got uppity with Japan over its arrest of a fishing trawler captain, and the next thing you know China was apparently telling rare earth exporters, to quietly yank on Japan’s chain, through the temporary cessation of exports [because of course doing it quietly in this way, would mean that no-one would put two and two together, right?].

The wider story broke in the New York Times last week, following the earlier publication of a single anecdote on the subject, by the Industrial Minerals web site. This is a Web site not to be confused by the way [as it was by at least two so-called “reputable” mainstream news publications], with Dudley Kingsnorth’s Industrial Minerals Company of Australia Pty Ltd [IMCOA]. Dudley and his company had nothing to do with the story as it emerged.

Protagonists from all sides of the various stories and sub-stories came rushing forward, claiming this, that and the other. Then came the inevitable denial from China, followed by the inevitable “they denied it so they MUST be guilty” routine, and before we knew it, ladies and gentlemen, we had ourselves a good ol’-fashioned tale of conspiracy, dark dealings and yet more ABSOLUTE evidence, by gosh, of the perfidious nature of the Chinese. And so it goes.

I almost hate to break it to you, folks, but the truth of the matter is that outside of a few dingy offices, several thousands of miles away from where you and I are probably sitting right now, no-one really knows what ACTUALLY happened last week, or continues to go on – or not, as the case may be. Anecdotal “evidence” continues to flow but frankly, it’s all rather irrelevant.

Ultimately it doesn’t actually matter if the alleged ban was or is real or not: diversifying our supplies of any important materials, makes as much plain common business sense now, as it did before last week’s storm in a teacup. Right? Whether it’s alleged threats to cut off supply, or an unfortunate but catastrophic earthquake or other natural disaster, placing all of one’s procurement eggs in one geographical basket is just daft if it can be avoided, particularly in the case of the rare earths where there are deposits geographically located all over the globe.

Perhaps if North Americans and Europeans spent as much energy on actually implementing and coordinating sound procurement strategies, underpinned by sound national policies and objectives, as they did on the pissing and moaning that has taken place these past few days, we might have been just a little closer to the creation of a robust, decent supply chain than we are now. The reaction to last week’s story feels like being stuck on a boat with half a dozen rowers all paddling in different directions, taking us nowhere except towards the ominous waterfall ahead. All mouth and no trousers, as they say back in my old neighborhood.

The story does actually get a little better in Japan; that country has been looking to develop non-Chinese sources for their technology metals for years. They have also been developing alternatives to rare earth elements – again, for years. Not that certain Japanese ministers and politicians appear to know this [or those who would quote them]; apparently there is nothing unique to the Americas or Europe, in politicians having no clue regarding the scientific work being done right under their noses, in their respective countries.

As a resource-poor nation, Japan has had no choice on this matter, for years. As just one example, Japanese researchers have been working to reduce the amount of dysprosium needed in high-performance neodymium-based permanent magnets since at least 2004, if not earlier. Long before the present rare earths bubble, or the one before that…

And yet, despite being just about the world’s leading location [certainly outside of China] for science and innovation in the rare earths and their applications, Japan was excluded as a possible partner, in work to be conducted by a new US rare earths research & development center, which was proposed in legislation making its way through the US House of Representatives this week. There is mention of cooperation with directorates of the European Union, to avoid “duplication of efforts”, in the bill, so I suppose we should be thankful for small mercies. Not linking up with Japan, however, and its formidable scientific and engineering talents, is just plain myopic, and brings into question the motivations of the bill in the first place.

We’ll see how the China vs Japan story unfolds [or doesn’t] as time goes by. We’ll also see if the rare earths bill gets turned into legislation or if the upcoming campaign season and subsequent lame duck session in Congress will see the bill disappear into oblivion. In the meantime, let’s just hope that the powers that be, in the public and private sectors of the USA and Canada, can get their political and financial acts together in the face of potential supply chain disruption, from threats real or imagined.

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1 Aat Oskam September 29, 2010 at 5:44 pm

Gareth, one story has unfolded whether or not China has banned Japan from REE’s temporarely: Lynas made a deal with “a major Japanese firm” to deliver puified REE’s by 2011. So rumour or not, Japan is looking for alternative providers of Ree’s. Europe and USA are next? Good changes for firstcomer MolyCorp and Lynas, don’t you think?
Greetings from Holland,

Aat

2 Jack Lifton September 29, 2010 at 5:49 pm

I was in China from Sep 7-8 and in Japan from Sep. 9-14. I then went to Hong Kong and then came home to suburban Detroit and then back out to New York City twice. At every city on my journey – Beijing, Shanghai, Tokyo, Hong Kong, and New York – I was besieged by institutional investors and government officials (from all three countries) asking my opinion of the “crisis.” I agree with Gareth’s analysis above, and I enjoy his Yorkshire-originated description of events that the politically incorrect would call a “Chinese fire drill.”

When I was in the metals trading business in France, some 25 years ago, I recall a time when Sony complained to the French government, that French customs were holding Sony products for “inspection” for so long a time that they became obsolete and non-competitive with those of the French manufacturer, Thompson-CSF. The French replied that although they believed in free trade, they also believed in public safety and in careful inspections of imported goods, and that such delays applied to everyone equally. I’m sure that the latter part of that statement was true.

For the last few weeks Chinese customs has, for the first time, opened every container of rare earth metals and sampled them and inspected them. This takes a great deal of time, because such inspections are just a small part of the overall flow of inspection processes. I was told that the “inspections” contaminated many lots of high purity rare earth metals, which then had to be further processed “ad hoc” at all of their Japanese and even at one American destinations. Interstingly enough, the small American shipment that was held up. was for a highly senitive use. Was Chinese customs sending a message?

I think that the dispute between Japan and China is a fundamental one; it is nothing less than who will control the natural resources on and below the sea bottom in the China Sea. We have just observed a skirmish and one of the weapons brandished by one of the combatants was control of supply of a critical natural resource.

As Gareth has stated, unless we get off of our asses and expand our supply base, we will always be vulnerable to the critical natural resources supply weapon. This time it was Japan bearing the brunt of the blow. Next time…?

3 Jim Letourneau September 29, 2010 at 5:59 pm

Gareth – Your comments are right on the mark. It doesn’t take much imagination to see how the Japan/China “story” made it all the way to the New York Times without much in the way of verification (aside from there being two languages to interpret).

For all the chatter about “strategic” metals, it appears that it is going to take a few years of educating Americans and Europeans as to what that term means before any action is taken. All they really need to do is go to dictionary.com

STRATEGIC
1. pertaining to, characterized by, or of the nature of strategy: strategic movements.

2. important in or essential to strategy.

3. (of an action, as a military operation or a move in a game) forming an integral part of a stratagem: a strategic move in a game of chess.

4. Military .
a. intended to render the enemy incapable of making war, as by the destruction of materials, factories, etc.: a strategic bombing mission.
b. essential to the conduct of a war: Copper is a strategic material.

People are constantly asking questions about the ingredients in the food they eat. When governments get interested in finding out what metals go into the green revolution, high end consumer goods, and strategic (what does that mean again) military applications we’ll be getting somewhere.

4 Gareth Hatch September 29, 2010 at 6:39 pm

Aat: certainly there are opportunities for individual companies and their investors. However, without a coordinated effort to ensure that rare earth materials from companies such as Molycorp, Lynas and others, never have to go to China at any stage of their processing into separated oxides, metals, alloys and other compounds, we will continue to have vulnerability in the supply chain.

Jim: you raise an important point… certain departments of the Department of Defense have actually attempted to drill down into their supply chain, to see just where these materials are being used, but it is certainly a formidable task, and required the cooperation of the prime and sub-contractors. Making such cooperation mandatory might go some way to getting the job done, who knows…

5 Chris September 29, 2010 at 9:41 pm

Pentagon Loses Control of Bombs to China Metal Monopoly.

A very good article, would’ve been nice to have seen them also mention that China will be consuming all it can produce.

http://www.bloomberg.com/news/2010-09-29/pentagon-losing-control-of-afghanistan-bombs-to-china-s-neodymium-monopoly.html

6 Thaidiamond September 29, 2010 at 11:29 pm

There are two dimensions to this story.

The first—and most important—is geopolitical. This part is not new news.

In Asia, where I live and work, the Spratly Islands over two decades back were the first shot in what many
other regional ‘neighbors’ still see as Beijing’s attempt to create a new Chinese lake.

And tensions have not just confined to northeast Asia. Vietnam, Indonesia, Malaysia, the Philippines, Taiwan and Brunei—all have maritime boundary quarrels with China.
On July 23rd, before the Japanese incident with the Chinese fishing trawler, they erupted publicly on the fringes of an Asian security forum in Hanoi, where Hillary Clinton, the US Secretary of State, said that respect for international law and established rules was key in the South China Sea.
Earlier this summer, Indonesia’s government last month wrote to a UN commission (“on the limits of the continental shelf”), contesting China’s position on the South China Sea.
The view from much of Asia is that China’s claim to sovereignty over almost the entire sea lacks international basis and encroaches the legitimate interests of the global community. They also realize they have to be very careful putting that to an 800 pound gorilla.
While it’s historically been oil and potential for other natural “undiscovered” resources that have been the motive for Chinese claims, it not just the island “rocks” themselves that are being claimed. Importantly, its the geographical and territorial extensions that sovereignty over various island groups would imply.
At its heart, this recent squabble was not only about the Senkaku islands: it sends a ‘strong message’ to its its Asian neighbors.
What’s new this time is that China has upped the ante.

It showed that it is willing to go to extraordinary lengths to exert its maritime claims. Lately it has taken to calling the South China Sea a “core national interest.” (See: “Out But Not Over,” The Economist, Sept. 24th).

Is this surprising?

If China is willing to go to the lengths of the earth—South America, Africa or expensively into Afghanistan—to secure raw vital raw materials, you can be sure there are going to be aggressive next door in the South China Sea. 

Which brings us to the second dimension: the rare earth card.

As to whether China actually banned REE exports to Japan is an exercise in diplomatic intrigue—and an academic question.

They didn’t have to.

The “threat” of such action was enough to have the Chinese captain released. For a deterrent to work, it has to be believable. That’s easily done. Have lower level bureaucrats hold up export licenses for whatever reason…later the “official” top channels can officially deny any such punitive action.

Tell that to the Japanese whose imports of rare earths was…shall we say…”delayed.”

Here too the Chinese may have upped the ante. They export rare earths not just to the Japanese—but to the world.

And the world has just woken up to the fact they too can be ‘threaten’ is such manner.

What was a exotic issue debated on specialized websites—or early investors like me who purchased his first rare earth stock in 2004—has now got the world’s attention. As well as a whole new class of investors as evidenced by the exploding stock action in a number of key rare earth stocks since this incident took place.

Good risk management always dictates plans for contingencies.

The world needs a diversified source of rare earth elements. Right now that’s spelled as non-Chinese sources.   

This latest chapter added a new dimension to an old story—and brought what was on many country’s policy back burners right to the front.

And for companies that have viable projects in other parts of the world this is very good news indeed.

This is one final question: has China overstepped by ‘stopping’ rare earth shipments however temporarily? Given its strategy to attract key manufacturing to set up shop in the Middle Kingdom via the promise of access to (and preferable pricing of) REEs, has this strategy now been given a shorter shelf life?

7 karlis ullis September 30, 2010 at 12:15 am

Most of the main REE’s have been climbing even before this news
ie: Lynas, Ree, raref, cmrzf etc.
But many metal commodities are up look at Copper ETF – JJC
Inflation is this sector?
Karlis Ullis , MD

8 Chris September 30, 2010 at 12:30 am

” This is one final question: has China overstepped by ‘stopping’ rare earth shipments however temporarily? ”

I guess if not today then eventually. They have been saying for some time now to the rest of the world u better get it in gear. Their own internal demands alone will eventually cause them to “short” the world market.

They have simply takin advantage of every REE opportunity over just about everyone else, plain and simple.

Now hopefully the U.S. and others can make a popping sound, the sound u hear when someone has pulled their head outta their azz.

9 Wendy D September 30, 2010 at 12:49 am

I think it was Jack that said, a couple of years ago, that non-China users were confident of REE supplies as long as they paid the right price. But that they were now in a situation where they might have to face the fact that REEs would be unavailable at ANY price…

Yet even now there is not the will in governmental and financial circles to finance non-Chinese sources. Every time one of the juniors trying to develop an REE deposit is driven to the market for more money, they have to beg, and accept onerous discounts to market or warrant issues to “sweeten” the deal. The recent Molycorp float was a case in point. Not only did Molycorp have to reduce their offer price, they STILL couldn’t get it all away. A comment which stuck in my craw was one from a Wall Street institutional investor: “It seems too much to pay…”.

Perhaps he won’t think so when he can’t get a new Blackberry, or his new Prius is delayed, or the green energy projects he is invested in collapse for lack of raw materials…

10 Nadim Hajjar September 30, 2010 at 2:47 am

i was watching these days the rapid increase of the new REE productors share value (LYNAS, MOLYCORP, GWM…), the increase is just impressive. I think that they are using (or creating) the rumors about China’s actions and policies in order to attract new investors. Are we living the creation of a REE bubble? Does China have enough power and operating margin to increase (one day) it’s production again and push the prices down killing the new projects? Maybe i am exagerating a little bit but will the chineese stay cool about new projects and so less monopoly? What is the role of the exporting quotas in the future?

11 Eamon Keane September 30, 2010 at 6:55 am

Great article.

If you read this excerpt from the origins of the formation of the IEA, and replace oil with rare earths, the parallels are striking [1].

“During the Middle East War crisis of 1973-1974, the main industrial
countries became painfully aware of their vulnerability to the new
economic power of the oil producer countries. For the industrial countries, the sting in that crisis derived from their sudden need to respond to the oil embargo by a number of Arab producers and from the price spike that too oil prices rapidly to historic and damagingly high levels. Perhaps even more troublesome, however, was the realization that, having accepted for some years the short-term luxury of growing oil import dependence, the industrial countries were themselves largely responsible for the very predicament in which they suddenly found themselves.

As discomforting as that realization might have been at the time, it
became the wellspring of the industrial countries’ response and was a
necessary step in building the new institutional systems which could
make the problems more manageable. One promising element was the
notion that if those countries bore their share of the responsibility for
causing the crisis, they might find within themselves the means of
resolving or controlling the situation in the future. Their contributions to
the extent of the crisis had included excessive reliance on oil generally
and imported oil in particular, insufficient investment in indigenous oil
exploration and exploitation, in diversification of energy sources and in
the development of energy technologies. To this list must be added weak conservation and energy efficiency measures, inadequate collection and use of data on the operation of the oil market and the absence of arrangements for workable systems of oil supply shortfall management.

Increasing the industrial countries’ vulnerability still further was their
capstone failure to organize themselves properly by means of institutions designed to deal successfully with those problems and others to come in the years ahead.”

The only question is, where are we now? I’d hazard a guess at 1971. We know what the future holds, yet perhaps we need an actual crisis to galvanize collective action.

[1] IEA, “The History of the IEA 1974-1994 Vol I”, 1994, Available from: http://www.iea.org/textbase/nppdf/free/1990/1-ieahistory.pdf

12 JAY BIRGE September 30, 2010 at 11:46 am

Quid-pro-quo comes in many forms!

13 fran September 30, 2010 at 9:03 pm

the world has yet to awaken to the presence of a second hegemonic player on the global stage. one that knows well both ends of KOWTOW.

14 chris September 30, 2010 at 9:31 pm

I just saw a commercial for dyson.com vacuum’s that said ” we use Neodymium magnets in our digital motor “.

Would be nice to see this catch on like Lithium-ion phrase has.

Went to website and looked and it’s in the bottom of the page #3.

http://www.dyson.com/technology/ddmTabbed.asp?tab=where

15 Henk Mol October 4, 2010 at 6:51 am

Note that it is NOT about rare-earths being not available for magnets! It is about the problem that Dysprosium is much less found than Neodymium, so much more difficult to hoard. You need it in certain applications to get high strength magnets under adverse conditions.
Japan recognised that it is dependent on the import of in particular heavy rare earths and contrary to the rest of the world they really go deep into finding ways to become less dependent on it. The recent import problem for the japanese seems not about bulk lantanum, preasodynium, cerium or neodymium which they may have stockpiled, but about dysprosium, europium and similar elements. That they work on a way to mitigate their problem, is clear. In a press release on 30 August 2010 their NIMS – Magnetic Materials Centre they reported a method to process Nd2Fe14B such that they need significantly less or nearly no Dysprosium. It is however not clear wether the high temperature coercitivity is improved, as Dy is substitution, up to 15% of Nd replaced, is used for making magnets that work in the electric motors of EVs and HEVs at 150 – 180 deg celcius. Anyone has follow up on that? Regards Henk

16 Gareth Hatch October 4, 2010 at 10:06 am

Thank you for the additional comments folks.

Henk: a couple of points: my information is that Japan / Japanese companies actually have a significant stockpile of dysprosium that would last them for several months if supplies were to remain cut off. Interestingly the rare earth that they are most short of is samarium, used in the samarium-cobalt magnets for various high temperature applications. It’s interesting to me because samarium remains just about the cheapest of the rare earths in the market.

Regarding work that the Japanese are doing to reduce usage of dysprosium: they have been working for a number of years, in a number of research groups, on this very challenge. Work was presented at the Rare Earth Permanent Magnet Workshop at the beginning of September 2010 in Slovenia, on this and other subjects. Coercivity is maintained, but less dysprosium is used; the dysprosium that is used, is skillfully placed at the grain boundaries of the main 2-14-1 magnetic phase, where it is of most use in combating demagnetization from heat or other energy sources. By placing the dysprosium preferentially in this manner, less of it is needed in the initial alloy.

17 Henk Mol October 5, 2010 at 2:02 am

Dear Gareth and Jack
Thanks a lot for the analysis. You help us fiind the answers by getting facts first hand – thereby putting the things in the right perspective. Being an engineer for a company that makes components that find their way in cars, electric motors etc I am working dayly with the question why customers use REE magnets, which magnets they use, and what volume or quality trends they have. Unfortunately I was not in the opportunity to visit the conf in Slovenia. I hope to learn about the applications, trends, and technology on the EVS25 in Shenzhen. Thanks !
Regards, Henk Mol

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