What Is The Japanese Perspective On The Rare-Earth Supply Issue?

by Jack Lifton on July 17, 2011 · 14 comments

in Japan, News Analysis, Permanent Magnets, Rare Earths

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I note that the Sunday New York Times last weekend, had an article in its business section with the title, “Japan’s Economic Gloom Runs Deeper This Time.” Of particular interest to those of us following the rare-earth-supply issue is the following paragraph in the article (emphasis is mine):

“…since the collapse of the bubble economy of the 1980s …the Nikkei 225 stock index is still three-quarters off its peak. And the economy has been hit by blow after blow, from sagging property prices to mounting debts and intensifying competition from China.”

Nowhere is China’s current stranglehold on the supply of rare earths more deeply felt than in Japan, and nowhere else, I repeat, nowhere else, is obtaining an alternate supply more important than in Japan.

The reason for this is that Japan’s rare-earth permanent-magnet (REPM) industry is considered to be the best on earth. Its largest REPM maker, Hitachi Metals, in fact still holds more active patents in the technology than anyone else in the world.

Japan is very protective of its REPM industry. If a Japanese manufacturer uses a REPM made by Hitachi Metals or which is covered by a Hitachi Metals patent license, then that magnet must have been made in Japan, under the terms of the patent licenses that Hitachi Metals manages.

The Chinese REPM industry, now the world’s largest, and twice the size of Japan’s by volume, considers this system to be a form of Japanese protectionism, and it wants to break into the Japanese market, the world’s largest after China, itself.

I believe that this competition more than any other external factor, is what is driving the current Chinese agenda on limiting the exportation of the rare earths as raw materials. Chinese magnet makers would like to make the magnets for Japanese end users to incorporate into permanent-magnet motors and permanent-magnet generators as well as into speaker magnets. Japanese manufacturers know that if this were to happen, then it would only be a matter of time before China pressured Japanese manufacturers to move all of their subcomponent operations to China in the same manner as they did to American manufacturers and continue to do.

Japan cannot afford the luxury of lower domestic costs disguising the transfer of an industry, its jobs, and its future developments in technology to another country. The Japanese economy simply cannot afford to take such a gamble, and the Japanese look at what happened to the American rare-earth supply chain as an object lesson in sheer short-sighted greed.

I find it intriguing that American investors who know or should know the above facts, even so still believe that a company like Hitachi Metals which is way ahead of any American company in terms of the manufacturing technology for REPMs, would agree to compete with itself, by letting a raw-material supplier become a new Hitachi Metals licensee. I think it is as unlikely that Hitachi would do this with an American supplier, as that it would with a Chinese raw-material supplier. I do believe that Hitachi Metals would like to re-enter the US REPM market by manufacturing in the USA, with American raw materials. Structured carefully as to ownership and control, this would give Hitachi Metals a definite competitive advantage when dealing with the US Defense Department, which now has prohibitions against buying certain types of rare-earth-based magnets, which are made in Japan (and elsewhere).

Japan is a particularly resource-poor country. Its military ruling elite dominated the populace for centuries by, among other things, controlling the production and use of metals such as iron and copper (as bronze). A razor-sharp samurai sword wielded by a man in iron chain mail and bronze armor, was the most effective means of controlling the Japanese peasants until Western “traders” brought firearms, and large quantities of both fabricated and fabricated metals to Japan in the mid-nineteenth century.

Japan’s attempt to create a self-sufficient natural-resource supply by force of arms, failed precisely because its principal enemy had an unlimited (from the Japanese perspective) supply of natural resources, especially of energy and metals. Japan will never again give up any advantage based on natural resources.

Japan won’t give up nuclear-generated electricity for dependence on imported coal and oil, nor will it give up independent technological prowess. Japanese private industry is actively seeking independence in natural resources, and this is evidenced by the activity not only of Hitachi Metals and Toyota, among many others, but also of the giant Japanese trading companies seeking to buy and operate sources of iron, copper, and the rare earths, as well as indium, gallium, and many other technology metals.

The rare earths are a critical component of Japan’s competitive stature in the world of technology.

China isn’t the only game on the planet, and, by the way, South Korea has begun its own quest for technology metals too.

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1 Ruediger Haberland July 17, 2011 at 1:24 pm

I agree totally but further questions arising:
will the Japanese start their own mining, will they buy into an existing activity?
Is there any know how on separating/refining the REEs in Japan?

Have also in mind that China is still traumatised by the 3 opium wars (1850…1910?) when Britain enforced open selling of opium (grown in India) in exchange for Chinese silver! British, French and German troops destroyed the most beautiful summer palace and the ruins are shown to visitors from all over tha world: we do not forget.
So Europe should not be sleeping too deeply.
RHABE

2 Lou Pearson July 17, 2011 at 1:58 pm

Jack,

Thank you for your perspective. I’m informed that Dr. Honkuras, representing Aichi Steel spoke at the Great Western Minerals annual meeting, and indicated that Aichi had an interest in making an investment in Great Western. What kind of investment would make sense for Aichi to make? And what would this accomplish for Aichi?

3 John Petersen July 17, 2011 at 2:01 pm

Excessive dependence on another human being is called codependency and classified as a serious mental disease or defect. Against that backdrop I think the Japanese refusal to form codependent international relationships is probably one of the sanest attitudes on the planet. Wasn’t Billy Holliday famous for the line “God bless the child that’s got his own?”

4 fran July 17, 2011 at 3:22 pm

YES! reasonable view. now,

for the interested, unsophisticated reader–

what action[s] should be taken?

for the sophisticated otherwise,what action[s]?

we have been led and followed. what now?

5 Richard Flook July 17, 2011 at 6:06 pm

Hi Jack,
Wonderful blend of current affairs and history. I read some years ago a book that proposed in the long run, the economic strength of a country is based on the resouces within its boundaries. On this basis, the past economic strength of Britian and the current economic strength of Japan were/are anomalies. So are we witnessing an economic (and intellectual) transition in Asia not unlike the transition from Britain to the USA?

6 Furkhat Faizulla July 17, 2011 at 9:51 pm

After Second World War, Unlike USA or China, Japanese is become a kind of people rather than change others for themselves, they adjust themselves. Everybody in Japan knew the security of supply of rare metal is very critical for its industry, but socialism like company culture and short term of management term (most of the key position in most of the big companies are usually 3 year and they take turn by aging people from bottom) will let them rather than take huge short term risk to go to invest oversea mines, they like to move its part of production to underdeveloped countries or try to work hard on technology domestically to find alternative material for the one tight in supply. As I know directly from my Japanese magnet manufacturers, almost all of them are in a talk or in the middle of move of moving their certain magnet production to China, also trying to replace or reduce tight in supply rare metals, like rare earth.

7 Bob M July 17, 2011 at 10:27 pm

Very savvy, Jack. I think Hitachi Metals would be welcomed in the US as an excellent counterweight to China.

8 blackjack July 17, 2011 at 10:36 pm

Japan has forward contracts with LYNAS already – the closest refining of REE’s to market and already sold
Germany is not being left behind either
Siemens is working on vertical approach to Lynas supplying the REE’s and Siemens making the magnets.
Fail to plan ahead
plan to fail ahead

9 Max12345 July 17, 2011 at 10:53 pm

It seems to me that for the international resource sector investor (who also wishes to focus on rare earths, among other hard commodities) the rivalry and / or competition for rare earths between Japan and China or between the U.S. and China or between the West and China can only mean good news if played correctly. One risk earlier mentioned was that China could suddenly flood the market with Rare Earths for two or three years just to bring down the many new Rare Earth explorers/developers/producers based outside China. It seems increasingly unlikely that China will want to do this, or far that matter be in a practical position to do it. Given the particular article above, of particular interest should be those Rare Earth companies whose development plans feature Japanese investment and related off-take agreements. All other things being equal the tighter the Japanese market becomes and/or the more control or manipulation of the RE market China engages in, (or is perceived to engage in) the more likely it becomes that production from these companies will come on line sooner or will in other ways be more significant. The entire situation with Rare Earth markets and needs -as tricky as it may be in various respects – presents fantastic investment opportunities.

10 D. Carlton Rossi July 18, 2011 at 1:21 pm

Mr. Lifton,

A brilliant piece of writing which is quite passionate and persuasive.

11 Boris July 19, 2011 at 4:41 am

@Lou Pearson
Aichi is world’s first player to make anizotropic NdFeB for polymer bonded magnets (in Europe for example: http://www.amagfine.cz/product/product.html ) . GWMG (via it’s subsidiaries) can make alloy (input material) for that. (http://www.raremetalblog.com/2011/04/great-western-minerals-group-signs-long-term-co-operation-agreement-with-aichi-steel-to-supply-rare-.html)

12 fran July 19, 2011 at 9:27 am

was the joint venture activity announce dec 2010 between HITACHI and MOLYCORP meant to address the substance of your essay?

13 robit July 20, 2011 at 3:32 am

Jack, Fran and all
Here is another development in China’s movement on resources:
China’s Cnooc to buy OPTI Canada for $2.1B
China’s Cnooc Ltd. has agreed to buy OPTI Canada Inc. OPCDF for about US$2.1 billion, the companies said Wednesday. Cnooc, China’s biggest offshore oil and gas producer, will make the purchase through its wholly owned CNOOC Luxembourg SA subsidiary, the companies said in a statement. The deal is subject to regulatory approval in Canada and China, but the companies said they expect the transaction to be completed in the fourth quarter.

14 fran July 20, 2011 at 7:57 pm

ROBIT–

second major chinese purchase in three years; the USA can’t decide the merits of a major pipeline south fothe bitumen.

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