The True Drivers Behind China’s Accelerated Development of Natural Resources

by Jack Lifton on December 6, 2009 · 12 comments

in China, News Analysis, Rare Earths

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A few weeks ago, in the second of my articles on “The Rare Earth Crisis of 2009“, I commented on the fact that the Chinese put as great an emphasis on full employment as the West does on making a profit. This emphasis has to be borne in mind when considering the Chinese perspective on the environmental impact of their operations.

In his latest article over at RareMetalBlog, Gareth Hatch comments on a report in the latest edition of UK’s Sunday Times by Lindsey Hilsum, on the extensive pollution associated with the production of rare earth elements in Baotou, Inner Mongolia. Apparently “locals tell the tale of a ‘viscous, red liquid’ that oozes from a lake near to the city, a lake as it happens that contains the tailings of rare earth mining production. Water from the lake seeps into the surrounding farmland, rendering the fields barren and the water supply undrinkable.

Lindsey Hilsum goes on to report that in Jiangxi, one of China’s other main rare earth production areas, polluting rare earth extraction plants that were once shut down by the authorities, now illegally “operate at night, under armed guard, with the collusion of local Communist party leaders who help mafia bosses keep the lucrative trade going.”

Gareth says that:

The irony that all of this pollution and contamination is occurring in the name of the production of the so-called “green elements” should, I hope, not go unnoticed.

While there are certainly signs that China is genuinely trying to clean up its industrial and environmental act, reports like these are a sobering but timely reminder of the very real, hidden price that is being paid, day in, day out, for producing the low-cost goods to which the West is addicted. By continuing to rely on the Chinese for these materials, produced in this way, we enable this behavior, and indirectly facilitate the continued demise of Western, and in particular North American manufacturing and production.

That this pollution and befouling of the environment is still occurring in the supply chain of rare earths to the West, despite the vast potential reserves in Canada and elsewhere in North America, makes this act of enablement an even more bitter pill to swallow. Where are the “über-capitalists” in North America? Why are they not falling over themselves to line up to help the junior miners and exploration companies fully realize their ore deposits – in an environmentally sensitive and responsible manner of which we are capable? Why is it such a challenge for these guys to raise the cash they need to make these projects a success?

I’ll make another point here… according to the China Environment Forum, there were over 5,000 environmental protests in China last year, and the numbers are growing. This increased social and political unrest over pollution and the deteriorating health of the population has the authorities concerned. Despite the apparent blind eye to illegal activity described earlier, it is conceivable that a massive, nationwide crackdown on environmentally unsound mining and processing plants could occur in the near future, in a bid to quell unrest.

This would ultimately benefit the heath and well-being of Chinese villages and city dwellers – but such a move could abruptly shock the already precarious supply chain of rare earths, from China to the West. This would cause a reduction in supply, and a rapid increase in cost – long before future deposits come on line in Canada and elsewhere, at present rates at least, and in sufficient quantities to be able to compensate.

If the West won’t increase the rate of investment in its own resources as a means of confronting the ethical dilemma that current production practices in China present – surely this latter scenario, at least, is enough for us to get our collective acts together?

These points are well taken, but I wonder if our institutional investors really understand the key driver for China’s rush to “develop” its natural resources.

Western investors see greed / profit as the main driver for any production of natural resources anywhere. I think that the Chinese government, which we must remember is the owner of, and licensor of any production of, all natural resources in China, is determined to catch up with Western technological progress by whatever means necessary – not to make profits, but rather to level the cultural playing field.

Chinese “entrepreneurs” are not risking their lives and engangering the lives of their fellow countrymen primarily to produce natural resources for export; they are driven by greed, surely enough, but their greed is satisfied by the managers of Chinese state enterprises who cannot get sufficient raw materials to meet their quotas under the current five-year plan.

These managers will pay more than the “contract” price for supplies, because in China, failure to meet your goal is the same as failure to do your job. Simply to say that you could not get sufficient supply is merely making excuses, because the same five-year plan that you are not fulfilling, says that the natural resource producers will produce enough material to fulfill their part of the plan, and their suppliers of equipment will also produce enough. Those failing to meet their quotas are clearly failing the people… I think we all understand how this type of pressure can lead to environmentally unsound decisions and even to official mines looking away from unscheduled and unsafe production.

The idea that we in the West can compete with this type of thinking by simply looking at such metrics as “return on investment” is at best naive.

I have said before and I will continue to say that the so-called prices set for rare earth metals by Chinese producers, at all levels, are arbitrary.

When the crunch point comes, and it may come very soon, when there are no rare earth metals to be had for export, the prices of the rare earth metals will skyrocket and institutional investors will squander billions to re-start the Western supply and value chains for the rare earth metals. Western institutional investors simply don’t know how to value rare metal resources; they are about to have an expensive lesson.

Let me repeat: I believe that the rare earth metals are underpriced already at the present time, because they represent a Chinese pricing set for the main purpose of keeping production of rare earth metals – and their end use products – in China, to maximize the jobs created by this industry, within the domestic Chinese economy.

This situation cannot last much longer, because I believe that China itself is running short of rare earth metals due to inefficient production methods, environmental problems, and corruption.

Please share your questions and comments on this subject below.

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1 Tim Starns December 6, 2009 at 6:20 pm

Thanks for the update jack. I did read the article at RMB, and fully agree with your comments, and so posted. What I didn’t address is your point about the falsely low costs of Rare Earths and how that will change in the near future. I do think that when prices rise, there will be more incentive to the job right from mining, through processing, to final products, to prevent flashback costs from environemental damage, which then becomes financial damages. The damages that China has admisttedly done to itself are being reflected in the pre-COP15 statements they have been making. They are saying now that they will be at the forefront of cleaning up their industry and their nation’s ecological and physical health. And they apparetly will introduce much more stringent environmental concerns to this industry, as they proceed. I guess we’ll just have to wait and see if they’re good to their word.
Nevertheless, they have exemplified how NOT to do it. Let’s hope our government and institutions are smart enough to take a cue, and ensure this industry is as green as its promise, in practice and product.

2 Andrew December 6, 2009 at 6:45 pm

It’s Machiavellian that we enable China through our addiction to low cost goods to dominate in this and other fields without demanding real civilized standards of conduct, in this way we are destroying our future before our very eyes.
Many people are looking for the Chinese to lead the way out of the global recession but with such a government as they have they will never really come into their own without their own revolution for individual rights and freedoms – in my opinion they are the biggest bubble going and it’s really us in the West that need to wake up and demand a globalism that meets our hard earned standards and allows a brighter future for all of mankind.

3 John Empsall December 6, 2009 at 8:01 pm

This is reminiscent of the old Soviet Union – keep running uneconomic factories and mines to keep people employed. In the long term, it’s unsustainable.

4 John Petersen December 7, 2009 at 12:53 am

The worst part of top down command driven enterprises is that they can stay environmentally irresponsible far longer than anyone would believe possible. In earlier times when China had the ability to supply 100% of global demand for REEs lax environmental practices allowed it to dominate the market. With coming fundamental changes in global REE demand, particularly for batteries and magnets, we are likely to see a two-tiered market develop for a time where China remains irresponsible while producing a baseline supply of cheap REEs and other producers with better practices make up the difference at a far higher price. Over time, the existence of a higher world price should encourage China to clean up her act, but it may take a while. Galvanizing green consumers over environmental problems at the other end of the supply chain is difficult, particularly when the other end is nowhere near their backyard.

5 Peter Dumbrille December 7, 2009 at 10:43 am

“This situation cannot last much longer, because I believe that China itself is running short of rare earth metals ”
Jack,
While intuitively I could agree that a shortage may occur due to the reasons you give, can you actually justify this belief with facts such as production figures or data on proven reserves to back up your statement ? Restricting their exports, which many believe is underway, does not in itself prove anything except they know they have a winner and will get a better price.

6 Jack Lifton December 7, 2009 at 1:23 pm

Peter,

I do not mean to imply that China’s resources and reserves of REEs are being significantly depleted. I am saying that China’s production rate capability is declining! I believe that the data on China’s resources and reserves are a state secret, and so I conclude that all statements about them are “estimates.” Exploration geology is a new “science” in China, and experienced Western exploration geologists do not have free run in China. Financial speculation based on Chinese supply data is speculation indeed.

7 Peter Dumbrille December 7, 2009 at 4:56 pm

I guess China didn’t get labelled
“inscrutable” for nothing !

8 Tim Starns December 7, 2009 at 7:01 pm

Jack,

As I recall a few weeks ago, an article on RMB quoted one Mr. Xu, the “Father of China’s Rare Earths” as saying that China had depleted about 35% of its total reserves, and had done so not only at a wholly unreasonable ecological cost, but also rather inefficiently, (such that a significant amount was simply lost), and now the remaining estimate of 65% was in question.

Aside from that, and given that sources like Avalon have quoted their mine to milling costs (on their website) ranging from 69-139 dollars per ton, how much more does it cost to responsibly leach/extract the REMOs (Rare Earth metal Oxides….oooh , good word, like the movie adventurer Remo Williams…I’ll patent that one) ? Add purification and transportation, what are we talking here? The current TREO concentrate is rated at about $9.00 per pound as I read it. So are we talking maybe $50 or even $100 per pound? Maybe more.
What’s your best guess for TREOs in bulk, prior to separation? Of course that depends on the percentage makeup of the various elements, but I’m just ballparking thinking we could easily be looking at a ten fold increase in prices.
And what level of markup will various companies employ if the market is in panic mode for supply?

9 Sam Linton April 15, 2010 at 7:08 am

What’s you view on China importing REE sands? It is for building up stockpiles, a way to obtain higher quality raw material, or both? Or, is it something else like a snatching up of supplies to control market pricing?

As an aside, I think it is sad that the West thinks in terms of short term economics. We are killing ourselves by not continuing to be the leader in development (in nearly every way). REEs should be relatively abundent across the US, but like oil, we are willing to sit on it without regard for how that affects us in the future.

Thanks for your time and insite into this crucial subject.

10 Jack Lifton April 15, 2010 at 10:27 am

Sam,

I don’t know what ‘sands” you refer to, but if you mean monazite “sands” then the problem with processing them is the radioactive residues produced by such processing. China may be willing to deal with this problem, because it now has a use for the thorium produced, and it can always use any uranium recovered by processing monazite.

China has embarked on a large scale program to develop uranium enhanced thorium fueled nuclear reactors for civilian use-such reactors do not produce any practical weapons isotopes. These reactors by the way are called ‘thorium” reactors in the press.

At the same time China has clearly embarked on a program to remediate rare earth mining sites both in Mongolia and in Szechwan . The government has suspended all new mining ventures as well as additional operations facilities construction until 2015 in order to clean up the area, improve efficiency, and eliminate illegal mining. This means obviously that REE production will decrease, but it does not mean that CFhinese domestic demand for REEs will decrease, so I believe that China is now looking in the near term to support non-Chinese production of REEs both for its own future needs and to assure a supply of the REEs to non-Chinese export customers so as not to encourage either the suspension of the use of REEs or the substitution of them by other raw materials either not available to the Chinese or of greater cost.

The contest, if there is one, is between the two philosophies you have described. In the west we seem to think only of short term profits as a goal; in the east the long term benefits are always paramount in their thinking. If the goal is a stable prosperous economy they are right and we are wrong.

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