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A closer look at China's rare earth industry

BEIJING – Many have written in recent months about China’s iron-grip on the market for rare earth – the minerals used for a host of commercial and military goods – but few have looked beyond the global economic repercussions of the mainland’s dominance to the conditions that allowed for China to rise to the top of the industry worldwide.

Enter Steve Dickinson of China Law Blog. In a well researched entry this week, Dickinson delved deeper and found an industry that was able to drive the legendary “China price” down to a quarter of previously recorded prices by ignoring environmental laws, pursuing egregious labor practices and relying on heavy government subsidies.

That last point is what has allowed a loose collection of mining companies both large and small to survive and operate independently of one another during an era defined by Chinese government induced corporate mergers in critical industries ranging from car manufacturing to the airline industry.

What has resulted is a brutal market where companies constantly undercut each other for contracts and, in the process, drive the price of rare earth lower and lower – essentially crushing the rare earth mining industry worldwide:

“These operations ruthlessly bid against each other on price terms. This “ruinous competition” results in a price that barely covers the cost of production. Though China has recently pushed to consolidate the mining in fewer and larger companies, there are still a sufficient number of players so that the intense price completion [sic] continues.”

On the face of things, Dickinson suggests that this has created an advantageous workflow for western companies who have so far managed to avoid transferring technology for processing these rare earth minerals into the finished materials they need.

However, this heavily subsidized China price has allowed instead a variety of “green” industries like hybrid cars and wind power vanes to bloom around what is an inaccurate representation of the true cost needed to safely and fairly mine rare earth.

What happens next if China’s capacity is not reigned in or if government subsidies continue is clear:

“By 2011, capacity is expected to increase to 100,000 metric tons. This amount is about double the entire projected world demand for 2011. The result will be predictable: the Chinese manufacturers will engage in ruinous price competition. The price will fall dramatically. Worldwide, competitors to the Chinese will be driven out of business. Within China, none of the Chinese manufacturers will make any money. However, the process will continue even though no money is made, because the manufacturers are not private enterprises. They are owned and controlled by provincial and local governments, each of which jealously guards these precious investments and none are permitted to go bankrupt. Thus, the normal market correction resulting from falling prices does not occur in China. Instead, overcapacity is maintained, prices are reduced, and pollution, waste and worker conditions are simply ignored.”

Such conditions would cast a dark shadow over American plans to kick start its own rare earth mining industry at locations like Mountain Pass. On the flipside, new government mandated quotas for rare earth in China likely spells the end to the China price western companies have enjoyed over the years.

Should the price of Chinese rare earth minerals ever reach its true cost – estimated by some to be as much as four times higher than current prices – it would place enormous pressure on budding new green industries in the US that are reliant on this artificial cost.

It’s a tricky situation that bears watching, for the conditions are set for another big showdown between the West and China in the near future.