China's rare gems
Few people knew what rare earth metals were two years ago.
Then China emerged as the world’s largest supplier of these essential ingredients in modern technologies such as smartphones, fiber optics, lasers and automobile catalysts.
In August, Beijing launched a trading platform for rare earths in a bid to build the country’s influence over global prices of the commodity. The move will likely see China increasingly punch above its weight: while the country accounts for only about one-third of global reserves, it produces up to 97% of global supply. Given the controversy when China cut back on its exports of rare earth metals in 2010, the launch of the platform may well rustle a few feathers globally, but we should also expect any negative rumors to die down pretty quickly as the rest of the world stays focused on doing business with China.
Before discussing the new trading platform in more detail, it is worth explaining the two key factors that give China its competitive edge in the rare earths market. The first is geology. Rare earths are in fact anything but rare, being found all over the world, and China is only one of many countries with sizeable deposits – others include Australia, Brazil, Canada, India, South Africa and the US.
But in most countries apart from China rare earths are diffuse and not found in sufficient concentrations to make mining and extraction commercially viable – often they are clustered with toxic or radioactive elements. So despite the demand for these essential materials, used in everything from electric motors to television sets, it is usually too costly to extract them. By a quirk of geological fate China has “cleaner” deposits that are much easier to access and extract. Some deposits, such as those in Inner Mongolia, are even located in coalfields, enabling mining companies to leverage existing infrastructure.
China’s other key advantage is its rare earths policy. This dates from the 1960s and was accelerated under the premiership of Deng Xiaoping who envisioned the elements as “the oil of the twenty-first century”. As a result, Beijing set in place a long-term policy to develop infrastructure for the rare earths industry which included building integrated mines and production centers in places such as Jiangxi, Sichuan and Baotou provinces.
It is in Baotou, which is home to half the world’s light rare earths supply, where the Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech Company, China’s leading rare earths producer, launched the trading platform with nine other companies and organizations.
Those involved with the trading platform have said that pricing will be handled transparently and consistently. The platform will initially focus on physical trade in rare earths with the possibility of launching futures at a later stage.
While it is clear that Beijing wants to increase its muscle with respect to global pricing of the commodity, one hopes that the greater market influence the platform brings could help China feel more secure in its position as the world’s no.1 supplier of the materials, a development likely to provide stability in costs and supply.
Whatever happens, you can be sure the world will be watching to see how China handles its “rare gems” with great interest.
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