Introduction

On March 26, 2014, the World Trade Organization (WTO) issued its long-awaited findings in response to formal complaints made by the United States (USA), the European Union (EU) and Japan (collectively the Complainants), concerning China’s approach to the exports of rare-earth elements (REEs), tungsten (W) and molybdenum (Mo).

The 257-page document, combining the individual sets of findings for each Complainant (the Report), was completed by a three-person Panel of the WTO’s Dispute Settlement Body (DSB). It is an exhaustive evaluation of the measures that China has put in place to regulate the export of these materials, and follows a two-year investigation by the WTO into the complaints made.

My March 2012 article on the initiation of the WTO actions, reviewed the details of the initial complaints, and the mechanism behind the WTO dispute process, including the DSB. In it I suggested the potential arguments that China might make to defend its export measures, using certain exceptions to the WTO rules, and the potential consequences of various outcomes.

In the following article, I will review the main findings of the DSB Panel, the basis for their determinations, and the key takeaway points from the Report. We’ll also look at what China’s next moves might be, and the potential consequences for REE supply and pricing. I’ll also highlight the ongoing key advantage that the Chinese downstream REE supply chain has over other countries, even in light of the recent WTO findings.

The Complaints

Since the initial request for the formation of a DSB Panel to review the issues at hand, the specific complaints were refined. They focused specifically on measures relating to export duties, export quotas and the limitations placed on companies that are permitted to export these materials. The Complainants alleged that these measures are inconsistent with China’s obligations under its Accession Protocol – the document that codifies China’s acceptance into the WTO. They also alleged that the measures were inconsistent with the 1994 General Agreement on Tariffs and Trade (GATT) – specifically Article XI on the General Elimination of Quantitative Restrictions.

Initial claims relating to “an alleged lack of uniform, impartial, or reasonable administration of the export quotas” were dropped soon after the process began.

China responded by claiming that the country’s export-related measures were permitted, by virtue of Article XX of the 1994 GATT, related to General Exceptions. China pointed specifically to Article XX(b) relating to measures “necessary to protect human, animal or plant life or health” and Article XX(g) relating to measures for the conservation of “exhaustible natural resources“.

Process Timeline

• The process started on March 13, 2012, when the Complainants each requested consultations with China, under WTO rules, with respect to the initial measures and claims that were detailed in my previous article;
• Consultations were held during April 25-26, 2012. These consultations did not resolve the dispute between China and the Complainants (collectively the Parties);
• On June 27, 2012, the Complainants each requested that a DSB Panel be established;
• On July 23, 2012, the DSB established a single Panel to hear the cases presented by the Complainants;
• On September 12, 2012, the Complainants requested that the Director-General determine determine the specific membership of the Panel;
• On September 24, 2012, the Director-General appointed Mr. Nacer Benjelloun-Touimi to chair the Panel, and Mr. Hugo Cayrús
 and Mr Darlington Mwape as the additional members;
• The Panel adopted a set of Working Procedures and a timetable on October 18, 2012;
• The first substantive meeting of the Panel with the Parties took place during February 26-28, 2013, during which an additional session with interested third parties also took place;
• A second substantive meetings of the Panel and the Parties was held during June 18-19, 2013;
• The Panel sent questions to the Parties on February 13, 2013, March 1, 2013, April 11, 2013, May 30, 2013 and June 21, 2013;
• The Panel issued the descriptive part of its Reports to the Parties on July 31, 2013;
• The Interim Reports were issued to the Parties on October 23, 2013; and
• The Panel issued its Final Reports to the Parties on December 13, 2013.

Summary of the Panel’s Findings

The final combined Report from the Panel went into painstaking, exhaustive detail on every aspect of each specific complaint, and China’s responses to those complaints. In summary, the DSB Panel found that:

• Because its Accession Protocol does not form part of the permanent ‘framework’ of the 1994 GATT, China could not claim the benefit of the exceptions noted in Article XX of the 1994 GATT for the imposition of export duties or export quotas, or for imposing certain restrictions on the activities of companies that export REEs, W and Mo, which otherwise contravene the provisions of its Accession Protocol;

• Even if Article XX was available to China as a justification for export duties, those duties were not “necessary to protect human, animal, or plant life or health“, as required under Article XX(b), and thus the imposition of export duties was “inconsistent with China’s WTO obligations”;

• China’s export quotas “were designed to achieve industrial policy goals rather than conservation”, thus negating China’s ability to use Article XX(g) to justify the imposition of export quotas. The Panel further found that these measures did not work together with other measures imposed on domestic Chinese use of REEs, W and Mo, as also required by Article XX (g); and

• Although Article XX did allow for “restrictions on the rights of enterprises to export” REEs and Mo, China did not demonstrate how such restrictions on the basis of Article XX(g) specifically, were justified. The Panel found that these “trading rights restrictions breach its WTO obligations“.

Analysis

Having reviewed the Panel Report in its entirety, there are three overarching themes to take away from it:

1) The negative environmental impact of mining and processing in China is undisputed
During the WTO process, China strongly asserted that the mining and production of REEs and other metals in China has caused significant harm to its environment, and to the health of people, animals and plants in the country. China presented extensive evidence on the environmental risks associated with the REE supply chain, including reference to the toxicity of mine tailings and the challenge of air and water pollution. The Report included China’s statement that:

[T]he risks to human, animal or plant life or health and the costs of controlling such risks are key reasons why rare earth production was shut down outside China. In this regard, China submits that companies outside of China that were producing, or had the capability to produce, rare earths were not ready to bear the high costs of implementing technology that would tackle environmental harm and meet national regulatory environmental requirements.

The EU and the USA did not dispute China’s assertion with respect to environmental damage; Japan indicated that it deferred to the Panel’s judgment on this particular issue.

After reviewing the evidence, the Panel stated in the Report that it considers that “China has demonstrated that the mining and production of rare earths, tungsten, and molybdenum have caused grave harm to the environment and to the life and health of humans, animals, and plants in China“.

The initial announcement of the Panel’s findings at the end of March met with significant criticism from entities within China, the implication being that the WTO had not considered the environmental impact of the REE industry in China, in its findings. On the contrary, the Panel made it crystal clear that it did in fact recognize that such harm had occurred. The Panel insisted however, that the existence of such damage “does not suffice to demonstrate that export duties are necessary to protect human, animal or plant life or health“.

2) China did not demonstrate that export duties have a material effect on environmental protection
In response to the complaints made, China insisted that its export duties on REEs, W and Mo were “an integral part of a comprehensive policy that has the goal to reduce pollution and protect the health of China’s population, its animals and plants“.

The Panel noted that it was not sufficient to simply state that the imposition of export duties was part of a wider “comprehensive policy for environmental protection” in China. In fact, the Panel found that no part of the comprehensive environmental policy that China cited, showed a link between export duties and “a pollution reduction objective“. There was no evidence to suggest that putting export duties in place would have or had had any material effect on the stated goal of pollution control. This was a similar finding to a previous WTO dispute involving China.

This assertion of a connection was always going to be a problem for China to prove, since the final destination of a resource (i.e. outside of China) really has no bearing on the way that it was produced in the first place.

3) China did not demonstrate evenhandedness with measures associated with resource management
The Panel noted that export duties increase the price of REE products that are exported for use outside China. China failed to demonstrated that there were any corresponding measures that increase the price of REE products that are intended for use inside China.

The discussion on export quotas centered on China’s insistence that it was allowed per Article XX(g) to impose such quotas on the basis of “the conservation of exhaustible natural resources“. However, this exception also requires that “such measures are made effective in conjunction with restrictions on domestic production or consumption“. The Panel acknowledged that each member of the WTO has permanent sovereignty over its natural resources, and that member countries may adopt “conservation measures should they wish to do so, in the light of their own objectives and policy goals, including economic and sustainable development“.

However, the Panel noted that:

no WTO Member has, under WTO law, the right to dictate or control the allocation or distribution of rare earth resources to achieve an economic objective. WTO Members’ right to adopt conservation programmes is not a right to control the international markets in which extracted products are bought and sold.

The Panel found that China had not demonstrated evenhandedness in its approach to domestic and foreign entities, with respect to access to REEs, and thus the imposition of export quotas was not made in conjunction with other measures that would affect the domestic supply chain. There was significant discussion on the role of production and separation quotas, but the Panel was not convinced that the impact of the measures was anything other than discriminatory against foreign entities.

What’s Next?

China has up to 60 days from the date of the Report’s publication, to decide if it will appeal against the Panel’s findings. If it does not, or if it does and the findings are upheld, then it is likely that China would be required to drop its export duties and export quotas on REEs.

The export duties on individual REE products varies from 15-25%; in addition, since the price spike of 2010-2011 there have been additional costs associated with ‘quota surcharges’ on individual REE products. In the absence of other measures, the elimination of China’s REE export measures would have the effect of reducing the export prices for REEs to those currently enjoyed in China, for use in China.

While this is great news for end users of REEs, it is not particularly good news for the operators of existing REE mines outside of China, or the developers of new REE projects. Many developers have for some time been using erroneous price assumptions when reviewing the economics of their projects, since they have assumed that they could sell intermediate concentrates into China, at discounts to FOB / export prices. The reality is that such sales would have to be competitive to internally sourced concentrates, and so the correct approach is to discount in relation to domestic, not FOB / export prices. If the prices converge as a result of the elimination of export controls, then the ambiguity goes away, and we are left with similar prices regardless of the destination of the products.

That said, there have already been discussions within the industry in China, concerning the imposition of across-the-board resource taxes on REE products, which would elevate the prices above the current domestic levels, presumably to some point below current FOB prices. If China is genuinely concerned about controlling the environmental impact of REE production, and in protecting its resources from exhaustion, then the imposition of such taxes, as well as a reduction in the overall production quotas, and the imposition of pollution taxes, could be effective measures – measures which do not discriminate against foreign entities, thus conforming with the WTO rules.

It should be noted that regardless of the outcome of the WTO dispute, downstream users of REE products in China, that incorporate these materials into components and other goods that are then exported from China, will still have a distinct advantage over downstream users outside of China. Apart from labor costs, exports of finished goods are eligible for a rebate on the 16% VAT paid on the original raw REE materials, a rebate that has not been given on exported raw materials since 2007.

We will keep an eye on the appeals process for this WTO case, and will of course share what we discover, when we have more to report.

Introduction

As those who follow the rare-earths sector will know, on March 13, 2012, the United States, the European Union and Japan (the complainants) filed simultaneous and near-identical complaints with the World Trade Organization (WTO), in which they requested consultations with China (the respondent) on the measures that it has in place related to restrictions on the export of rare earths, tungsten and molybdenum.

The following article presents an overview of the WTO dispute process, the specific details of the rare-earths-related complaints, and looks at how China might respond to the specific complaints made. It also looks at various criticisms of the complainants for filing the disputes. In addition, the article looks at the consequences of the various potential outcomes of the disputes, once they have been concluded, and looks at clues as to how things might actually turn out, gleaned from a similar WTO trade dispute.

The WTO Dispute Process

The precursor to the WTO (and later subsumed into it), the General Agreement on Tariffs and Trade (GATT) had a mechanism for dispute resolution, but it had significant limitations. The Marrakech Agreement (also known as the Uruguay Round agreement) in 1994 established the WTO itself, as well as the WTO’s Dispute Settlement Body (DSB). The WTO describes the rationale for the process thus:

WTO members have agreed that if they believe fellow-members are violating trade rules, they will use the multilateral system of settling disputes instead of taking action unilaterally. That means abiding by the agreed procedures, and respecting judgements.

Much of the recent commentary on the disputes has accused the complainants of cynical motives for their initiation (perhaps understandably so, depending on one’s perspective). The fact remains, however, that the four parties involved are all members of the WTO, and have all formally agreed to the above process for dispute resolution. It is thus far from inappropriate for the complainants to use the legal mechanisms at their disposal in order to further their collective interests.

Under the normal rules of the DSB (which actually consists of all members of the WTO in general session), the first stage of any dispute is the consultation process, which may last up to 60 days. If these consultations fail, then the DSB will appoint a Dispute Panel, whose final report can only be rejected by the consensus of the DSB. Rejection is thus highly unlikely. This is the opposite of the old GATT approach, in which rulings could only be adopted by consensus, which meant that the objection of a single member (such as the respondent in the dispute) could block such a ruling.

Either side may appeal the findings of the Dispute Panel, primarily on the basis of the way that existing rules have been interpreted. No new evidence may be presented at that time. Such appeals are heard by a subset of the permanent Appellate Body, which can uphold, modify or reverse the findings of the Dispute Panel. The DSB is required to accept or reject the report of the Appellate Body within 30 days. Again, rejection of the findings requires full consensus of the DSB, so is highly unlikely.

Under normal circumstances, disputes are expected to be concluded within 12 months of initiation. Any appeals are expected to be concluded within a further 3 months, so that the whole process is supposed to be completed within 15 months of initiation. The process does allow for flexibility in these timelines, and in reality, disputes often take longer. A recent dispute (that we’ll come back to later in this article) initiated by Mexico, the European Union and the United States in August 2009, concerning the export of bauxite, coke, fluorspar and other materials from China, was finally deemed to have been settled in February 2012, some 30 months after initiation.

Details of the Recent Complaints

The complainants each filed near-identical requests for consultation with China, “with respect to China’s restrictions on the export of various forms of rare earths, tungsten, and molybdenum.” The requests made reference to numerous Harmonized System (HS) codes (used for classifying products, materials and services for international import and export) for specific rare-earth, molybdenum and tungsten products and compounds. In the case of rare earths, forms referenced in the documents include (but are not limited to):

• Rare-earth ores;
• Thorium ores & concentrates (presumably by virtue of their rare-earth content?);
• Individual rare-earth metals, including so-called “battery-grade” rare-earth metals;
• Individual and mixed rare-earth oxides, carbonates, chlorides, fluorides and other compounds (including cerium hydroxide & cerium cyanide);
• Rare-earth-containing phosphorescent powders;
• Rare-earth-containing ferroalloys; and
• A variety of rare-earth-containing magnetic powders and alloys.

Yttrium and scandium are included in the HS code classifications for rare earths, alongside the lanthanides.

With respect to “various forms of rare earths, tungsten and molybdenum“, the complainants specifically alleged the following actions by China are not in line with current WTO trade provisions:

• The imposition of export duties;
• The imposition of export quotas and other quantitative restrictions;
• The imposition of other restrictions such as the right to export based on licenses, prior export experience, minimum capital requirements, and “other conditions that appear to treat foreign invested entities differently from domestic entities“;
• The maintenance of minimum export prices, through the examination and approval of contracts and offered prices, and through the administration and collection of the export duties, “in a manner that is not uniform, impartial, reasonable, or transparent“;
• The imposition and administration of restrictions through unpublished measures.

The trade provisions with which the complainants allege that the aforementioned measures do not comply include:

• GATT Article VII: ‘Valuation for Customs Purposes’;
• GATT Article VIII: ‘Fees and Formalities connected with Importation and Exportation’;
• GATT Article X: ‘Publication and Administration of Trade Regulations’;
• GATT Article XI: ‘General Elimination of Quantitative Restrictions’;
• Various commitments within the Protocol on the Accession of the People’s Republic of China (including specifically Paragraph 11.3); and
• Various commitments within the Report of the Working Party on the Accession of China.

To summarize the proceedings then, the complainants allege unfair treatment of non-Chinese entities via export restrictions, discriminatory commercial operating rules within China, the setting of unofficial minimum export prices (what some might call price fixing) and an overall lack of transparency concerning the implementation of the measures in question.

The Chinese Response

These are early days for the disputes. At the time of writing, the Chinese delegation has not yet officially responded, through the WTO, to the request for consultations by the three complainants. There have, however, been some initial responses from official and unofficial Chinese sources outside of the WTO arena, with some having been published prior to the request for consultations, in anticipation of the WTO action. These responses mostly refer to allowable exceptions that are embodied within the GATT that, such sources contend, allow WTO members to put measures in place to control exports. Let’s take a look at some of the cited exceptions and other responses.

GATT Article XX: ‘General Exceptions’ begins with the statement:

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:

before going on to list a variety of the aforementioned measures, some of which are likely to be referenced in the Chinese response to the complaints. These include measures:

“(b) necessary to protect human, animal or plant life of health;“

This obviously relates to measures meant to protect the environment, and to mitigate pollution. Sources both Chinese and non-Chinese have frequently cited the environmental damage caused by rare-earth mining and processing, as a justifiable reason for restricting the export of rare earths. There is certainly significant evidence to suggest that rare-earth operations have previously caused widespread pollution and damage to local ecosystems, have contaminated water sources and have caused health problems in local populations, livestock and plant life.

However, it is difficult to see how controls on the ultimate destination of rare-earth materials once out of the ground and processed, have any effect on the practices used to get them out of the ground and processed in the first place. Recent estimates indicate that approximately 65-70% of demand for rare earths comes from end users within China. A more persuasive argument could be made if overall production levels of rare earths were reduced, as a means of reducing the environmental impact of rare-earth mining, instead of restricting their export. However, overall production levels of rare-earth ores have remained steady or have actually increased in recent years.

There are indications that excess rare-earth processing capacity in China is being taken offline, with an emphasis on the closing of facilities that have the most egregious track records when it comes to pollution. New standards for pollution mitigation have also made a positive contributed here. Only the most skeptical of observers would deny that at least recently, China is taking the pollution problem associated with rare earths seriously.

There is no explicit language in this clause of Article XX that relates to or requires the application of measures to domestic production or consumption, in order for them to be legitimately applied to exported materials as well. China may therefore be able to use this measure to successfully justify the export quotas and licensing processes, even if non-domestic customers are disadvantaged by them, if they can demonstrate that such actions are not a “disguised restriction on international trade“, as stated in the pre-amble for Article XX.

“(g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption;“

Another oft-cited argument for the implementation of rare-earth export restriction relates to the disparity between the proportion of rare-earth supply that originates in China (around 95% these days), and the proportion of global rare-earth resources located within China (approximately 30-35% depending on who you talk to). Proponents of this argument say that this places an undue burden on China, which is unfairly expected to meet the demand for rare earths out of proportion with its resources, which are rapidly being depleted.

There are a number of issues with these arguments:

• The first is that again, over two-thirds of overall demand is coming from end users located in China, and thus the comparison should perhaps be between proportion of supply (95%+) to proportion of demand (65-70%), rather than to proportion of resources (30-35%). Granted, a significant fraction of those end users are exporting end products back out of China to the rest of the world. Those end users would of course argue that they were ‘forced’ to locate their operations in China in order to be competitive with Chinese market participants. We can also be pretty sure that the Chinese authorities didn’t resist the opportunity for the creation of jobs and tax revenues, when those foreign companies set up shop in their country.
• The second issue relates again to the fact that it is difficult to see how controls on the ultimate destination of finished rare-earth materials through export restrictions, have any effect on efforts to conserve China’s rare-earth resources, since overall rare-earth production levels have not decreased in recent years, and numerous companies which previously received rare earths outside of China, have relocated operations to be within China.
• The third issue relates to the question of whether or not the rare-earth resources in China can be deemed to be “exhaustible”. Of course, any specific finite natural resource deposit that is removed from the ground, will at some point be exhausted. In the case of the rare-earth deposits in northern China however, where the vast majority of the world’s light rare earths come from, estimated mine lives in the hundreds of years are frequently quoted, with little disagreement.
• In contrast, the ion-adsorption clays in the southern part of China, from where the world’s heavy-rare-earth supplies originate, are frequently referred to as being rapidly depleted, with mine lives estimated by the authorities to be in the order of anything from 6-20 years. While I am aware of more than one source that privately disputes these numbers, nevertheless, there would appear to be legitimate concern in China regarding potential exhaustion of the southern deposits.
• This contrast in depletion rates between deposits in the north and south of the country, is perhaps one reason why this year, for the first time, the authorities in China divided the export quotas into separate allocations for light and for medium + heavy rare earths, in anticipation of the WTO trade dispute. Unlike for medium + heavy rare earths, significant new sources of light rare earths are expected to come on-stream in the next 12 months, from outside of China, and it is likely that the allocations by the Chinese for the export of light rare earths will be adjusted accordingly. In addition though, having a separate allocation for the rarer medium + heavy rare earths could well make for a strong fall-back position for China, if it fails to make the “conservation of exhaustible natural resources” argument for the rare earths as a whole.
• The fourth issue (and frankly the most problematic) relating to reliance on clause (g) above, is the explicit expectation that any measures taken with respect to foreign consumers, will only be deemed valid if those measures are also applied to domestic consumers as well. In my mind, this is the single biggest flaw in any attempt by the Chinese authorities to use the “conservation of exhaustible natural resources” argument to justify export restrictions, since by their very definition, they apply only to foreign consumers. It may smack of a technicality, but it’s a pretty significant one, and frankly will undermine any attempt by China to use clause (g) to counteract the complaints filed.

“(j) essential to the acquisition or distribution of products in general or local short supply; Provided that any such measures shall be consistent with the principle that all contracting parties are entitled to an equitable share of the international supply of such products, and that any such measures, which are inconsistent with the other provisions of the Agreement shall be discontinued as soon as the conditions giving rise to them have ceased to exist […].”

In some ways, this clause is a variation of the previously discussed clause (g) of Article XX. While it would not hold much water with respect to the northern light-rare-earth deposits, it is possible that it might be used with respect to the supply of heavy rare earths, although it would be a bit of a stretch to equate the future potential exhaustion of deposits, with “general or current local short supply.” I therefore think that it is unlikely that China will use this clause in its arguments, and that such a claim is even more unlikely to stand up to scrutiny if it does.

In addition to Article XX of the GATT, Article XXI: ‘Security Exceptions’ might, in theory, come into play as well. Commentators have noted that during the Rose Garden press conference of March 13, 2012 to announce the request for consultations, President Obama did not make mention of the importance of rare earths to the defense supply chain (and, incidentally, did not mention tungsten or molybdenum at all). While it is true that the largest volumes of anticipated rare-earth demand are likely to be in the green-technology applications mentioned during the President’s announcement, rare earths are deemed by many to be critical to a range of defense applications. This, despite a dominant group within the US Department of Defense not agreeing with this assessment (or at least, declining to acknowledge that there is a risk of disruption to their supply, despite the best efforts of certain members of Congress to persuade them otherwise).

It is possible that these defense applications were deliberately not mentioned by the President, to avoid giving the Chinese WTO delegation an incentive to use part of Article XXI in a future response to the WTO action, specifically the sub-clause that states:

“Nothing in this Agreement shall be construed […] (b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests […] (ii) relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment;”

This sub-clause is the (legitimate) basis for numerous countries placing restrictions on trade, where such trade could impact national security. In the USA, a good example would be the restrictions on the export of dual-use technologies, as outlined in the Defense Federal Acquisition Regulation Supplement (DFARS). I’ve never heard anyone on the Chinese side use this as an argument for export restrictions on rare earths, and it is unlikely to start doing so. Still, we can be pretty sure that the US in particular will avoid bringing the topic up during the subsequent consultations.

Criticisms of the Recent Complaints

In anticipation of a WTO trade dispute concerning rare earths and subsequent to its initiation, various commentators have criticized the complainants for taking such actions.

One common criticism is that the United States in particular, is trying to use the WTO action to ‘force’ China to mine materials that it is not prepared to mine itself, because of the environmental problems that such mining can cause. The argument goes that the non-Chinese market for rare earths was happy to enjoy the low costs of these materials until relatively recently, but that such costs were only possible because of the lack of pollution mitigation in China.

While I can empathize with this latter viewpoint to an extent, I am not convinced that anyone is trying to ‘force’ China to mine anything, since a positive finding for the complainants in this particular instance would not lead to such an outcome.

There is a range of other criticisms of the WTO action that would be similar to the anticipated responses from China, as detailed above. Such criticisms can get quite heated and emotional; however, they invariably fail to acknowledge that ‘rules are rules’; that at the end of the day, each of the parties involved voluntarily signed up to be held accountable to the rules and regulations of the WTO, and to be subject to its processes.

Moving away from criticisms that can be directly argued on the basis of some of the exceptions discussed above, an additional criticism is that the filing of these actions on behalf of downstream end users of rare earths, by the complainants (each a government entity), enables the continued shortsightedness and even belligerence of commercial end users who continue to value profit margins over the strategic concerns of the jurisdictions in which they operate.

The end users continuing to focus only on their own commercial goals, so the thinking goes, without acknowledging possible obligations beyond that, inhibits the potential growth of an upstream supply chain outside of China. After all, Adam Smith himself once stated that “defence is of much more importance than opulence“, condoning preferential treatment for industries deemed to be of strategic importance, since, as he wrote in The Wealth of Nations,

“[i]f any particular manufacture was necessary, indeed, for the defence of the society, it might not always be prudent to depend upon our neighbours for the supply; and if such manufacture could not otherwise be supported at home, it might not be unreasonable that all the other branches of industry should be taxed in order to support it.”

The argument therefore goes that instead of filing WTO disputes on their behalf, the US and other governments should instead be encouraging the rare-earth sector to become independent of China, through the creation of an upstream industry.

Of course, these latter issues are only indirectly linked to the WTO action, and we should not try to infer too much from such actions. As stated above, regardless of what people think that companies and markets should or should not be doing from a commercial or even a strategic perspective, if one believes that governments should adhere to the agreements to which they sign up, then the WTO dispute process is a perfectly legitimate method of asserting the rights of individual members, independent of all other arguments.

One other point that gets raised in the context of the WTO dispute, is that since the Chinese authorities started to impose rare-earth export quotas, there has not been a year where the official actual export numbers came close to meeting or exceeding the quotas set. However, the reduction in export quotas for 2010, by 40% compared to the previous year, caused a surge in price increases that did not abate until the summer of last year, regardless of the actual supply situation ‘on the ground’.

The massive differences between domestic and export prices for rare-earth materials in the latter half of 2010 and much of 2011, further exacerbated issues of competitiveness between enterprises located within China and those located without, and led to demand destruction. It would be one thing if these fluctuations were the result of normal market activities; such would be life in the commercial jungle. But if those price differences were caused by the imposition of unofficial minimum export prices, as alleged in the WTO complaint, then this is a whole other ball game, clearly in contravention of WTO rules and being played on anything but a level playing field.

Potential Outcomes of the Dispute

There are a number of possible permutations for the end result of the collective disputes. If we take the complaints collectively, we can speculate on the consequences of what those outcomes might be, should a dispute panel be formed, and the process comes to a conclusion. Let’s look at some scenarios:

• China is found to be in contravention of the WTO rules on all counts: there are a number of consequences to this ruling. China would be required to remove export restrictions, which would probably lead to a fall in export rare-earth prices, and increased demand as a result. This would likely reduce the incentive for companies to relocate their operations to China if they have not done so to date. However, purely in commercial terms it would also reduce the need, for additional sources of supply outside of China, and could make it harder for the new non-Chinese sources of light rare earths to compete – but purely on (now fair) commercial terms.
• An alternative action, that could happen instead of or in addition to the first, would be the enforced reduction in production levels of rare earths in China, such that both Chinese and non-Chinese end consumers get to ‘share the pain’.  This would lead to shortages of newly mined and produced rare earths, especially heavy rare earths, which could increase prices. This would further increase the incentive for the development of an upstream supply chain outside of China.
• Which of these two alternatives would come to dominate, should they both be put into action, is hard to say at this point.
• China is found to be in contravention of the WTO rules as they relate to light rare earths, but not heavy rare earths: this would be an interesting outcome because although the previous points would apply to light-rare-earth production, the production of heavy rare earths would be exempt, and further restrictions would be possible. It would almost certainly lead to increased prices, and a further widening of the gap between export and internal prices for these materials. This would provide an incentive for end users of heavies to continue to relocate operations to China, but would simultaneously boost the case for the development of heavy-rare-earth projects outside of China. This is particularly the case if the overall demand for heavies continues to grow, especially within China.
• China is found to be justified in its export restrictions, and the WTO finds in its favor: if the WTO rules that China’s export restrictions are justified, and does not require internal consumers to be subject to similar requirements as non-Chinese consumers, then the most obvious outcome would be a greater incentive for foreign end users to move operations to China, or to buy semi-finished or finished products from China, since it is likely that the price differential between domestic and export rare-earth materials will continue to be significant.  Such a ruling would provide significant incentive to develop the external upstream supply chain. If China comes out on top with the disputes and if it really is running out of heavy rare earths, then it would still need to ‘play nice’ with the complainants (although with the possible exceptions of the Norra Kärr project in Sweden and the Bokan project in Alaska, the leading potential new sources of heavy rare earths are not to be found in the jurisdictions of the initial complainants), since at some point in the future, China might become a net importer of heavies.

Looking at the Outcomes of Other Cases

It is reasonable to ask if the outcomes of previous WTO trade disputes can be used as precedents for the current set of complaints. The WTO makes it clear that each case is supposed to be considered on its merits, and on the evidence presented. However, if similar complaints have been made in the past, and similar evidence is presented, then it is not unreasonable to look to the outcomes of such disputes to give an indication of how the rare-earth case might turn out.

A particularly relevant case that recently concluded, concerned export restrictions on “various forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc“. The original complainants were Mexico, the European Union and the United States, who were subsequently joined by Argentina, Brazil, Canada, Chile, Colombia, Ecuador, India, Japan, South Korea, Norway, Saudi Arabia, Taiwan and Turkey.

Initiated in August 2009 and concluded February 2012, the complaint featured similar allegations to the present rare-earths case. According to the WTO summary of the case:

The complainants argued that the use of export restraints creates scarcity and causes higher prices of the raw materials in global markets. They also provide Chinese domestic industry with a significant advantage by way of a sufficient supply, and lower and more stable prices for the raw materials.

It went on to state that

In one of its key findings, the Panel found that China’s export duties were inconsistent with the commitments that China had agreed to in its Protocol of Accession. The Panel also found that export quotas imposed by China on some of the raw materials were inconsistent with WTO rules.

The Panel found that the wording of China’s Protocol of Accession did not allow China to use the general exceptions in Article XX of the GATT 1994 to justify its WTO-inconsistent export duties. The Panel also considered that even if China were able to rely on certain exceptions available in the WTO rules to justify its export duties, it had not complied with the requirements of those exceptions.

In particular, China had argued in its defence that some of its export duties and quotas were justified because they related to the conservation of exhaustible natural resources for some of the raw materials. But China was not able to demonstrate that it imposed these restrictions in conjunction with restrictions on domestic production or consumption of the raw materials so as to conserve the raw materials. The Panel acknowledged, however, that China appears to be heading in the right direction in adopting a framework to justify its quotas under WTO rules, but that the framework is not yet WTO-consistent as it still has to be put into effect for domestic producers.

As for other of the raw materials, China had claimed that its export quotas and duties were necessary for the protection of the health of its citizens. China was unable to demonstrate that its export duties and quotas would lead to a reduction of pollution in the short- or long-term and therefore contribute towards improving the health of its people.

Furthermore:

Regarding the administration and allocation of its export quotas, China successfully defended its practices in claims brought by the United States and Mexico whereas the European Union succeeded in its separate claim that it brought against China.

The Panel also found that certain aspects of China’s export licensing regime, applicable to several of the products at issue, restrict the export of the raw materials and so are inconsistent with WTO rules.

Not unexpectedly, China appealed against the findings of the Dispute Panel. Interestingly, the United States also filed appeals concerning certain aspects of the original findings. Some of the key findings of the Appellate Body’s report:

The Appellate Body upheld the Panel’s recommendation that China bring its export duty and export quota measures into conformity with its WTO obligations such that the “series of measures” do not operate to bring about a WTO-inconsistent result.

The Appellate Body upheld the Panel’s finding that there is no basis in China’s Accession Protocol to allow the application of Article XX of the GATT 1994 to China’s obligations under Paragraph 11.3 of the Accession Protocol. In upholding the Panel’s finding, the Appellate Body examined the text of Paragraph 11.3 and found that the provision does not suggest that China may have recourse to Article XX to justify a breach of its obligation to eliminate export duties.

The Appellate Body further upheld the Panel’s conclusion that China did not demonstrate that its export quota on refractory-grade bauxite was “temporarily applied” to either prevent or relieve a “critical shortage”, within the meaning of Article XI:2(a) of the GATT 1994. The Appellate Body found that an export prohibition or restriction applied “temporarily” in the sense of Article XI:2(a) is a measure applied in the interim, to provide relief in extraordinary conditions in order to bridge a passing need. The Appellate Body agreed with the Panel that such a restriction must be of a limited duration and not indefinite.

It can be seen then that China will have to do a better job of demonstrating the validity of its export restrictions on rare earths, than it did for bauxite, fluorspar and the other minerals and materials referenced in the recent dispute.

Next Steps

As previously stated, at the time of writing China’s WTO delegation has yet to formally respond to the request for consultations, and the consultations are yet to take place. We’ll keep you informed as significant events occur in relation to the case – but it could be a while…

In November 2010, the Science and Technology Select Committee of the House of Commons (the lower chamber of the UK Parliament) announced an inquiry into the importance of strategic metals to the UK. The Chair of the Committee, Andrew Miller MP, said

“This inquiry has the potential to be wide-ranging, from concerns about the availability of rare earth elements to how metals are recycled from discarded technological devices, some unfortunately through the use of exploited child labour in developing countries.”

The impetus for the inquiry was the growing speculation in the UK and elsewhere, concerning the future availability of strategically important metals, including rare earths. The Committee sort to answer five key questions:

1. Is there a global shortfall in the supply and availability of strategically important metals essential to the production of advanced technology in the UK?
2. How vulnerable is the UK to a potential decline or restriction in the supply of strategically important metals? What should the Government be doing to safeguard against this and to ensure supplies are produced ethically?
3. How desirable, easy and cost-effective is it to recover and recycle metals from discarded products? How can this be encouraged? Where recycling currently takes place, what arrangements need to be in place to ensure it is done cost-effectively, safely and ethically?
4. Are there substitutes for those metals that are in decline in technological products manufactured in the UK? How can these substitutes be more widely applied?
5. What opportunities are there to work internationally on the challenge of recovering, recycling and substituting strategically important metals?

Written submissions in response to these questions were received by the Committee and published earlier this month. Evidence was received from a variety of sources, including professional societies, universities, government agencies and companies (including TMR).

Earlier today, the Committee completed a first round of hearings at Portcullis House in London. Witnesses included:

• Louis Brimacombe – Tata Steel
• Tony Hartwell – Environmental Sustainability Knowledge Transfer Network
• Ian Hetherington – British Metals Recycling Association
• Professor David Manning – Geological Society of London
• Dr Mike Pitts – Royal Society of Chemistry
• Dr Bernie Rickinson – Institute of Materials, Minerals and Mining
• Sophie Thomas – The Design Council

The hearings lasted for two hours, and were conducted in two parts. You can see complete coverage of the event here (if you have any problems running this video – visit the UK Parliament archive page instead):

A transcript of the hearings will likely be available shortly, and once published we’ll add a link to them here.

A few very quick ‘takeaways’ from the hearings:

• There was general consensus that the European Community Directive on Waste Electrical and Electronic Equipment (WEEE), which currently requires that consumer goods manufacturers take responsibility for the disposal of devices at the end of their useful lives, should be expanded to cover industrial and commercial goods and appliances too.

• Product designers need to work with materials scientists and engineers to design hi-tech products that can be easily dismantled, to enable rare-metal-rich components to be recovered, re-used or recycled.

• In the few cases were product components are recovered, the processes used to dismantle and to acquire these components from the waste stream, are far less sophisticated than the processes used to create the products in the first place.

• Product designers need incentives to design their products with recovery and reusability in mind.

• Local expertise in materials science and engineering is required wherever manufacturing is going to occur, in order to support the supply chain properly.

• Much of the work in Europe on product end-of-life issues has focused almost entirely on environmental issues; more work needs to be done to expand the discussion to sustainability and economic considerations – and the social value of all such activities.

• When discussing where rare-earth projects were underway outside of the UK, no-one on the panel of witnesses or committee of MPs, appeared to be aware of the advanced rare-earth projects currently underway in Europe – specifically Sweden (and Greenland, if you consider it to be part of Europe). This was despite at least one written submission giving details on such projects (that from TMR!).

• One witness said that in his research prior to coming to the hearings, he had tried to ascertain what  the market might be for recycled rare earths such as neodymium, but was unable to find any information on this. He then commented that without such markets, there was no incentive to recycle rare earths, or other materials. I’m not sure that I’d agree with this. If one assumes a reasonable level of purity in any such recycled materials, then the material is surely fungible i.e. is no different from “primary” neodymium-based materials.

• The general consensus was that the answers to the questions originally posed by the Committee, had to be answered in the wider European context at least, since these were issues that went way beyond the UK’s borders, and since very few strategic metals are actually mined or produced in the UK.

We’ll keep an eye on any further developments on this story, and update you as and when we can.

By Mike Alberti – Remapping Debate – Published: January 11, 2011

While the recent controversy surrounding China’s almost complete control over rare earth elements may seem to some like an arcane debate over minerals with hard-to-pronounce names, for many experts and economists it represents a concrete example of a broader long-term failure of United States trade and industrial policy.

Rare earth elements are a set of 17 minerals, some of which are crucial to producing a wide array of high-tech products. They are used in iPads and in flat screen TVs, in wind turbines and in hybrid electric car batteries. These minerals are also needed for the tracking systems of missiles and military drones. Until about 1984, the U.S. mined the majority of the world’s rare earth supply; today it produces almost none. Nearly all of the mining now occurs in China.

From the mid-60’s to the mid-80’s, global rare earth mining was dominated by the Mountain Pass mine in California. The mine closed in 2002, after a series of radioactive wastewater leaks raised environmental concerns, and after increased Chinese production — partially due to state intervention and partially due to a lack of environmental controls — had begun to undercut U.S. prices.

Meanwhile, U.S. manufacturers that relied on rare earths found it easier to be closer to the source, and also relocated. In 2004, a company called Magnequench — a huge producer of permanent magnets that require rare earths and that are crucial components in the guidance systems of cruise missiles — closed its plant in Indiana and moved its facilities to China.

Read the rest of this article….

By Rob Spiegel & Suzanne Defree – EDN – Published: December 2, 2010

China has started to severely restrict the exports of rare-earth materials, which often find use in “green”-technology designs, including hybrid vehicles and energy-efficient lighting, as well as in the medical, defense, and consumer markets. The country delivers nearly 100% of the world’s rare-earth materials: 17 metals that are somewhat hard to refine and that tend to occur in the same ore deposits. The cutbacks have resulted in shock waves through the electronics industry and could force design changes in the near future.

China set out on a moderate restriction path this year and then announced in July that it would cut exports by 72% for the remainder of 2010. It plans an overall export reduction of 30% for next year.

These cutbacks have increased the price of rare-earth materials an average of 700%, prompting legislation, which is currently stalled, to restart US rare-earth-materials production. The Western Hemisphere’s one rare-earth-materials producer, Colorado-based Molycorp Minerals, issued an initial public offering of stock in July, raising $390 million to restart its California mine and ramp up processing to counter world shortages.

Part of China’s motivation for reducing rare-earth-materials exports is its desire to emphasize its industrial status. China’s leaders want to move away from raw-materials exports and evolve toward exporting more finished goods.

Production of rare-earth materials fell off worldwide beginning in the 1980s when low prices in China made production unfeasible elsewhere in the world. Tom Valiere, senior vice president and co-founder of Design Chain Associates, says this cutback is a wake-up call for US industry. “We used to lead the world in the export of rare-earth materials,” he says. “In the last 20 years, we’ve become dependent. The whole thing flew under the radar until green technology placed demand on rare-earth materials and we realized they were sole-sourced to China.”

China’s restrictions this year have been part of a multiyear plan to save most of its supply for its own industry. “Each year, China has brought down its exports by X% and never exceeded its quotas,” says Gareth Hatch, co-founder of Technology Metals Research. “The reduction the country made in July was a huge reduction over the first half of the year.”

Worldwide shortages are now occurring. “The world outside China uses a collective 50,000 tons annually,” says Jim Simms, director of public affairs at Molycorp Minerals. “[China] reduced its exporting in 2010 to about 30,000 tons. Since China supplies about 97% of rare-earth materials, the world has to depend on what China exports.”

Simms believes that the demand for the materials will just increase over the coming years. The company expects to produce 20,000 tons by the end of 2012. “My BlackBerry only has about 3/10g of rare-earth materials,” he says, but “a single wind turbine requires about one ton. A car can use about 25 kg.”

Lynas Corp, a rare-earth-materials supply company in Australia, expects to increase rare earths delivery in 2011 to 11,000 tons per year.

Rare-earth materials facts

Rare-earth materials include terbium, which finds use in flat-panel TVs and high-efficiency fluorescent lamps, and neodymium, key to the permanent magnets in high-efficiency electric motors. Rare-earth materials are not indeed rare. The series of nonferrous metals is common in the environment. According to Design Chain Associates, most rare-earth materials are as common as copper, and even the rarest is more common than gold.

Part of the market pressure on rare-earth materials comes from new demand that green technologies has prompted. The market, including electric- and hybrid-vehicle motors and wind turbines, requires magnets.

Legislation stalls

Over the summer, the House of Representatives passed HR 6160, RESTART (Rare Earths and Critical Materials Revitalization Act of 2010). The bill authorizes development of a domestic rare-earth-materials program aiming at addressing short-term shortages. Industry organizations continue to push for legislation such as RESTART to speed the output of rare-earth materials. “We discussed the rare-earth situation with government committees, and they’re concerned about it,” says Fern Abrams, director of government relations and environmental policy at IPC (formerly, Interconnecting and Packaging Electronic Circuits).

IPC has taken a stand encouraging legislation to rekindle the rare-materials production in the United States. “We’re asking our members to write to their representatives asking that they assist US efforts to re-establish mining in the United States,” says Ron Chamrin, manager of government relations at IPC. “There are bills in Congress, as well as activity in the Department of Energy. It’s not a panic, but the government should be concerned and take action.”

A US Government Accountability Office report claims that China’s dominance in rare-earth materials’ mining and refining has implications for global availability and pricing and could also jeopardize US defense readiness.

Meanwhile, China’s export restriction of rare-earth materials has hit Japan the hardest, especially for its production of high-efficiency electric motors in electric and hybrid vehicles. China placed further export restrictions on Japan last month over Japan’s detention of a Chinese fishing-trawler captain. In anticipation of rare-earth-materials shortages, Nidec Corp, a maker of electric cars, has developed a process to build switched-reluctance motors without rare-earth materials. The company will begin making the motors without the materials in 2012.

HALIFAX, NOVA SCOTIA, Oct 07, 2010 (MARKETWIRE via COMTEX) — Ucore Rare Metals Inc. (“Ucore” or the “Company”) is pleased to comment on the bipartisan passage of H.R. 6160, the Rare Earths and Critical Materials Revitalization Act of 2010 (“the Act”), by the U.S. House of Representatives. The Act incorporates amendments to the National Materials and Minerals Policy, Research and Development Act of 1980 and other proposals to further the establishment of a domestic supply chain for rare earths in the United States.

The Act calls for a program of research, development, and commercial application to assure the long-term secure and sustainable supply of rare earth materials sufficient to satisfy the national security, economic well-being, and industrial production needs of the United States. The program will be designed to support activities from the exploration and discovery of rare earth materials through to the development of new or improved processes and technologies utilized in the industry.

Additionally, the Act calls for a Temporary Program for Rare Earth Materials Revitalization, authorizing the Secretary of Energy to make loan guarantees for projects including the separation and recovery of rare earth materials from ore or other sources and further downstream processing, including the preparation of oxides, metals, alloys or other forms of the materials needed for national security, economic well-being or industrial production purposes. The Act contemplates cooperation between public and private sector participants to achieve a complete rare earth materials production capability in the United States within 5 years of enactment of the Act.

“The passage of this Act by the House further demonstrates policy makers’ commitment to the re-establishment of a US domestic supply chain for rare earth materials,” said Jim McKenzie, President and CEO of Ucore. “We’ve recently seen China’s willingness to use their near monopoly on the supply of rare earth products as a diplomatic tool, which underscores the necessity for cooperation between private and public sectors in the U.S. to assure a stable supply of these materials which are so crucial to domestic security and economic well-being. The five year timeframe contemplated by the legislation reflects the urgency of the situation and the necessity of securing this supply in the near term. As Ucore transitions from exploration to mine scoping and development activities in 2011, the advantage of prospective financial guarantees and expediting assistance from Federal agencies can’t be overstated.”

Further legislation with respect to the supply of rare earth materials is also making its way through the legislative process. The Rare Earths Supply-Chain Technology and Resource Transformation Act of 2010, or ‘RESTART Act’ is currently being considered by the Subcommittee on Trade.

The RESTART Act, recently amended by Senator Murkowski of Alaska (R), incorporates a number of proposals, including the creation of an interagency working group consisting of representatives appointed by the Secretaries of Commerce, Defense, Energy, Interior, and State, as well as representatives from United States Trade and the Office of Science and Technology for the purposes of reestablishing a competitive domestic rare earth supply chain. The RESTART Act also calls for the provision of loan guarantees to rare earth industry participants, as well as the stockpiling of rare earth materials on an interim basis. Under this measure, the Administrator of the stockpile would be authorized to purchase necessary rare earth materials from China for a period of 5 years.

The RESTART Act further calls for a prioritization of Defense Production Act projects which address the domestic rare earth supply chain. Under the proposed legislation, within 180 days of the enactment, the Secretary of Defense will be required to issue a report describing past, current and future Defense Production Act projects to address the domestic rare earth supply chain, or to justify the lack thereof.

Within 90 days after the enactment of the RESTART Act, the Secretaries of Commerce, Interior, State, Defense and Energy will be called upon to issue guidance to rare earth industry related to obtaining loan guarantees under a number of available programs.

“While these Acts together promise to give U.S.-based rare earth producers a remarkable edge in the race to replace specialty metals now dominated by China, very few domestic projects have the qualifications of Bokan as a strategic military and technological asset,” said Jack Lifton, a leading REE expert and a party to the initial drafting of proposed RESTART legislation. “As the largest historically documented Heavy rare earth deposit in the U.S., Bokan is a counterpoint to Molycorp’s primarily Light rare earth deposit at Mountain Pass in California. Together, these two deposits, located in relative proximity to each other and on U.S. soil, have the potential of liberating the U.S. from non domestic rare earth dependencies in the near term.”

by Alex Madrigal – The Atlantic – Published September 23, 2010

A dispute over a fishing boat collision took a strange turn yesterday when the New York Times reported that China had halted exports of rare earth elements to Japan.

Since the report, Chinese officials have disputed that any such ban is in place. Regardless of the facts or outcome of this particular situation, the bare fact remains: China has a virtual monopoly on the mining and production of the 17 rare earth elements and could stop shipments of the metals to any country at any time.

That would impact all kinds of products and processes from glassmaking to lightbulbs to batteries to wind turbine production. Even the American defense industry is dependent on rare earth elements from China, as a Government Accountability Office report found earlier this year.

The M1A2 Abrams tank has a navigation system that requires the elements. The Aegis Spy-1 radar needs them, too. Already, supply crunches have caused production delays in military technology, the GAO reported.

The wind and electric vehicle industries also require large amounts of rare earth elements, and fear a squeeze.

Given that two industries as diverse as green tech and defense both need rare earth metals, why is the United States so dependent on Chinese production? Is China just the only place we can get this stuff?

No. In California, there’s a place called Mountain Pass.

For decades, most of the world’s rare earth metals were mined and refined right there. The process of restarting production could begin at any time. The company that controls the pass, Molycorp, said it would take about $500 million to start mining again.

With that upfront investment, production hasn’t restarted. Chinese rare earth elements are just cheaper. But this is the sort of problem that you need to get started on long before a crisis. The GAO found it might take 15 years for the entire production chain to be back online.

This isn’t the sort of problem you can just throw money at and instantly fix, as rare earth elements industry analyst Jack Lifton noted this month.

“I don’t know what possesses politicians to think that they can simply invent intellectual capital. You can’t. It takes time. And once you fall behind in your specialty, you are behind. You have to catch up. It’s not a matter of reading the latest papers; you also have to go back to what happened between the latest papers, and when you knew how to do it,”

Lifton said.

“So I find the politicians and financial minds in America seem to have no knowledge whatsoever of manufacturing or mining. They just think that money solves all problems.”

Some Congressional representatives are trying to get a domestic industry going. There is a bill before the house, the Rare Earths Supply-Chain Technology and Resources Transformation Act of 2010 or the RESTART Act, that, if funded properly, could get an American rare earth metal industry going.

But, according to a spokesman for the bill’s sponsor, Mike Coffman, a Republican from Colorado, the bill hasn’t seen much movement since it was introduced in April of this year.

It could get a boost from a long-awaited Department of Defense report that is due out from the agency’s Industrial Policy wing in early October. It should examine the problem with far greater depth than the GAO report.

And the House Committee on Science and Technology passed a favorable judgment on a separate, more R&D focused bill this afternoon called the Rare Earths and Critical Materials Revitalization Act of 2010.

The point here is not to bash Chinese industrial policy. They need and want rare earth metals. They produce them on their soil. And they can do with them what they want. It’s not their policies but ours that are the problem.

Again, here’s Lifton summing up the issue:

“China doesn’t consider itself to be hoarding anything. They figure that they’re using their own materials for their own needs. They question why we insist on using words like “control” and “hoard,” because they ask, “If you needed the material, why shut your factories?”

So it’s as simple as that. We really are foolish in America. We’ve shut down an industry that’s strategic and critical, and all in the name of low cost. Now we’re surprised that the consequences that are obvious in doing this have now come back to bite us. I’m not surprised, and neither is anybody else in China.”

We could fix this problem. But unfortunately our politics works on the 15-minute timescale of fame, not the 15-year clock of industrial policy.

by Kira Kay – PBS Newshour / The Bureau for International Reporting – Original Air Date: June 14, 2010

Correspondent Kira Kay reports on a Canadian hunt for “rare earth” minerals, elements mined almost exclusively in China, that are key to emerging green technologies, cell phones, engines and other high-tech devices despite their short supply. Includes interview footage with Jack Lifton.

Sometimes things actually move pretty quickly in Washington. The FY2011 National Defense Authorization Act [NDAA] was passed on Friday by a vote of the US House of Representatives, with a comfortable margin. As reported earlier this week, the Act contains provisions pertaining to the rare earth supply chain, with a set of mandates directing the Department of Defense to take specific actions regarding the supply chain as a whole. Contained in Section 835, these provisions successfully made it through the process and are part of the final passed House version of the bill. The next step will be for the Senate to work on its own version of the NDAA, for the two items to then be amalgamated in conference, before being signed into law later this year.

Prior to the vote of the full House on the bill, Rep. Mike Coffman [R-CO] on behalf of himself and Rep. Brad Ellsworth [D-IN] proposed an Amendment to the bill, relating to neodymium-based [Nd-Fe-B] permanent magnets. The Amendment [#6 on the list] looked to add a new Section 839 to the bill, titled “Defense Industrial Base Priority For Rare Earth Neodymium Iron Boron Magnets”. The Amendment noted “an urgent need” to restore US-based capabilities for manufacturing sintered Nd-Fe-B magnets for defense applications and to eliminate the vulnerabilities in the US defense supply chain as they relate to these “key materials”. At present there are no manufacturers of sintered Nd-Fe-B magnets in the USA.

The Amendment mentioned the findings of the recent Government Accountability Office [GAO] report on rare earths. It further noted that the USA was technologically capable of restoring a Nd-Fe-B manufacturing capability, but that restoring such capability would take 3-5 years. Noting that worldwide supplies of rare earths “are expected to tighten significantly within the next 3-5 years” and that there is an appreciable time to get new parts qualified for defense programs, the Amendment noted that work “should begin immediately” on restoring Nd-Fe-B production capability “to avoid future weapon system delivery disruption”.

Having made these observations, the Amendment then required that:

Not later than 90 days after the date of the enactment of this Act, the Secretary shall submit to the Committees on Armed Services of the House of Representatives and the Senate a plan to establish a domestic source of sintered neodymium iron boron magnets for use in the defense supply chain.

The Amendment further clarified what constitutes a “domestic source” of Nd-Fe-B magnets by stating that:

For the purposes of subsection (b), the capability to manufacture sintered neodymium iron boron magnets includes the alloying, pressing, and sintering of magnet materials. It does not include manufacturing magnets from standard shapes or imported blocks of neodymium. The Secretary’s plan shall not allow the grinding or reprocessing of neodymium to be considered a `domestic source of sintered neodymium iron boron magnets’.

This latter comment relates to the practice of companies procuring blocks of Nd-Fe-B magnet material from China, Japan, Germany and elsewhere, and then grinding the blocks into a final shape in the USA, before magnetizing or assembling the blocks into magnetic devices.

Rep. Coffman’s Amendment was considered in concert with several other amendments ‘en bloc’, and this group of Amendments passed by a voice vote. Section 839 is therefore now a part of the final passed House version of the NDAA. I asked Jeff Green, the industry lobbyist who has been working diligently on the issue of rare earth supply chain vulnerability, what this says about the awareness of members of Congress of these issues. “There is clear bi-partisan agreement on this issue,” said Mr. Green, “as evidenced by the fact that both the Chairman and Ranking Member of the House Armed Services Committee moved to submit this and other Amendments en bloc”. It is clear that the combination of growing mainstream interest on rare earths, and events such as the March hearings in the House on rare earths, and the recent publication of the GAO report, have had an impact. “We are seeing some traction,” said Mr. Green, “on some key issues of importance to national security and defense”.

The combination of the language in Section 835 and 839 of the NDAA is pretty powerful, certainly as it related to the production of rare earth magnets in the USA. While I am not sure that it would actually take as long as 3-5 years to get Nd-Fe-B production up and running again [assuming that the appropriate capital investments were made], certainly at least a couple of years would be reasonably required to build and install equipment, to optimize processes and to get people trained. The larger headache is what to do about the creation of US or North American-based rare earth refining capabilities, the absence of which is a critical problem in the process of getting the supply chain back up and running. It remains to be seen how the Department of Defense will tackle this issue, if the language in the NDAA as it presently stands is eventually signed into law.

There is one other potential wrinkle in the Nd-Fe-B story; that of patent licensing. While the decline of North American Nd-Fe-B production was very much related to Chinese pricing issues, the restoration of such production for commercial purposes has in part been hampered by red tape associated with a suite of patents on Nd-Fe-B that Hitachi Metals of Japan presently holds. Originally owned by Sumitomo Special Metals, these patents have been licensed to specific companies over the years, some of whom did have production in the USA. However, indications are that Hitachi Metals is not keen to issue new licenses to companies in the USA for Nd-Fe-B production; this is likely to be one reason for the delay in the proposed rare earth magnet joint venture between Molycorp Minerals and Arnold Magnetic Technologies, announced last year.

Further complicating matters is the arcane legal status of some of these patents. While many of the original composition-related patents have since expired, many of the newer patents have not, with some of the more important ones not expiring until after 2014. However, some industry insiders are speculating, and not just privately, that there are fundamental flaws in the patents themselves and how they have been interpreted over the years, including the mis-translation from Japanese into English, of critical parts of the original patent claims.

All of this may, however, be moot, for defense-related Nd-Fe-B production in the USA at least, if it is formally determined that the production of Nd-Fe-B magnets in the USA, is in the national interest. It is a long-established legal convention that the US Government can legally take and make use of intellectual or other property for its own purposes, so long as appropriate compensation is given in return. Indeed, this is enshrined in the Fifth Amendment of the US Constitution which states, in part, that private property cannot be taken for “public use” without the provision of “just compensation”. So, in the event that the procurement of ‘home-grown’ Nd-Fe-B magnets by the Department of Defense is endangered by the patent situation, there is a fairly clear way out; simply taking the intellectual property associated with the magnetic material patents, and allowing manufacturers to use it to produce magnets, in return for ‘reasonable’ compensation to Hitachi Metals.

Of course, it’s unlikely that things will get to that point; a variety of interactions between Washington and Tokyo would no doubt take place before things escalated, in order to ‘encourage’ Hitachi Metals to ‘do the right thing’. Besides, with only a few years left on these patents, excessive intransigence hardly seems worth the effort…

First published at RareMetalBlog.

Yesterday CNN aired a short piece on rare earths, and growing concerns on their supply. The video can be viewed here: