From my perspective, the natural evolution and expansion of global free-market capitalism into mainland China was disrupted by the reforms of Deng Xiaoping about 25 years ago. By fiat he created a centrally commanded version of capitalism in which it appeared that domestic Chinese costs (of both skilled and unskilled labor) were lower than those in the then-developed world. We now know that this was only a perception (an artifact), due to virtual and actual subsidies paid by the Chinese local, provincial, and national governments, to ‘kick-start’ and then maintain what turned out to be a massive export-driven Chinese national economy.
The ‘reforms’ of Deng were labeled Capitalism with Chinese characteristics and they worked. However, the logical, foreseeable consequences of the subsidy program (invisible to foreigners but known to insiders), namely the economic cancers of over-capacity and over-supply, also began. Its consequences are now sharply curtailing the rate of growth of the Chinese economy, and the impact of these consequences is also to hold back the global ‘recovery’ from the debt-fueled Western economic collapse of 2007.
The Chinese national government is taking official, not virtual, steps to attempt to reverse the impact of this over-capacity and over-production on its economy, and in this way is again having a direct impact on the entire global economy. This is very apparent in the global rare-earth sector. This sector is tiny in the context of the global industrial economy, but it is a perfect example of the problems created by central (command) control of the production of a natural resource.
The news from China about the reorganization of its domestic rare-earth-mining sector is a strong indication, I think, that from a global point of view the world’s rare-earth total supply chain is also in a rapid transition to reorganization, and, alliteration aside, it is, by economic necessity, evolving toward one of compact regional centers, as distinct from the current Sinocentric model.
In the paradigmatic and foremost of these centers, China, the rare-earth markets are being directed to reorganize into survivable units, i.e. with a minimum size to be profitable, even without virtual and actual subsidies. China’s rare-earth supply chain has too much of everything – mines, separation plants, metal / alloy / fine-chemical makers, and magnet and other end-use product makers. China announced just this past weekend that strict limits on emissions of pollution from named industries, such as mining, are to be enforced. From the point of view of economics, this means the capitalizing (recognizing the costs as liabilities) of both curbs on current polluting emissions and of remediation (cleaning up) of the damage from past emissions.
This means that even as over-production and over-capacities in the total supply chain, which is today essentially Chinese, have driven down the selling prices of the rare earths, the industry will be saddled with new and permanent increased costs of operation and the huge legacy costs of an industry long used to artisanal mining (in China’s case this means rogue and illegal mining). To implement a ‘crackdown’ the Chinese government has already added very significant taxes to mining and processing to fund remediation; it has also promulgated expensive regulations requiring proof of the holding of licenses to produce and to consume rare earths. These taxes and regulations will force the industry to contract, by creating a minimum size for a profitable rare-earth business.
The rising costs in China though, especially due to capitalization of environmental remediation, are also fueled by an expansion of the rule of law (equality of the rich and poor before the law) and even a distinct glimmer of a serious adherence to the concept of property rights, are reworking the rare-earth landscape (“if your pollution injures me or my property I can bring you to law, or, as in China – and the USA – the State can shut you down, pending the resolution of the problem”).
Most of the (logical) evolution of China from a “developing nation,” which it loves to call itself in international trade, to the world’s second largest economy by GDP, has taken place in plain sight and with lots of publicity. We outsiders who do not read Mandarin or understand Chinese culture, see the overall plan, but certainly not the operational details at any particular sites.
The fierce internal competition in China among legal producers of the rare earths, has until now been matched in ferocity by illegal, unregulated ‘midnight mining’. The existing dozens of small separation plants in China (and even nearby in places such as Vietnam and Thailand) have operated for years on irregular offers of such illegal material as cash-generating icing on the cake. Now, as the central government of China forces consolidation and requires certificates of mine and separation-plant allocation, the illegal miners have to work with a ‘total illegal supply chain’ to keep everything ‘off the books’. Those who puzzle over the existence of an illegal separation plant built by Chinese ‘contractors’ in Vietnam and ask, “from where does it get feedstock?” are naive in the extreme. Such a plant is part of an illegal total supply chain. I can only assume that corrupt officials in China, Vietnam, and perhaps other Southeast Asian countries, keep this supply chain going.
I discuss this, because it is a plausible explanation of how a seeming global shortage supported by ‘official data on total production’ of the critical rare earths, does not seem to cause extreme distress or shutdown of industries totally dependent on rare-earth permanent-magnet (REPM) alloys, modified with dysprosium and terbium. The fact that official production figures do not support the current demand picture of dysprosium and terbium, show that end-users must now, in the face of the Chinese crackdown on illegal production, secure their supplies outside of China. If, for example, as the Chinese repeatedly say, they are not able to expand their proven resources of heavy rare earths through legal mining regulated as to health, safety, and pollution, then the illegal mining and refining that is supporting the current shortfalls, is undoubtedly draining the reserves much faster than the official figures are showing. This is the real crisis!
Non-Chinese sources of heavy rare earths must now be brought into production under all circumstances. Non-Chinese manufacturing centers and regions need to attain self-sufficiency as soon as possible. There are ion-adsorption clays exactly as those in China in the tropical regions, in addition to numerous non-Chinese hard-rock sources, including those listed on the TMR Advanced Rare-Earth Projects Index.
There is, however, simply not enough middle and heavy rare-earth separation and purification capacity outside of China, to support European, North American, and non-Chinese, Southeast Asian DEMAND, along with an increasing Chinese domestic demand. This is in particular true as Chinese domestic demand literally explodes. Long-term Chinese planning is based on the very fact that Chinese sources of the heavy rare earths must be conserved, to support the changeover of the Chinese economy from being export-driven to being domestic-consumer-driven.
For the total rare-earth supply chain, the news is even worse. Outside of China the global capacity for rare-earth metals and alloys production is tiny. If we base non-Chinese REPM production capacity on secure access to didymium metal, samarium metal, ferro-dysprosium, and cobalt, then I suspect non-Chinese capacity would be today at most just 10% of global demand.
The non-Chinese world, even if its costs become level with or lower than those in China, still has one big problem – the cost of building new separation and metal and alloy making facilities, as compared with the already arrayed and substantial available capacity within China. This problem can only be resolved by central, regionally deployed tolling facilities for separation, such as the one being developed in Quebec by Innovation Metals Corp. (whose President is my TMR colleague Gareth Hatch), and perhaps even for metal and alloy making. I believe that this will occur in four regions: Europe, North America, Japan, and Korea. India will most likely be a fifth non-Chinese rare earth total supply chain center, but perhaps later than the first four here mentioned.
Disclosure: Jack Lifton is a member of the Technical Advisory Board for Innovation Metals Corp.