Who was watching your supply chain? Recent geopolitical muscle-flexing has highlighted major strategic vulnerabilities in the supply chains of dozens of countries and many more companies worldwide.
Rare earths (rare earth elements or REE) have been in the news a lot in the last week, with the New York Times and Financial Times along with the G20 meeting of Finance Ministers voicing concern over actual and anticipated reductions in exports from China, which accounts for over 95% of global REE production. Today, reports suggest the World Trade Organization and EU are seeking a solution (and investigating legal recourse) to German and broader EU concerns over reported Chinese export restrictions on the 17 minerals which offer critical magnetic and luminescent properties for clean and high tech industries.
It is actually an issue that has been around for some time, with interest in REE rising sharply in 2009 as businesses and investors increasingly focused on clean technologies. REE are used in many “clean” products such as hybrid and electric cars, catalytic converters, thin film solar panels and wind turbines, as well as in high tech devices including computers, MRI machines, medical applications, smart phones and iPods. REE are also found in everyday items such as household appliances, cars and industrial motors.
The short-term issue which has sent REE prices up and politicians to the negotiating table, as well as promoting speculations of bubbles in the media, is that everyone seems to have just woken up to the fact that China has an effective global monopoly on the production of these critical raw materials – and that this leverage is being used in geopolitical disputes. The wake-up call: On September 7, 2010 the collision of a Chinese fishing boat and Japanese Coast guard vessel resulted in the arrest by the Japanese of the Chinese trawler captain, reigniting an ongoing dispute between the two countries over a group of disputed islands in the East China Sea. Despite the subsequent release of the captain, Chinese customs officials imposed a block on shipments of REE to Japan from September 21. On October 21, news agency AFP reported that Japan’s reserves of REE could be exhausted by March or April 2011, according to Yoshikatsu Nakayama, Japanese vice-minister of economy, trade and industry.
Even as this dispute rumbles on, the US and Europe are voicing increasing concern over the alleged slow-down, if not halt, of Chinese REE shipments to their countries, amid rising tensions over trade and currencies. Last week the US opened an investigation into whether China was violating WTO rules with its clean energy policies, including export quotas and export duties on rare earths. Such quotas and exports are only allowed by the WTO to protect the environment or to preserve supplies of resources that might otherwise be exhausted. However, some German companies allege that they have been told by Chinese officials that they should invest in China if they wanted access to such raw materials – which would violate the WTO policy. At a conference in Berlin today, Pascal Lamy, head of the WTO suggested that the completion of the Doha trade talks, stalled since 2008 would be key in resolving the growing tensions: “A completion of the Doha Round will serve as a stepping stone towards better international trade rules in resource sectors.”
Taking a step back, the much bigger questions here are: How did China become an effective monopoly supplier of REE, given the critical importance of the minerals to many future-oriented industries? Are there longer-term alternatives to Chinese dominance of production? Are the Chinese being unreasonable in reducing REE exports (something which has actually been happening for the last two years or so)? Was someone asleep at the wheel in the US, Europe and Japan?
Let’s start with supply. In a nutshell, China became a monopoly producer because of a combination of good (but not uniquely good) deposits, low labour costs and lower standards on waste. Rare earths are not really rare and have similar abundance to nickel or tin. The problem is their occurrence is not concentrated in similar commercial ore deposits. This means many small-scale mines, which require substantial labour, of which China has plenty. The mining of REE can also produce noxious waste products, which is why the biggest producer of REE from the 1960s to the 1990s, the Mountain Pass Mine in California was shut down after a spill of radioactive waste. This left the field clear for China to take over as the low-cost competitor and build its market dominance.
On to supply alternatives: Yes is the short answer. New sources of REE are being developed in Canada, the US and Australia, while India, Brazil, South Africa, Eastern Europe along with several other countries have potential to develop REEs (some used to be major suppliers). For example, the Mountain Pass mine is expected to come back online in 2011 under much more stringent environmental safety guidelines. The challenge for new or re-emerging suppliers will be that new mines will take three to five years to reach full production. Japan is also actively pursuing the recycling of valuable metals and minerals, including REE, from used electronics such as mobile phones and computers. The Japanese and Koreans are also looking into REE substitutes, with researchers reporting success with REE-free technologies for electric car motors. So longer-term, there will be increasing competition on the supply side.
What about demand? One of the factors likely influencing China’s reduction of exports is the growing demand for REE in their domestic industrial base. A paper on rare earths from Avalon Rare Metals Inc. suggests that global REE demand has increased from 85,000 tons per annum in 2003 to 124,000 tons in 2008 and is on track to reach 200,000 tons by 2015. As China’s economy has boomed including rising production of electronics products such as the iPhone, and with the government’s increasing commitment to clean technologies, Chinese demand has also grown rapidly. Imagine how this domestic demand could soar if China were to commit to only allowing hybrid or electric cars! So there are clearly economic drivers behind the reduction of Chinese exports of REE. The bigger questions are whether they could increase the supply, from significant reserves, to satisfy domestic AND global demand increases, and whether the current trade and currency stand-offs are driving a harder line from the Chinese than economic motivations would require. After all, it would not be the first time that resource producers have used their advantages for political ends – take Russian supplies of gas to Europe in the last decade.
The implications for industries and consumers worldwide of these dynamics could be significant. Long-term, supply and demand is likely to come back into balance, as new supply comes online, alternatives to REE are found and trade tensions are addressed. Short-term, prices are likely to remain higher, and speculation is probable around new producers of REEs, with implications for the costs of many finished products – your next electric car or mobile phone could well be more expensive than the last. And if Japan does not resolve its issues soon, one of the world’s major industrial producers may see its industries face significant shortages which will impact their competitive positions. The biggest challenge will be finding international agreement on trade that avoids such potentially dramatic risks in future.
Which brings me to the question I have not yet addressed. Was someone asleep at the wheel in the US, Europe and Japan? Frankly my view is yes, absolutely! It is incredibly worrying to think that not just governments, but corporations which depend on a single source of critical raw materials did not recognize such a significant strategic risk earlier and have contingency plans. Why? Were executives not looking across the full supply chain to understand the dynamics around their suppliers’ suppliers? Did they not make the leap from thinking about purchasing a material, to thinking more broadly about the shapers and influencers who could impact potential future supplies? As prices have gone up in the last two years, have they actively looked at alternatives?
I may well be being unfair to many of you, who perhaps have thought about your end to end strategic supply chain, and who do have contingency plans for critical raw materials. But REE shortages and price hikes should NOT have been a surprise. Organizations need to build much broader awareness of critical trends – beyond the strategy group and CEO – and think through the options that these imply for the long-term health and success of the company’s future. Control of and access to critical resources will be an increasing arena of cross-border business and political competition – and disputes – in future. See The Global Trends Report 2010 for more.
Your comments on this topic are very welcome, and let me leave you with one last thought:
By 2030, assuming average economic growth and no efficiency gains in water use and management, the aggregate global demand for water will rise to 6,900 billion m3 from 4,500 m3 in 2009. This represents a 40% gap between demand and the current accessible, reliable, environmentally sustainable supply. In some regions the picture is even worse, with one-third of the population, concentrated in developing countries, estimated to be living in basins where the demand-supply gap exceeds 50%. (Source: The 2030 Water Resources Group.)
Are you ready?