The rare earth minerals market is headed for a more normal supply condition following a World Trade Organization (WTO) ruling against Chinese export restrictions and the discovery by scientists of a large deposit of the raw materials used heavily in high-tech equipment manufacturing.
The WTO this week declared China was wrong to impose restrictions on rare earth metal exports and noted measures taken by the country in recent years have constrained supply and led to unwarranted price increases. Without saying so directly, the WTO indicated China was illegally manipulating the supply of minerals such as bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus, and zinc. The average price of these rare earth metals has shot up, and supply has been constrained since China, which supplies 90 percent of the world demand, began imposing export restrictions in the last year. (See: The Truth About Rare Earths, Part 1 and The Truth About Rare Earths, Part 2.)
The WTO did not outright say China's action was illegal; the agency does not use such terms. It merely said in a July 5 report that the country's "export duties were inconsistent with the commitments that China had agreed to in its Protocol of Ascension," and 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." (Click here for the summary of the WTO report.)
The WTO panel finding took two years and followed complaints by a group of countries, including the United States and a battery of interested third-party players. The US in June 2009 alleged that China had imposed various "restraints on the exports," adding "there appear to be additional unpublished restrictive measures," being carried out by Chinese vendors. Here's China's defense and the WTO's response, as outlined by the organization:
China had argued in its defense 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.
So, what does the finding against China mean for the global electronics industry and the demand-supply condition in the rare earth market? First, the WTO did not specifically indicate what should follow on its finding, but I assume a verdict against China would mean the country has to roll back whatever restrictions it has on the export of the minerals. China has not responded to the ruling.
The verdict should be a relief also for Western electronics equipment vendors and component suppliers, many of which had become greatly concerned about their ability to source rare earth metals from China. But even greater relief is on the way, according to the Information Network, a market research and consulting firm. China's restrictions sparked frenzy for alternate sourcing for the minerals over the last year, and it appears the industry might be able to dramatically reduce its dependence on Chinese suppliers following a huge discovery.
Robert Castellano, president of The Information Network, noted in an email:
In the past few days we have learned that vast deposits of rare earth minerals, crucial in making high-tech electronics products, have been found on the floor of the Pacific Ocean and can be readily extracted. Discovered by Japanese scientists, it is estimated that rare earths contained in the deposits amounted to 80 to 100 billion metric tons, compared to global reserves currently confirmed by the US Geological Survey of just 110 million tons that have been found mainly in China, Russia and other former Soviet countries, and the United States.
Before we start celebrating though, we must get answers to several questions. The Information Network did not disclose the exact location of the Pacific Ocean findings nor indicate whether they are within any particular country's maritime boundaries, within international or disputed water. Furthermore, the ease of mining and recovery was not discussed. We must not swap one set of problems for a nastier headache.