What China’s Loss in the Rare Earths Dispute Means for Global Sourcing

Date: June 4, 2015

What China’s Loss in the Rare Earths Dispute Means for Global Sourcing

China Ends Rare Earths Export Quota

Earlier this year, China announced that it would comply with the World Trade Organization’s 2013 ruling on its rare-earths export quotas. This new outlook has ended a long debate on whether or not the Chinese government should be allowed to limit the volume of exports of these key minerals widely used in high-technology industries, including smartphones, green energy practices, and military applications. While it may be easy to label this decision a victory for the WTO and a dramatic loss for China, the outcome isn’t exactly black and white. China’s position on the rare-earths dispute and their perceived failure may not yield the results that many in the sourcing industry were hoping for.

The important thing to note is that prior to China’s acceding to the WTO ruling, the limitations China imposed on the global market for rare earths didn’t exactly create a monopoly-like control over rare earths for China. In fact, it actually created a more robust market for rare earths. Production in other countries, like Australia, Japan, and Malaysia that are also rich in rare earths, was increasingly exploited, saturating the market with a competitive supply of these highly prized minerals. The world has since looked elsewhere for their share of rare earths; China once produced 93% of the world’s rare earths, but in recent years, that output has dropped to 86%, falling below even their own allowances under the very quota system they themselves created.

Additionally, Chinese companies were eager to make higher profits for themselves and did not feel it was beneath them to conduct more business beyond the quota limitations imposed on them by the government. Sometimes they agreed to sell their rare-earth supplies at almost half the cost of those through official channels. According to some reports from the late 2000s, between 15% and 30% of China’s total rare-earths production was being smuggled out of its borders. The more the Chinese government tried to impose higher global prices for their rare earths and the more restrictions they levied on manufacturers, the more likely it would be for those very companies to turn around and find underhand ways of exporting their products overseas.

And it is here that the real problem lies: with the illegal miners in China and companies buying from them. It is still not clear whether China’s officials will act on this troubling issue, yet the outlook seems bleak to several rare-earths experts. Some claim that the illegal activity is suppressing prices and that ready availability of supplies in China could dry up in as little as 12 months if action is not taken against these unlawful practices.

So what exactly does China’s new announcement on their rare-earths supply mean for the global sourcing market? Well, perhaps not very much. The major players in the rare-earths market have already coexisted with China’s market and, because of that, market prices have reflected a rather competitive rate overall. This new development in the rare-earths dispute hasn’t and most likely will not affect how other rare-earths suppliers will carry on their business or how companies will source them. With the end to the quota limitations, China gets to play nice with the WTO and its members, of which China is also a part. The acceptance of the ruling also allows China to end a policy that wasn’t working for them in the first place. It turns out that this “loss” ended up as not such a bad deal for Beijing after all.

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