February 06, 2013

Much Ado about Nothing: Allaying Concerns about China's Potential Control of Greenland's Rare Earths

On Monday, Quartz published a story about China’s growing foothold in Greenland and the mounting concerns about its quest to produce the semi-autonomous island’s rare earth metals. (See “China’s creep into Greenland is setting off alarm bells.”)

The New York Times reported last September that the retreating Greenland ice sheet is giving way to new opportunities for the 57,000 people living on the once sparse island. In particular, the melting ice is leading to new discoveries of mineral deposits, including rare earths. According to the report, the small Greenland town of Narsaq sits near one of the world’s largest deposits of rare earth elements – which are critical in the manufacturing of advanced technologies, from smart phones and smart bombs to wind turbines and high-end batteries. According to Greenland Minerals and Energy Ltd, the deposit could contain about 10.3 million metric tons of rare earth metals, equivalent to about 10 percent of the known global reserves (which total about 110 million metric tons, according to the U.S. Geological Survey).

Quartz reports that Western officials are particularly concerned about potential Chinese control of Greenland’s rare earth elements given that they are critical to advanced technologies and have few – if any – reliable manufacturing substitutes. (Some technologies can substitute rare earths, but they do not have the same effective properties.) Adding to the angst is the fact that China today produces about 97 percent of the world’s rare earth elements – even though it only holds 50 percent of the world’s known reserves, and that China has been limiting exports in order to satisfy its own domestic demand.

But how worried should Western officials be about China’s potential control of Greenland’s rare earths? A couple of points are worth mentioning that should help allay concerns.

First, China’s share of the rare earth market is in relative decline. Sure, China produces 97 percent of the world’s rare earth resources. But the United States has ample reserves as well; they are just not being produced – yet. According to the U.S. Geological Survey, the United States holds about 13 million metric tons of rare earths, or about 12 percent of the known global reserves. One of the largest mines is in California. While the United States used to produce these minerals, more rigorous environmental standards made it difficult for U.S. producers to compete with cheaper Chinese metals, and so U.S. producers stopped extracting them. But that is starting to change as prices rise. The market appears to be doing its thing, and the United States is ramping up U.S. rare earth production to compete with Chinese metals. Naturally this will help diversify the market. Moreover, Australia and Malaysia are also planning to increase production of their known reserves as well. Other countries are likely to follow suit, including India and other states in Central Asia.

Second, China’s drive to develop Greenland’s rare earths is driven more by its economic than geopolitical interests. Chinese production of rare earth elements appears to be in decline –particularly heavy rare earths – and may be driving the industry to diversify its resource base. After all, global demand is on the rise, and there are profits to be reaped from sustaining its place as a major producer of rare earths. Greenland’s rare earth deposits present an opportunity for it to expand its sources of these minerals.

(Caveat: China's development of Greenland's rare earths can have geopolitical benefits as well, but those have more to do with its interest in the Arctic than in controlling the rare earths market. This is beyond the ambit of this post, but is worth mentioning.)

Of course, policymakers have fresh memories of China halting exports of rare earths to Japan in 2010 when the two countries were locked in a bitter maritime dispute in the East China Sea. Naturally, U.S. and other Western officials are concerned that China may once again use its sizeable share of the rare earths market to exert geopolitical pressure on those countries dependent on China’s rare earths. But I suspect that this 2010 incident was more of a one off event than the beginning of a pattern of behavior. After all, sparking a trade war with the West is not in Beijing’s interest. In fact, it was largely this incident in the first place that sparked concerns, raised prices and kicked start growth in non-Chinese rare earth production.   

With all this said, a few deep breaths are in order. But that does not mean that U.S. and other Western officials should not be concerned about their dependencies on rare earths for advanced manufacturing. Indeed, one of the biggest struggles facing industry today is the lack of transparency in the global supply chain of rare earths. Reliance on third party manufacturers and nebulous supply chains has led to an opaque understanding about where manufacturing vulnerabilities lie. This is something the industry is going to have to get a handle on. 

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