Foreign Policy Research Institute A Nation Must Think Before it Acts China’s Rare Earth Metals Consolidation and Market Power
China’s Rare Earth Metals Consolidation and Market Power

China’s Rare Earth Metals Consolidation and Market Power

Rare earth metals or “rare earths,” a collection of 17 elements[1] that are valued for their conductive and magnetic properties, have made headlines again.  Over the past year and a half, their prices have risen to levels not seen since their peak in 2011.  What’s more, in December 2021, Beijing approved the merger of three of China’s biggest rare earth metals state-owned enterprises (SOEs)—China Minmetals Rare Earth, Chinalco Rare Earth & Metals, and China Southern Rare Earth Group—along with two other companies—Ganzhou Zhonglan Rare Earth New Material Technology and Jiangxi Ganzhou Rare Metal Exchange.  The merger created the world’s second largest rare earths producer, accounting for 30 percent of China’s total rare earth metals production and 60-70 percent of its heavy rare earth metals production.

The new company, reportedly named China Rare Earth Group, is the latest product of a decade-long effort by Beijing to consolidate China’s rare earths industry.  The effort is one of several that Beijing has pursued to gain greater control over industries that it sees as having strategic importance, from defense and energy to technology and telecommunications.  And certainly, Beijing views its rare earths industry as being strategically important, as Chinese General Secretary Xi Jinping himself noted in 2019.  Echoing that view, China’s state-run media has repeatedly lauded the usefulness of the industry as leverage in China’s disputes with Western countries, particularly the United States.

Bigger Is Better

Yet, China’s official framing of the rare earths industry consolidation sounds innocuous: to assure “the stability of production and supply chains”—a goal that Beijing seems to have long since achieved given Chinese dominance over worldwide rare earths production since the 1990s.  But for Beijing, assurance of “the stability of production and supply chains” amounts to more than control over the physical production of rare earth metals; it also means the ability to influence their prices, much like the way the OPEC cartel tries to manage the price of oil.  That ability is clearly a priority for China’s Ministry of Industry and Information Technology (MIIT), whose chief, Xiao Yaqing, complained that “China’s rare earths aren’t being sold at a ‘rare’ price but sold at an ‘earth’ price.”

Unfortunately for Beijing, the structure of China’s rare earth industry had long been highly fragmented, making it difficult for Beijing to influence prices.  In fact, intense competition among private Chinese companies depressed rare earths prices during much of the first two decades of their global dominance.  In a bid to boost prices, Beijing imposed export quotas on rare earth metals in 2009.  But after an international protest was lodged against the quotas, the World Trade Organization struck down their use in 2014.  Unfazed, Beijing pivoted from export quotas to output quotas.  The central government also began to consolidate many of China’s rare earth metals companies, first into six big SOEs and now, with the recent merger, four of them.

Beijing believes that less corporate competition and more state control will enable it to gain greater control over rare earths prices.  Indeed, a smaller number of big Chinese rare earth metals companies, which already dominate the world’s production of the metals, should have more bargaining power to negotiate prices with foreign buyers.  Such power, Beijing thinks, will not only benefit its homegrown rare earths industry, but also give China greater political advantage and, perhaps, Chinese companies that use the metals an edge over their foreign competitors.

Another reason for China’s consolidation of its rare earths industry concerns international expansion—a key part of the five-year development plan that MIIT laid out for China’s rare earths industry in 2016.[2]  For China’s rare earths companies to fulfill that plan, they need capital.  Industry consolidation helps.  Big companies can raise financing more readily and cheaply than small ones.  And Chinese SOEs can do so from Chinese state-owned banks at preferential rates.  Hence, as Chinese rare earth metals companies have grown larger, they have also become better positioned to expand internationally.  By way of example, Ganfeng Lithium acquired Bacanora, a British lithium producer, in 2021.

A final reason for China’s consolidation push is Beijing’s desire to improve the environmental conditions under which rare earth metals are produced, at least domestically.  The byproducts of rare earth metals mining, refining, and smelting are often toxic and, in some cases, radioactive.  With direct government control over a small number of big rare earths producers, Beijing should, in theory, be able to better enforce environmental rules and regulations.  Curbing externalities would help forestall further public discontent with the pollution that has typified China’s rare earths production in the past.

Buyer Pushback

In the early 2010s, Western concerns about China’s dominance over rare earth metals production largely revolved around the metals’ importance to military systems, like radar and sonar.  Today, those concerns have grown to include what that dominance means for national competitiveness in several commercial technologies, such as batteries, electric vehicles, and wind turbines.  China’s enactment of rare earth metals export controls and its demonstrated willingness to use them as a political tool to retaliate against Japan for its nationalization of the Senkaku Islands (Diaoyu in China) in 2009 have only reinforced those concerns.

In response, a few Western countries have boosted their rare earth metals mining, refining, and smelting capacities.  The United States has been the most active.  A once-shuttered rare earths mine in California reopened in 2018; new companies, like Rare Element Resources and UCore Rare Metals, have begun to operate in Texas and Alaska respectively.  In the meantime, the U.S. Department of Defense awarded Australia’s Lynas Rare Earths, the biggest rare earth metals producer outside of China, a grant to build a light rare earths refinery in Texas.  Concern about continued secure access to rare earth metals has stimulated new investment into their production outside China.  Tellingly, China’s share of global rare earth metals production slipped from 80 percent in 2017 to 60 percent in 2021, according to the U.S. Geological Service.[3]

Meanwhile, many Western companies—particularly automobile manufacturers that expect to consume large quantities of rare earth metals—have sought ways to reduce their reliance on them.  Some companies, like BMW, Daimler, Nissan, Tesla, Toyota and Volkswagen, have sought to economize their use of rare earth metals.  Others, like General Motors, have gone a step further to use alternative rare earths sources, namely those in the United States.  A select few companies, like Japanese air-conditioning manufacturer Daikin, intend to entirely phase out rare earth metals from their products.

On the other hand, more ambitious research and development efforts into either new methods of refining and smelting rare earth metals or new materials to replace them have been slow to gather steam.  That is likely because rare earths prices fell precipitously after their 2011 peak and stayed low through 2017.  However, considering the sustained price increases—not to mention supply-chain disruptions—since then, Western companies may be wise to invest a bit more into such research and development if they hope to contain their costs in the future.

Digging Up Trouble?

Beijing has faced few barriers to the consolidation of the Chinese rare earths industry.  But if China’s ever-growing companies are to maintain their global dominance over rare earths production, they will have to more aggressively expand overseas.  It turns out rare earth metals are not so rare; they are found all over the world.  And as the world has grown more aware of the value of rare earth metals, the ability of Chinese companies to easily strike favorable deals may wane.

Chinese companies seeking to profit from minerals used in lithium-ion batteries have already encountered more difficulties abroad.  In one case which began in 2007, two Chinese SOEs, Sinohydro and China Railway Group, struck a deal with former Congolese President Joseph Kabila to exchange Chinese infrastructure investment for a 68 percent stake in a large cobalt-and-copper joint venture called Sicomines.  At the time, the deal was undoubtedly good for the two Chinese SOEs.  But it became even better after its terms were secretly amended in 2017 to accelerate payments to Chinese investors at the expense of promised infrastructure development.  When the revised terms became public in 2021, they created a furor in Congo.  They also prompted the current Congolese government to question the fairness of China Molybdenum’s 2016 deal for the giant Tenke Fungurume cobalt-and-cooper mine.  Naturally, the two cases serve as cautionary tales to other countries considering deals with Chinese companies.

Nevertheless, if Chinese companies are able to maintain their dominance over rare earth metals production, Beijing’s industry consolidation has the potential to create a Chinese “trump card” in Beijing’s relations with Washington and the West.  Unlike OPEC, China has no need to worry about partners cheating on production quotas.  However, Chinese SOEs do have to worry about the political winds in Beijing, where power has undergone its own consolidation under Xi.  The increasingly consolidated political structure surely makes China’s market power over rare earth metals easier to wield.  But should Beijing wield that power too vigorously, or threaten to use it too often, Beijing may further propel the very forces that will undermine its longevity.

[1] The 17 elements are cerium, dysprosium, erbium, europium, gadolinium, holmium, lanthanum, lutetium, neodymium, praseodymium, promethium, samarium, scandium, terbium, thulium, ytterbium, and yttrium.

[2] China Ministry of Industry and Information Technology, Rare Earth Development Plan, 2016–2020 (2016).

[3] U.S. Geological Survey, Mineral Commodity Summaries, January 2022, p. 2; and U.S. Geological Survey, Mineral Commodity Summaries, February 2019, p. 2.

The views expressed in this article are those of the author alone and do not necessarily reflect the position of the Foreign Policy Research Institute, a non-partisan organization that seeks to publish well-argued, policy-oriented articles on American foreign policy and national security priorities.