With more than 140 countries having signed the Paris Agreement to combat climate change in June 2016, the world is on the long road towards de-carbonising global economic growth through cleaner energy and smart technologies. However, a deep-dive into the underlying technologies, leads to a severe yet overlooked problem. Rare earths, a cluster of 17 elements often called the “vitamin of industry”, may be a bottleneck to such clean, green and smart innovations.
To understand the hidden risks behind smart and clean technologies we continued our investigation into China’s water issues, and take a deeper look at the rare earth industry in China & globally, as well the associated environmental damage in our new report, “Rare Earths: Shades Of Grey – Can China continue to fuel our clean and smart future?”
The “Chinese Era”
The Chinese rare earth industry only started to boom in the early 1990s and by the mid-1990s it overtook the US to become the “monopoly” supplier of rare earths in the world. Or as put by the United States Geological Survey (USGS), in the mid-1990s the global rare earth market entered the “Chinese Era” from the “Molycorp Era” (Molycorp is an American rare earth company that once provided the majority of global rare earths).
China’s rare earth resources could be comparable with the crude oil resources in the Middle East
In the early 1990s, Chinese leadership was proud of China’s abundant rare earth reserves and encouraged the development of rare earth mining, separation, smelting and re-fining. During the famous “Southern Tour” in the spring of 1992, Chairman Deng Xiaoping, the “chief architect of China’s reform, opening up and modernization”, concluded that rare earth resources were unique resources of China and could be comparable with the crude oil resources in the Middle East.
“China supplies over 90% of the global market rare earth needs with 23% of the world’s total reserves”
State Council’s “Rare Earth White Paper”, June 2012
However, only two decades later Chinese leadership dramatically changed their attitude towards the rare earth industry. On 6 October 2010, Premier Wen Jiabao brought the issue to the 6th China-EU Business Summit, saying that “China contributes a large proportion of the global rare earth output, far exceeding its proportion of the global rare earth deposits.” According to State Council’s “Rare Earth White Paper” published June 2012, “China supplies over 90% of the global market rare earth needs with 23% of the world’s total reserves”.
To protect its strategic and exhaustible rare earth resources, China started to implement stringent administrative conservation & protection regulations and policies on rare earth since the late-1990s. This included the three quota systems:
- Production quota issued by Ministry of Land and Resources(MLR) since 2006;
- Smelting and separating quota issued by Ministry of Industry and Information Technology (MIIT) since 2010; and
- Export quota issued by Ministry of Commerce (MOFCOM), which can be traced back to the export licencing system in 2002.
In July 2010, China cut its export quotas by 22.5%. Understandably, this stirred up protests
In 2014, the WTO ruled against China & by May 2015, China phased out its export tariff
In July 2010, China cut its export quotas by 22.5%. Understandably, this stirred up protests from the largest recipients of China’s rare earth supply, the US, Japan and Europe. Complaints were brought to the World Trade Organisation (WTO) arguing that China’s export quantity control policies were protectionist and against free trade rights.
In 2014, the WTO ruled against China. By May 2015, China phased out its export tariff, resource compensation fees and cancelled the export quota system, in accordance with the WTO ruling.
Changing landscape: New regulations, consolidation & limited supply yet expanding demand
While the world’s attention was on the WTO dispute, several changes were going on in China leading to a dramatically changing landscape.
China released its “most stringent Environmental Law”, as well as a series of environmental action plans to fight against pollution. Among them are the ‘Water Pollution Prevention and Control Action Plan’ (“Water Ten”) and the ‘Soil Pollution Prevention and Control Action Plan’ (“Soil Ten”). Both mean higher environmental compliance costs for China’s rare earth industry.
A series of industrial standards are issued or under drafting
It also started to standardise the industry. After two decades of wild development, a series of industrial standards that covered: mining techniques, water intake volumes, energy consumption, discharge limits, packaging labelling and transporting, are issued or under drafting. Additionally, a national commodity traceability system is being built that will enhance the transparency of the domestic and global rare earth industry.
Furthermore, State Council also published national opinions to facilitate “sustainable and healthy development” of the industry, which meant consolidating China’s rare earth industry into six state-owned groups. In the first half of 2016, these six groups account for 99.9% of the national rare earth production quota.
MHREES are the more strategic & more scarce rare earth elements
Outside of China, driven by concerns of short supply, the US and various European countries launched assessments on supply chain risks from strategic materials, especially rare earths. Studies from the US and EU both concluded that Medium Heavy Rare Earth Elements (MHREES) (more strategic and more scarce rare earth elements) will be in shortage in both the short and long-term (varying levels from 2020 to 2030). China is the only supplier of some MHREEs.
As for Light Rare Earth Elements (LREEs), the results show that they may face a slight shortage in the short term (2020-2025) but will face oversupply in the long term. These assessments mainly examined the demand for rare earths driven by clean energy and electronic cars, which have been the two emerging application fields of rare earths since the 21st century.
By 2035 the demand driven by electronic cars & wind turbines alone would lead to a 7-fold & 26-fold demand increase in rare earth elements Dysprosium & Neodymium, respectively
Already in 2012, Kirchain et.al from Massachusetts Institute of Technology predicted that by 2035 the demand driven by electronic cars and wind turbines alone would lead to a 7-fold and 26-fold demand increase in rare earth elements Dysprosium (Dy) and Neodymium (Nd), respectively. Then there is the Paris Agreement. This signals an even more aggressive investment wave in clean energy, energy efficiency & saving, energy storage, as well as clean transportation and smart technologies, which means even higher demand growth on rare earth materials. Given this, it is crucial we tackle the pollution, environmental damage and pricing issues of rare earths (more on these here – link to other article) before this massive wave arrives.
Paradox: Smart & clean future built on pollution, cancer villages & black market
With an 85% share of global production in 2015, China remains the dominant country in rare earth production. In other words, the majority of future supply will continue to come from China.
The polluting & often toxic nature of rare earth mining & processing in China is an inconvenient truth often “swept under the carpet”
However, as historical cases have shown, rare earths used in products that are essential components of our clean, smart, low-carbon and climate-resilient future, are polluting. This polluting and often toxic nature of rare earth mining and processing in China is an inconvenient truth often “swept under the carpet”.
Already, the “Chinese Era” has come with at a huge environmental cost. For over two decades, major rare earth production bases in China have suffered from rampant environmental damage, unsafe drinking water, contaminated water & land and resource depletion; and the health of its people has suffered.
In Baotou, radioactive toxic waste combined with non-permeation proof treated grounds has turned communities into “cancer villages”
In Baotou, China’s “Capital of Rare Earth”, Baiyan Obo operates one of the largest tailings dam in the world. Radioactive toxic waste combined with non-permeation proof treated grounds has turned communities around the dam into “cancer villages”. The dam is still growing in size. It is a ticking time bomb that could spell disaster for the Yellow River that flows only 10 kilometres away. Any leakage of contaminated water, soil and dust could threaten drinking water safety and the health of millions of people who rely on the Yellow River watershed.
All of this has happened without China being compensated for its strategic resources or damage incurred. Based on on-ground investigations, MIIT estimated that an initial RMB38 billion (USD6 billion) was needed to clean-up the polluted rare earth mines in Ganzhou city in Jiangxi province alone; which accounts for only 8.6% of overall national production quota.
These “costs” and pollution is exacerbated by the rare earth black market, where there is no oversight, no chemical or water treatment. Despite this being an open dirty secret there is limited data on the scale of the market and its worth.
One way to gauge the black market is by comparing USGS data and China’s official production quotas; however, even then we find more shades of grey with a 32,980 tonnes gap. According to USGS, global rare earth production in 2015 of 124,000 tonnes was the same as in 2007. For the same period USGS reported that rare earth production in China dropped by 15,000 tonnes. However, according to China’s official data, during this period China‘s rare earth production quota actually increased by 17,980 tonnes. Hence the 32,980 tonnes gap. More on the rare earth black market see our article, “Rare Earth Black Market: An Open Dirty Secret“ and Chapter 3 of the report.
In 2011, there was a 120% import-export gap between China & foreign customs data
The Chinese government estimates that in 2011, when the black market was rampant, there was as much as a 120% import-export gap between what foreign customs declared and what China exported. Despite this being a crime, no different from illegal wildlife trafficking, little action is taken globally.
Although action is taken on conflict minerals…
…there is little action on rare earths
But action is being taken on other strategic raw materials and minerals. As of 22 August 2012, the US Securities and Exchange Commission (SEC) required companies to disclose the use of four particular minerals (known as “conflict minerals”) that had been sourced from conflict areas in the Congo Basin and beyond.
Also, top IT brands like Apple and Intel have promised to eliminate “conflict minerals” from their supply chain, but why do they continue to turn a blind eye to the “cancer villages” and contaminated water from rare earths? With China’s determination on winning “the war against pollution”, is this a risk for the booming IT industry, let alone the clean energy sector?
Is it ethical to build a sustainable future for all at the cost of the environment and people’s lives in China?
There are more questions than answers due to the many shades of grey in the rare earth market
On top of all this there is a question about the commercial viability of rare earths. The RMB38 billion for environment recovery in Ganzhou is around a quarter of the total market capitalisation of China’s five listed rare earth groups of RMB154 billion. Clearly, the “commercial viability” of all these mining companies would be questionable if environmental costs were to be factored in. Will this then translate in to higher prices for green and clean tech products, which in turn makes them less attractive and affordable? Will manufacturers then use less rare earths and so will their products become less efficient, lose performance? There are more questions than answers due to the many shades of grey in the rare earth market. What is clear is that we need to rethink the way we use rare earths for a sustainable future, especially with the massive growth demand predicted.
Supply gap: Can China continue to meet rising demand?
Demand for rare earths is only going to increase with our ever smarter and clean energy lives.
China continues to move from a developing country to a developed country and the government is determined to transform China from a manufacturing giant into a world manufacturing power with its ‘Made In China 2025’ Action Plan. The clear question is then, will China be able to cater for its own growing demand let alone that of the world?
As shown in the report, it appears that China may not even be able to feed its own growing domestic market with already a 71% planned consumption share of its domestically produced rare earths in 2014.
As shown in the chart above, the United Nations Conference on Trade and Development (UNCTAD) report on rare earths released in 2014, estimated that global demand for rare earths by 2020 will be around 200,000 – 240,000 tonnes. It also expects Chinese demand for rare earths to reach 70% of the world’s rare earth elements demand by 2020. This translates to around 140,000 – 168,000 tonnes of China demand.
What is clear is that if production remains flat, China will no longer be able to supply the rest of the world with enough rare earth
There is currently no mention that China intends to step up production, and with its official maximum production likely to stay flat at 105,000 in 2016, it remains unclear where the additional 35,000 – 63,000 tonnes will come from in the 13th Five Year Plan (2016-2020). What is clear is that if production remains flat, it will no longer be able to supply the rest of the world with enough rare earth.
If China is not able to provide the world with rare earths, where else can rare earths be sourced?
Alternate sources, deep sea mines?
Since 2010, to secure the supply of rare earths, especially HREEs, major rare earth consuming countries have set out to new countries for alternative suppliers. Japan and China have even started exploration pilots in the deep sea of the Pacific Ocean. In 2014 there were 429 rare earth exploration projects – mixture of initial & advanced stages – being conducted by 261 companies across 37 countries and regions. But not all went smoothly. By November 2015, only 53 advanced rare earth projects remained active.
Since 2010 countries have set out to new locations for alternative suppliers…
…Japan & China have even started exploration pilots in the deep sea of the Pacific Ocean
Setting up a rare earth business is not that simple as historic cases show. A notable case is Molycorp, which owned the Mountain Pass rare earth mine in California. Mountain Pass once supplied the majority of the world’s rare earths. The mine mothballed due to a shift in production in China among other reasons and was only reopened during the China supply scare. However, by June 2015 Molycorp filed for bankruptcy protection, reaching an agreement with creditors to restructure its USD1.7 billion in debt. The company’s stock price peaked at USD 77.5 on 3 May 2011 and dropped as low as USD1 on 28 November 2014. The Great Western Mineral Group, another of the Top 10 international rare earth companies with Molycorp according to the UNCTAD report, has also filed for bankruptcy.
Molycorp’s roller-coaster experience shows the failure in rare earth pricing and the market. Current prices are low, or “cabbage prices”. The market isn’t including any of the associated costs of rare earths, like compliance with environmental standards, technological requirements, nor the resources’ strategic value or health impacts.
Under the current pricing, it may not be economically feasible to develop new mines in countries with stringent environment standards
Under the current pricing, it may not be economically feasible to develop new mines in countries with stringent environment standards and enforcement. But will mining in South Africa or Kenya be cheaper? Should these countries be expecting “cancer villages” and radioactive tailing ponds? Can the current international governance system be stepped up to regulate rare earth mining activities in the deep sea?
Redefining our smart future by rethinking consumption & obsolescence
Another way to ask these questions is, can we achieve our clean and smart future without rare earths? Some say it is possible as many manufacturers have already reduced the use of rare earths in products after China cut its export quota in 2010; some even replaced rare earths with other elements. These solutions seem best as currently rare earth substitutes often come at a price or compromised efficiency and performance.
Despite limited supply, rare earths in toxic e-waste & other applications are rarely recycled…
…the global recycling rate is around 1%
What about recycling? Despite limited supply rare earths in e-waste and other applications are rarely recycled. In a 2013 study, the EU Raw Materials Initiative found that the global recycling rate is around 1%. Basically the contribution of rare earth resources extracted from waste products from 2010 to 2012 was negligible when compared with global supply. Why is this so low?
If rare earth elements were recycled from discarded electronic products, engines, batteries and fluorescent lamps, this will not only ease demand, especially on China, but also reduce e-waste’s toxic impacts on the environment.
Every phone user should ask themselves this, when you happily upgrade your smartphone, where do your discarded ones go? What about the rare earth materials embedded in headphones, speakers and tablet screens? A lot of the time it ends up in rural villages in China where the hazardous components leach into the water, soil and hands of the villagers – another dirty and toxic part of our clean and smart future. The UNDOC estimated that each year about 8 million tonnes of e-waste, valued at USD3 billion, is smuggled in to China, accounting for around 80% of the illicit market in East Asia.
There is a role for everyone
It’s time to rethink how we are going to achieve our low-carbon future in a sustainable way
There is a role for everyone. Business leaders, policy makers and consumers, it’s time to rethink how we are going to achieve our low-carbon future in a sustainable and more environmental and climate friendly way.
To explore more of the grey shades in rare earths read our full report in English and Chinese. By throwing light on these “shady activities”, we hope that a responsible local and global governance structure on rare earth can be achieved.
- Rare Earth Black Market: An Open Dirty Secret – The black market exacerbates environmental pollution from rare earth mining in China. With low prices, depleted reserves and contaminated drinking water, find out if your smartphone, tablet or electric car is party to this. Hongqiao Liu expands
- E-Waste: Downside to the Tech Revolution – China is one of the largest producers of e-waste globally. Faced with mountains of toxic e-waste, Green Initiatives launched the [WE] Project in Shanghai. Co-founder, Nitin Dani on this easy, safe & scalable way to recycle phones, home appliances & more
- Wind & Sun: Relief For China’s Dry North – China’s North is parched but is home to a significant amount of coal reserves & arable land. Can wind & solar power help bring relief? CWR’s Thieriot on how but be warned, challenges remain
- Towards Water & Energy Security - China Water Risk published report titled “Towards A Water & Energy Secure China”. Tough choices lie ahead in power expansion with limited water. Find out what strategies are employed and get a comprehensive overview of water risk exposure across China’s power landscape
- Wind & Solar: Hidden Water Risks - China is looking at aggressive renewable expansion with wind & solar set to soar. But could this intensify toxic hidden water risks from rare earth mining? Also some solar technologies require more water than coal to generate power. We explore these hidden risks in our report “Towards A Water & Energy Secure China”
- Renewable Energy: Bigger Than You Think - Renewables surge as coal wanes but the bulk of the renewable energy boom is yet to come. CWR’s Thieriot on why this aggressive surge won’t be enough to solve the climate-energy nexus
- China Water Risk’s 5 Trends for 2016 – Prioritizing environment alongside employment signals a reshuffle. To show it’s serious, China will “kill a chicken to warn the monkey”. The Year of the Monkey brings with it wild swings, so check out our top 5 trends in water for 2016 for it is better to be in a position to disrupt than be disrupted