Does a Rare Earth Trade Dispute Loom?

By Michael Montgomery—Exclusive to Rare Earth Investing News

The recent ruling against China’s trade policy by the World Trade Organization may set up a battle over rare earth element policy. The ruling stated that the export duties, quotas, and minimum export price of coke, fluorspar, manganese, zinc, and other commodities is in conflict with WTO trade practices. China has instituted many of these same measures in regards to rare earth elements, causing supply to diminish.

Over the last year, analysts have stated that the ruling against China may entice the EU and the US to bring up a trade dispute with China over rare earth elements. However, Christopher Ecclestone, a mining strategist for Hallgarten and Co, doesn’t agree with this assessment due to factors the western governments cannot avoid. In an interview with Rare Earth Investing News, Christopher Ecclestone offered some insight on the potential for future trade disputes with China and the effect on rare earth mining firms.

China’s environmental policy impacts production

The Chinese government has also maintained their position that the cut backs to production are a result of environmental protection policies. Rare earth production generates massive amounts of environmental toxins;  one ton of rare earth produces approximately 9,600 to 12,000 cubic meters of acidic waste water plus about one ton of radioactive waste residue. “[China] will take refuge in its environmental protection policy. The Chinese government can say that the world has been coming down on China for pollution, and it has cut production because it was destroying the environment and it had to cut back on that, and that means that it is producing less,” said Ecclestone.

The Chinese government has been telling the world for years that it was planning to make the changes to production. Outside of China, governments and consumers of rare earths have known that the cutbacks were coming, yet few took the steps needed to create a secure supply chain.

“The Chinese sent a lot of warnings about what they were going to do. They said they would cut back on supply, that they didn’t have bottomless pits of rare earths, and they said they want the supply for their own industrial uses, and no one can force anyone to sell anything. The Chinese could keep it in the ground if they wanted to,” stated Ecclestone, adding, “There is no shortage of rare earths outside of China, however, everyone has been waiting for someone else to produce.”

Export quotas

Arguments have also been made that this ruling may push China into increasing the second half export quota, releasing more of the material on to the market. However, this could be detrimental to western rare earth mining firms that have seen share prices rise dramatically after the 72 percent reduction to exports in the second half of last year, and 35 percent reduction for the first half of 2011. Ecclestone postulates on the effect of increased export quotas for mining firms.

“It would definitely weaken them,” stated Ecclestone, adding, “It depends how much they are expanded by. If it is some token amount like 5-10 percent, then I don’t see a big effect. But if they were to expand them back to the levels of 9 months ago, there could be a big tumble out there.”

China’s next move for export quotas is anybody’s guess. They may feel the pressure from the recent WTO ruling and keep the second half quota on par with the first half quota, or increase the quota, or they could further reduce supply of the elements yet again.

Zhong Shan, China’s deputy commerce minister said on Wednesday that the country will continue to improve its regulations regarding the export of rare earth according to both Chinese law and the regulations of the World Trade Organization.

However, this is the same rhetoric that has been used over the past year despite of ever tightening export controls. As Christopher Ecclestone attested, “The Chinese are like fly fisherman trying to fool the fish to come up for the bait.”