Rare Earth Trade Conflict: Diplomacy Needed

By Michael Montgomery—Exclusive to Rare Earth Investing News

The world has awoken to the importance of rare earth metals and the power of the Chinese monopoly over the market. Recent embargos to not only Japan, but the Europe and North America have sparked rumors of a trade dispute with the WTO. Tensions over the export policy have pushed diplomacy to the brink.

On the eve of the 17th Association of Southeast Asian Nations (ASEAN) Summit, a key Asian region summit, Secretary of State Hillary Clinton met with her Japanese counterpart in Honolulu, stating the latest restrictions as a ‘wake up call’ to diversify sourcing of the metals.

Clinton also announced a round of bilateral talks between her and China’s state councilor, Dai Bingguo, on the Chinese resort island of Hainan. “I would welcome any clarification of their policy and hope that it means trade and commerce around these important materials will continue unabated and without any interference,” stated Clinton. The meeting will set the tone for not only for Chinese President Hu Jintao’s upcoming state visit to the U.S., but also the upcoming G20 summit in South Korea in November.

Chinese economic minister canceled a meeting with their Japanese and South Korean counterparts, slated to take place before the summit, because of the ongoing spat between the nations over these issues.

The most frightening aspect of the alleged trade embargo is the perceived creation of an economic bargining chip, or use of resources as political leverage. These fears were exacerbated with the situation spawning from the arrest of a Chinese fishing boat captain after he rammed Japanese coast guard boats, as reported on Oct. 4th. All of China’s rare earth exporters stopped shipments to Japan on the same day, raising the eyebrows of analysts and reports worldwide. Chinese officials stated that the problem was due to issues with customs officials, repeatedly stating that no embargo was in place.

“Chinese officials have not improved matters by insulting our intelligence, claiming that there was no official embargo. China’s rare earth exporters, they say — some of them foreign-owned — simultaneously decided to halt shipments because of their personal feelings toward Japan. Right,” stated Paul Krugman, economist, and New York Times columnist.

Chinese Ministry of Industry and Information Technology spokesman Zhu Hongren stated that,  “China will not use rare earths as an instrument for bargaining.”

The volatility of this situation has helped many non-Chinese rare earth mining firms such as Molycorp (NYSE:MCP), and Rare Element Resources (AMEX:REE)(TSXV:RES) see share prices rise due to the need to secure future supplies of REE’s vital to high tech industries. The NY Times published a story claiming that shipments of rare earths have resumed, and coincidentally, or not, shares of the companies listed above have fallen. All of the volatility in the market may have a different effect than mining companies accelerating exploration of new deposits. Many companies in high tech industries that are reliant on REE’s may move their factories to China to avoid the ever tightening export quota’s.

It makes perfect sense.

Creating instability in the market will entice companies that are on the fence about moving production facilities to China for the very survival of their companies. China benefits by creating high paying tech sector jobs, and cashes in on the worlds growing desire for wind turbines, cell phones, and hybrid cars, expanding their middle class. This scenario was recently highlighted in a past article on Rare Earth Investing News.