The Resource Wars Are Only Beginning
A Rare Earths white paper released last week by a Chinese government agency is proving a Rorschach ink blot for non-Chinese commentators. Twitter traffic captures the cacophony: China defends Rare Earths curbs … China concedes errors … China shifts course … China counter-attacks …
It doesn't take an English Lit deconstructionist to discern that when so many different readers unpack the same text in such different ways, it tells us more about the assumptions we're carrying into the analysis than the interpretations we're pulling out.
And yet, as Freud could have told us, sometimes a white paper is just a white Paper. And what 'Situation and Policies of China's Rare Earths Industry' tells us is fairly straightforward: For decades, China has produced an increasing percentage of the world's Rare Earths, at significant cost to its environment, to satisfy willing buyers from nations quite content to see China deplete its own Rare Earths reserves. If there's a subtext of any sort, what the white paper does is mine the World Trade Organization articles to mount a pre-emptive defense of Chinese Rare Earths policy, as the WTO process moves from the unsuccessful 60-day mediation period to the quasi-judicial dispute settlement phase.
As the editorialists at the People's Daily opined earlier this year, 'Experts believe that the current issue faced by China is how China should use "WTO language" to safeguard its economic sovereignty. Looks like the authors of the Rare Earths white paper got the memo.
Case in point: In the white paper, China claims to correct the record in terms of its known Rare Earths reserve, which it puts at 23 percent of the world's total, not 36 percent as calculated by the U.S. Geological Survey. It's clear enough where China is going with this, as it will argue in the WTO that its sovereign right to manage its own non-renewable resources blunts any demand by other nations that China serve as the world's Rare Earths super-store, while many of the same nations 'stockpile' their Rare Earths reserves, simply by leaving them in the ground.
It's a nifty legal tactic – and then again, it may just be true. The dean of the Rare Earths analysts, Dudley Kingsnorth, now speaks of China having perhaps 12 to 15 years left of Heavy Rare Earths, those now selling in the thousands of dollars per kilogram, 10, 20 and even 30 times more than the current price for Light Rare Earths. Will the WTO dare to order China to keep mining metals in such short supply? As any American crime show fan can tell you, for the defense, it's all about creating "reasonable doubt."
Two other developments overshadowed by the Rare Earths white paper provide a glimpse of China's plans and policies regarding not just the Rare Earths, but a broader range of strategic resources.
The first was a piece published in early June in China's Shanghai Daily, reporting that Chinese turning in anyone involved in the burgeoning black market network of illegal mining, refining and smuggling of Rare Earths would be eligible for a reward of 50,000 yuan – nearly $8,000 U.S. dollars, or, for a typical South China subsistence farmer earning a dollar a day, about 20 years of wages. The average American would have to walk an al-Qaeda kingpin into FBI headquarters to claim a comparable cash reward.
Analysts estimate that China's illegal Rare Earths trade delivers as much as 40,000 metric tons a year of the metals to the global market. To put that amount in perspective, if China succeeds in cracking down on the illegal Rare Earths racket, it will more than cancel out the planned non-Chinese production from the United States' Mountain Pass mine and Australia's largest Rare Earths mine added together. So as the world races to bring more Rare Earths to the market, China is working to ratchet back supply – and ensure the remainder is tightly under Politburo control.
But China's Rare Earths policies are in turn part of its larger policy on natural resources, essential to the nation's rapid modernization in decades to come. Hence the second development in June to offer insights into China's larger resource strategy: The Hong Kong Exchange's (HKEx) offer of $2 billion for the London Metals Exchange (LME).
In a world of looming resource scarcity, this fusion of finance and resource supply should bring serious scrutiny to China's policies. Whether it will is an open question. UK authorities -- who have the mandate to approve the deal -- could start with this question: Why would the Hong Kong Exchange make what one analyst called 'the most expensive bid ever' for LME?
The price offered by HKEx for LME is 160 times net income - the kind of gaudy multiple that would make Mark Zuckerberg envious. Either HKEx has more money than sense, or it sees a value others don't. As part of its exchange, LME operates physical warehouses of metals ranging from aluminum, copper and zinc to tin, nickel and lead. Could HKEx's outsized interest involve the chance, unavailable until now, to locate physical metals warehouses on Chinese soil?
As China pursues a multi-point plan to safeguard resource access, what's the so-called 'Rest of the World' doing towards that end?
If we're growing concerned that the global market has delivered China a Rare Earths near-monopoly, we're hoping that maybe technology will get us out of the jam.
Maybe researchers will discover an alternative to Rare Earths for Electric Vehicle batteries. And wind turbines. And photovoltaic solar arrays. And CFL light bulbs. And cell phones and laptops. And several score applications essential to our advanced weapons systems. But then again, maybe while that first group of researchers is beavering away on RareEarths work-arounds, a second set of researchers will discover that Rare Earths may repel shark attacks (likely) or, fused with graphene - the next wonder-substance - will make nano-computing ubiquitous (apparently true, and funded by the Department of Energy's Office of Science). It's called Jevons' Paradox – the tendency that technological progress that increases the efficiency with which a resource is used will increase rather than decrease demand for that resource -- and it's been true since the only known use of Rare Earths was for flints in London's street lamps.
On the geo-political front, maybe Western environmentalists will see the tension between yearning for wind and solar power and opposing the mining of the metals and minerals that make wind and solar possible. Maybe Beijing Central will curb the Rare Earths smuggling that begins in a South China farm-field and funnels into the global market via the Chinese mafia. Maybe millenials peering at a screen to see the precise shade of Katy Perry's hair this week will take an interest in where that Yttrium and Europium in their retina display comes from, who dug it out of the earth under what circumstances.
And maybe chocolate chips will be found to cure cancer.
Many things are possible. What matters is what's probable.
And in that realm, it seems increasingly clear that while the 'West' has hopes, China has a plan. And whatever it is, it's not the one translated into English and published last week on the front page of the People's Daily.