US, EU, Japan take on China over rare earths

The US, Europe and Japan have joined forces to challenge China’s restrictions on exports of rare-earth metals, escalating a trade row over access to some of the most important raw materials used in advanced technologies.

In a formal complaint to the World Trade Organisation (WTO), the three trade powers accused Beijing of trying to hold down prices for its domestic manufacturers and to pressure international firms to move operations to China.

“We want our companies building those products right here in America. But to do that, American manufacturers need to have access to rare earth materials which China supplies,” US President Barack Obama said at the White House.

Europe’s trade chief said China’s restrictions violated international trade rules and had to be removed.

“These measures hurt our producers and consumers in the EU and across the world, including manufacturers of pioneering hi-tech and ‘green’ business applications,” said European Union Trade Commissioner Karel De Gucht.

Rare earths are crucial for the defence, electronics and renewable-energy industries and are used in a range of products such as the iPhone, disk drives and wind turbines.

Rash and unfair
Chinese state media described the trade complaint on Wednesday as rash and unfair.

“The accusations, which stress that China’s rare earth policies have restricted global supplies, can hardly hold up, with demand only filling around half the export quotas last year,” said state news agency Xinhua whose commentaries are generally seen as reflecting official views.

Beijing set an export quota of 30 258 tonnes in 2011 but it exported only 16 861 tonnes over the year, according to official customs data.

Industry executives said the fourfold increase in export prices over the past two years had encouraged buyers not only to relocate their operations to China, but also to develop alternative non-rare earth technologies.

As prices began to decline in the second half of last year, China also sought to reduce supplies further, launching a crackdown in August to force domestic producers to shut down until they were proven to be compliant with state output quotas, industry consolidation plans and new environmental regulations.

China has said its export curbs are needed to control environmental problems caused by rare earths mining and refining, and to preserve supplies of an exhaustible natural resource. Refining rare earths requires large amounts of acid and produces low-level radioactive waste.

The high price of rare earth
Earlier on Tuesday, China’s Minister of Industry and Information Technology Miao Wei said China was preparing to defend itself against a possible WTO case.

Investors bought shares in Chinese rare earth miners and Japanese rare earth processors on Wednesday, hoping the WTO action would force Beijing to allow more exports.

“Higher export quota potentially will allow them to sell more to overseas customers which are paying a high price for rare earth,” said Felix Fok, analyst at research firm JI Asia.

Hong Kong-listed China Rare Earth Holdings jumped almost 17% on Wednesday, with peers Inner Mongolia Baotou Steel Rare-Earth Hi-Tech up 3% and Aluminium Corp of China up 2.5%.

In Japan, rare earth processor Alconix rose 4% and in Australia rare earth miners also climbed as the spotlight returned to a sector that had been struggling.

“Some of these rare earths stocks have been absolutely smashed,” said Shaun Giacomo of Petras Capital in Sydney. Of the Australian listed miners, Alkane Resources rallied 13% and Araufura Resources 9.5%.

Re-election battle
Obama, who has faced criticism from Republican rivals for not being tough enough with Beijing, has hardened his stance on Chinese trade practices as he gears up for a re-election battle.

“Our competitors should be on notice. They will not get away with skirting the rules,” Obama said.

The rare earths dispute, which has been building for years, comes as China undergoes a political transition, with Vice President Xi Jinping poised to become the leader of the world’s second-largest economy by early 2013.

The US and Europe have clashed regularly with China over economic issues including the value of the Chinese currency. The US is due to make a preliminary decision next week on whether to impose countervailing duties on Chinese-made solar panels, potentially adding to trade tensions.

The rare earths case is the first to be jointly filed by the European Union, the US and Japan.

Though dependent on the outside world for vast qualities of industrial components such as iron and coal, China accounts for about 97% of world output of the 17 rare earth metals.

“China continues to make its export restraints more restrictive, resulting in massive distortions and harmful disruptions in supply chains for these materials throughout the global marketplace,” said US trade representative Ron Kirk.

The action over China’s export curbs involving rare earths, as well as tungsten and molybdenum, begins a 60-day process for the two sides to try to resolve the dispute.

Complaints ‘lodged and heard’
The next step would be for the US, the EU and Japan to ask the WTO to establish a dispute-settlement panel to decide the case. Once appeals are lodged and heard, the process could take as long as two years to complete.

The EU, the US and Mexico won a similar case against China in January concerning other raw materials.

A European official close to the case said China had not removed wider export restrictions since that ruling. In particular, the EU said in a statement, rare earth quota announcements “are further tightening the restrictions and are a clear signal in the wrong direction”.

Beijing has until the end of March to tell the US, the EU and Mexico how it intends to comply with the January ruling, providing an opportunity for China to address both that case and the rare earth restrictions at the same time, Kirk said in an interview.

“We are hopeful that because the WTO ruling in the raw materials case was so unequivocal that China will work with us,” Kirk said.

Foreign companies pay up to twice as much as Chinese firms for rare earth metals, the EU said.

The EU directly imports €350-million worth of rare earths from China each year, and also brings in products of far greater value containing rare earths from Japan and elsewhere.

The damage done to European manufacturing runs into billions of euros, the official said, because it was nearly impossible to diversify away from Chinese supply. — Reuters

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