Concerns raised over China's `rare earth' dominance

Sydney Morning Herald
Wednesday 2/9/2009 Page: 24

Deng Xiaoping likened it to oil in the Middle East, and China is ready to maximise returns from nature's gift, writes Keith Bradsher. A decision is looming in Canberra that could block plans by China to tighten its grip on the market for some of the world's most obscure but valuable minerals. China accounts for 93% of the production of so-called "rare earth" elements - and more than 99% of the output for two of them that are vital for a wide range of green energy technologies and military applications like missiles. Deng Xiaoping once observed that the Middle East had oil but China had rare earth elements. As OPEC has done with oil, China is now flexing its muscle.

Tighter limits on production and exports-part of a plan by the Ministry of Industry and Information Technology-would ensure China had the supply for its own technological and economic needs and force more manufacturers to make their wares in China in order to have access to the minerals. In each of the past three years, China has reduced the amount of rare earths that can be exported. This year quotas are on track to be the smallest yet. But what is starting to alarm Western governments and multinationals is the possibility they will be further restricted.

Chinese officials will almost certainly be pressed to address the matter at a conference in Beijing tomorrow. What they say could influence whether Australian regulators next week approve a deal by a Chinese company to acquire a majority stake in Australia's main rare earth mine. Until spring it seemed that China's stranglehold on rare earths might weaken in the next three years- two Australian mines are opening with a combined production equal to a quarter of global output.

But the two companies developing mines - Lynas Corporation and its smaller rival, Arafura Resources - lost their financing last winter because of the global financial crisis. Buyers deserted Lynas Corporation's planned bond issue and Arafura Resources's initial public offering. Mining companies wholly owned by the Chinese Government swooped in last spring with the cash needed to finish the construction of relines and ore processing factories for both companies. The Chinese companies reached agreements to buy 51.7% of Lynas Corporation and 25% of Arafura Resources.

The Arafura Resources deal has already been approved by Australian regulators and is subject to final approval by shareholders on September 17. The regulators have twice postponed a decision on Lynas Corporation, and now face a deadline of Monday to act. Matthew James, a vice president at Lynas Corporation said its would-be acquirer had agreed not to direct day-to-day operations but would have four seats on an eight-member board.

China's move on Lynas Corporation's highly strategic Mount Weld rare earths project in Western Australia was first announced in May. Under the proposed deal, China Non- Ferrous Metal Mining Company (CNMC) is prepared to inject $US252 million ($300 million) in fresh equity into Lynas Corporation and secure Chinese bank finance for the development of the project.

But like the proposed bail-outs of OZ Minerals by Minmetals and Rio Tinto by Chinalco, the deal must first secure clearance from the Federal Government after it is scrutinised by the Foreign Investment Review Board. Lynas Corporation can argue that without Chinese investment the Mount Weld project would remain mothballed, as it has been since February when the global financial crisis squeezed its financing options. A feature of the deal and one that reflects the sensitivity of China's rare earths dominance is that while CNMC will hold four positions on Lynas Corporations expanded board of eight, the executive chairman, Nicholas Curtis, will hold the casting vote.

Expectations of tightening Chinese restrictions have produced in the past two weeks a surge in the share prices of the few non-Chinese producers that are publicly traded. In addition to the two Australian mines, Avalon Rare Metals of Toronto is trying to open a mine in northwest Australia and Molycorp Minerals is trying to reopen a mine in California.

China's Ministry of Industry and Information Technology drafted a six-year plan for rare earth production and submitted it to the State Council, the equivalent of federal cabinet, said four mining industry officials who have discussed it with Chinese officials. A few contradictory details of the plan have leaked out, but it appears to suggest tighter restrictions on exports and strict curbs on environmentally damaging mines.

Beijing officials are forcing global manufacturers to move factories to China by limiting the availability of rare earths outside China. "Rare earth usage in China will be increasingly greater than exports," said Zhang Peichen, deputy director of the government-linked Baotou Rare Earth Research Institute.

Some of the minerals crucial to green technologies are extracted in China using methods that inflict serious damage on the environment. China dominates rare earth production partly because of its willingness until now to tolerate polluting, low-cost mining. The ministry did not respond to repeated requests for comment in the last eight days. Jia linsong, a director-general at the ministry, is to speak about China's intentions tomorrow at the Minor Metals and Rare Earths 2009 conference in Beijing. A single mine in Baotou, in Inner Mongolia, produces half of the world's rare earths. Much of the rest - particularly some of the rarest needed for products from wind turbines to Prius cars - comes from often unlicensed relines in southern China.

China produces over 99% of dysprosium and terbium and 95% of neodymium ii. These are vital to many green energy technologies, including high-strength, lightweight magnets used in wind turbines, as well as military applications. General Motors and the United States Air Force played leading roles in the development of rare earth magnets. They are still used in the electric motors that control the guidance vanes on the sides of missiles, said Jack Lifton, a chemist who helped develop some of the early magnets.

But demand is surging now because of wind turbines and hybrid vehicles. The electric motor in a Prius requires one to two kilograms of neodymium, said Dudley Kingsnorth, a consultant in Perth, whose compilations of rare earth mining and trade are the benchmark.