Japan cries foul over rare earths

The spat between China and Japan about supplies of so-called rare earth minerals – vital commodities used in high-tech goods from computers to electric cars – is more than just a diplomatic clash.

Driving the dispute is Beijing’s ambition to use tough export limits on these commodities as leverage to encourage foreign companies to relocate production lines to China.

Global concerns about China’s dominance of rare earth production have grown rapidly following, what Tokyo says, has been a near halt to shipments to Japan. Purchasers in Europe and the US say they are still getting shipments, albeit slowly. Each side tells a different version of the story: Beijing has officially denied the embargo to Japan and says heavy export quota cuts, imposed earlier this year, mark an effort to conserve resources.

But Chinese officials and western executives say quota cuts are part of a strategy intended to boost development of its domestic manufacturing industry by trading “resources for technology”.

The quotas create a powerful incentive to foreign companies to transfer production to China-based joint ventures because they only apply to the raw rare earths, not processed forms of the commodity, such as rare earth-made magnets.

Executives say that even more important than the quotas are a myriad Chinese tax breaks: an export duty of 25 per cent and a 17 per cent VAT rebate means that rare earth prices are much lower in China than overseas, enticing companies to relocate to China.

China’s Ministry of Industry and Information Technology has championed a policy to restructure the rare earths sector, “partly by controlling export volumes”, says Damien Ma of consultants Eurasia Group.

According to this plan, by 2015, China should maintain an annual export level of around 35,000 tonnes of rare earth metals – compared with this year’s quota of about 30,000 tonnes. It will be producing 130,000-150,000 tonnes, and have a domestic processing capacity of 120,000-150,000 tonnes.

“Instead of exporting purely unprocessed rare earths, the intention is to consolidate production and create more value-added applied materials that contain rare earths by keeping a crucial link of the supply chain in-country,” says Mr Ma.

The strategy is seen by some Japanese officials and executives as posing a serious threat to Tokyo’s technology leadership in the use of rare earths. “Clearly China wants the core technologies,” says one Japanese official. “It’s a new kind of mercantilism.”

China’s policy is causing concern at some Japanese producers.

TDK, one of the world’s largest producers of magnetic motors used in computer hard disk drives, hybrid cars and industrial robots, sees pressure to transfer production and technology. TDK’s techniques are a closely guarded secret, and advanced stages of the process are carried out only at its facilities in Japan.

Executives and analysts say Japan, which does not mine rare earths domestically, would have no other option but to accommodate some of Beijing’s demands and relocate at least some production plants to China.

But executives from some western countries are sanguine and downplay Tokyo’s concerns. Rhodia Group of France and Neo Material Technologies of Canada, both market leaders, opened factories in China in the last decade. Japanese companies such as Daido Electronics, a magnets producer, have also built plants in China.

Constantine Karayannopoulos, chief executive of Neo Material Technologies, estimates that more than half of Chinese rare earth demand is “actually consumed by Japanese, and to a lesser extent, South Korean, European and American companies, with plants inside the country”. China produces about 95 per cent of the world’s rare earth output, but it also accounts for around 65 per cent of global demand– although almost all of it is later re-exported by manufacturers. Japan consumes around 20 per cent of the world’s output, with the rest roughly split between Europe and the US.

“The picture is not as bad as it seems on the surface because materials, components and finished products containing rare earths can be exported without export quotas,” says Mr Karayannopoulos.

Rhodia says it “has not experienced any issue” with rare earth shipments.

Moreover, over the long-term, China’s strategy of using quotas to develop its domestic industry could backfire by facilitating the development of alternative mines in other countries or, more likely, industrial processes less reliant on rare earths, executives say.

Reporting by Mure Dickie, Jonathan Soble, Leslie Hook and Javier Blas