At the height of the diplomatic fracas between China and Japan over a disputed island chain, Beijing threw one punch that arguably did more to convince its neighbour to cave in than any other: It quietly slowed exports to Japan of an obscure but increasingly precious commodity known as rare earth metals.
By stepping up customs checks at its ports on rare earths headed to Japan - thereby slowing exports to a trickle - Beijing instigated a brief but telling panic among the many Japanese technology firms who need rare earths to produce everything from smart phones to Toyota Motor Corp.'s prized hybrid automobile, the Prius. One day after the new customs procedures were introduced, Japan - which depends on China for nearly all of its rare earths - caved in to Beijing's key demand in the fight, releasing the captain of a Chinese fishing boat that rammed two Japanese coast guard vessels last month near the uninhabited islands known as the Senkaku in Japan and the Diaoyu in China.
But China also communicated a message to its neighbour besides the one it intended. While the government of Prime Minister Naoto Kan was shocked at how far and how fast Beijing proved willing to escalate the quarrel over the islands, Tokyo also got a potentially valuable lesson on the dangers of relying so heavily on China for rare earths and other natural resources.
The tactic may have helped Beijing win the release of the fishing captain, but it may also result in a loosening of its stranglehold on the international market for rare earth metals. While Chinese Premier Wen Jiabao was making a show of refusing to meet with Japan's Prime Minister at the United Nations General Assembly in New York, Mr. Kan met with Mongolian Prime Minister Sukhbaatar Batbold on the sidelines of the assembly to discuss Japanese support for more mining of rare earths in Mongolia. That resulted in a deal announced Sunday in which Japanese firms and technology will assist the search for and production of Mongolian rare earths.
Last week, Japan's Industry Minister travelled to another of China's mineral-rich neighbours, Kazakhstan, and announced that Japan would subsidize the mining of rare earth metals there, too.
"This is not a coincidence. This is part of Japan's diplomatic strategy" following the islands dispute, said Yuki Asaba, associate professor of international relations at Yamaguchi Prefectural University. "But Mongolia is not a substitute for China. It's just a step for Japan to expand its supply."
China currently mines more than 95 per cent of the world's rare earth metals, which is the collective term for 17 chemical elements that are particularly abundant in the Chinese province of Inner Mongolia (adjacent to the independent state of Mongolia). Following a strategy laid out by the country's late leader Deng Xiaoping - who prophesied that rare earths would eventually be as important to China as oil is to the Middle East - part of the reason for Beijing's dominance is that Chinese producers sell the elements so cheaply as to make it uneconomic for competitors.
State-run Chinese firms sharply expanded production and slashed prices of rare earths in the 1990s, forcing producers in the United States (previously the world's leading producer and exporter) and elsewhere out of the market. Several Chinese firms involved in the rare earths industry refused to be interviewed for this article, and even Chinese academics who specialize in the topic said it was too politically sensitive to discuss with a foreign journalist.
Now that China has shown its willingness to use its control of the rare-earths market as a political weapon - something some Beijing-watchers have long feared - buyers are scrambling to react. But nowhere is the nervousness more closely felt than Japan, which is the world's biggest buyer of rare earths and accounts for 65 per cent of Chinese rare earths exports. Even before the tighter customs procedures were slapped on rare earths heading to Japan, China had slashed its exports of rare earths to 7,976 tons in the second half of this year from 22,283 tons in the first half and 28,417 tons a year earlier, Japan's Trade Ministry said.
Last week the influential Japan Business Federation demanded that the government take steps to ensure a reliable supply, and the Asahi Shimbun newspaper reported Sunday that the government wanted to reduce as quickly as possible its reliance on China, which currently supplies more than 90 per cent of Japan's rare earths, by dropping that proportion to 70 per cent.
Even before the island's dispute flared into a near-trade war, some Japanese companies were already uneasy about their heavy reliance on China. Electronics maker Toshiba Corp. - which uses rare earth elements in motor magnets - signed a deal in June with Kazakhstan's state nuclear power company, Kaztomprom, to produce the necessary elements at mines in the Central Asian country in which Toshiba has a stake. The massive Sumitomo Group trading house signed a similar deal with Kaztomprom earlier this year to produce 3,000 tons of rare earth minerals annually from the residue of uranium mining.
Other Japanese companies are known to be aiding the nascent mining of rare earths in countries as far flung as South Africa and Vietnam, and executives from Sumitomo and Mitsubishi Corp. were among those in attendance when the Japan-Mongolia deal was announced Sunday. Rare earths are critical in producing everything from wind turbines to guided missile systems.
Canadian miners could also stand to benefit as Japan and other countries look for non-Chinese suppliers of rare earths. Great Western Minerals Group, Rare Element Resources, Avalon Rare Metals and Neo Material Technologies are among the top non-Chinese producers of rare earths.
Some Japanese firms, meanwhile, are looking for ways to reduce - or eliminate altogether - their need for the commodities. In particular, auto makers are investigating whether it's possible to build hybrid cars without using rare earths. They may already have an answer: Last week, the New Energy and Industrial Technology Development Organization, a government research agency, and Hokkaido University announced they had jointly developed a new motor that doesn't require rare earth metals.
"We have been conducting research and development to find alternatives for the rare earths," Honda Motor Corp. spokeswoman Kumiko Hashimoto told the Japan Times newspaper. Toyota, which called its suppliers in the middle of the islands crisis to check on stores of rare earths, has reportedly set up an internal task force to investigate the company's options.Report Typo/Error