China's grip on the rare earths market is more fragile than it first appears. The minerals' high prices are vulnerable too.
Establishing a new industry lobbying group is the latest twist in Beijing's drive to shut dirty smelters. That may support prices near term, but miners elsewhere will be better placed as a smaller number of Chinese producers are held to higher environmental standards. As new mines come online outside the Middle Kingdom, greater competition should bring prices down.
China's trading partners may be tempted to see its latest crackdown as a smokescreen for protectionism. Beijing has used concerns about the industry's environmental side-effects to justify policies including strict export controls that arguably give domestic manufacturers an unfair advantage. But mining the silvery metals is a notorious source of toxic waste. Beijing has a legitimate reason to want to clean up production.
Lax environmental standards explain how China came to dominate the industry. Its miners kept expanding in the 1990s even as toxic waste concerns, and depressed prices, forced Western producers out of the business.
Now Chinese policy-makers are much less tolerant of big polluters than they were a decade or two ago. Ultimately, tighter environmental controls in China give cause for celebration. Alongside the substantial health benefits, higher standards make it harder for Chinese miners to undercut their competitors. The result should be a more balanced long-term supply of an economically and strategically important resource.
Higher global prices have already enticed Western producers back into the business. Molycorp is ramping up production at California's Mountain Pass mine, once the world's biggest source of rare earths. Lynas, an Australian miner, is putting the finishing touches on a big new processing facility in Malaysia.
If Lynas can overcome some last-minute licensing hurdles, the projects together have the potential to add up to 30,000 tonnes per year of production, according to UBS. That's roughly equal to China's 2011 export target. With other new projects on the drawing board in Canada and Australia, Roskill, a metals consultancy, expects China's share of global production to fall from 94 per cent last year to just over 70 per cent by 2015. That should drive today's high prices down.