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March 13, 2012

EU Joins U.S., Japan in Challenging China’s Rare-Earth Export Restrictions

The U.S., the European Union and Japan complained at the World Trade Organization today about Chinese limits on exports of rare-earths minerals that are critical to the world’s high-tech and so-called green industries.

“If China would simply let the market work on its own then we would have no objections,” U.S. President Barack Obama said at the White House this morning. The action is a message to economic competitors that “you will not get away with skirting the rules.”

China produces at least 90 percent of the world’s rare earths, 17 chemically similar metallic elements used in Boeing Co. (BA) helicopter blades, Nokia Oyj (NOKIA) cell phones, Toyota Motor Corp. hybrid cars and wind turbines. China says it curbed output and exports to conserve resources and protect the environment.

Rare earths became a political and legislative issue in July 2010 when China moved to limit domestic output and slash export quotas by 40 percent, souring ties with major users including the U.S. and Japan, where buyers cut usage after prices soared in the first half of 2011. China said on Dec. 28 it was leaving the 2012 overseas sales caps virtually unchanged.

Supply Chains

U.S. Trade Representative Ron Kirk said China’s policies on rare earths result in “massive distortions and harmful disruptions in supply chains for these materials throughout the global marketplace.” Today’s complaint also involves export restraints on tungsten and molybdenum, he said in a statement.

The U.S. Energy Department said in January that limited supplies of five rare-earth minerals -- dysprosium, terbium, europium, neodymium and yttrium -- pose a threat to increasing use of clean-energy technologies such as wind turbines and solar panels. While prices of rare earths fell in the second half of 2011, they remain volatile, leading some companies to search for ways to consider reducing reliance on the minerals, the Energy Department said.

China’s policy goal is to protect resources, environment, not to distort market or guard industry, the country’s Ministry of Commerce said in statement on website.

China’s policy regarding rare earths complies with WTO rules, and allegations the nation monopolizes the trade are “groundless,” Liu Weimin, a Chinese Foreign Ministry spokesman, said at a briefing in Beijing today.

“Despite such huge environmental pressure China has been taking measures to maintain rare-earth exports,” Liu said. “China will continue to supply rare earths to the international market.”

Raw-Materials Ruling

In a similar case, the WTO found in July that Chinese limits on raw-materials exports broke global rules and gave domestic companies an unfair advantage. WTO appellate judges upheld the ruling, which supported a complaint by the U.S., the EU and Mexico.

The Obama administration has been ratcheting up pressure on China over its trade policies a decade after the nation was accepted into the WTO. Obama signed an executive order two weeks ago creating a panel to probe unfair trade practices by nations including China. The U.S.-China trade deficit widened to $295 billion last year and the imbalance is a main source of friction between the two countries.

The U.S. has filed 12 WTO complaints against China while the EU has lodged five. China has complained twice against the 27-nation bloc and five times against the U.S.

“China’s restrictions on rare earths and other products violate international trade rules and must be removed,” EU Trade Commissioner Karel De Gucht said today in an e-mailed statement. “These measures hurt our producers and consumers in the EU and across the world, including manufacturers of pioneering hi-tech and ‘green’ business applications.”

Rebounding Demand

Morgan Stanley said on March 5 that demand for rare earths may rebound following a 25 percent slump in prices this year, benefiting producers of the metals such as Molycorp Inc. (MCP), which owns the largest rare-earth deposit outside of China, located near Mountain Pass, California.

The WTO case may boost rare-earth producers outside China, Luisa Moreno, an analyst at Jacob Securities Inc. in Toronto, said today in a telephone interview.

“We all thought that China was being unfair,” Moreno said. “It’s different when the president of the United States comes out and says, ‘I need to talk to China about these particular elements.’ It should be fairly important.”

Export restrictions “are issues for the respective governments to work through,” Jim Sims, a spokesman for Molycorp, said today in a telephone interview. “For Molycorp, we have to prepare for and compete in the market as it exists today.”

Elements Include Cerium

The raw materials covered by the complaint filed today are various forms of rare-earth elements, molybdenum and tungsten. The 17 chemical elements include lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium and lutetium as well as scandium and yttrium.

Today’s request for consultations is the first step in the case. Under WTO rules, the four governments must hold talks for at least two months in a bid to resolve the dispute. If the talks fail, the complaining governments can ask WTO judges to rule.

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