China’s Domination of Rare Earth Metals Puts Renewables At Risk (FAN, TAN, KOL, REMX, CHIE, KOL, GEX, FXI)

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February 29, 2012 4:08pm NYSE:CHIE NYSE:GEX

Ryan Landon Swanson:  China (NYSEArca:FXI) holds 97 percent of the world’s production of rare earth metals (NYSEArca:REMX)—a group of 17 elements that are used in technology products ranging from helicopter blades to cell phones to wind turbines and solar panels.  Since 2006, China has

begun to restrict its exports of rare earths, provoking concerns over WTO legality and recent threats by the US and European Union to initiate a formal trade dispute.  Furthermore, it is now apparent that humankind cannot infinitely produce wind turbines and solar panels, as their production is subject to limited resources and to how much the Chinese government is willing to produce and export.

China holds 52 percent of known rare earth reserves, while the US, Russia, and Australia hold 13 percent, 6 percent, and 5 percent, respectively.  The mining and processing of rare earths is notoriously toxic for the environment, making it politically difficult for other countries which have rare earth reserves, but stricter environmental laws, to compete with China in production.  Thus, in July of 2010 when China cut domestic output and exports by 40 percent, it sent shockwaves of fear through global supply chains.  Later in September of 2011, the Bureau of Mining Management announced that three of China‘s major rare earth mines would halt production by the year’s end, citing resource depletion and environmental degradation as reasons for the halting of production.  These seemingly whimsical export quotas have threatened technology manufacturers worldwide, including those in the clean energy business (NYSEArca:GEX), as the limited supplies of five rare-earth minerals (dysprosium, terbium, europium, neodymium, and yttrium) are essential inputs for wind turbines and solar panels.

China‘s tightening control over rare earth metals has huge implications for the global wind industry, as China could easily put foreign manufacturers at a cost disadvantage. Consequently, many foreign companies have set up their manufacturing operations in China, not just for cheap labor, but also to circumvent China‘s export quotas for rare earths.  This past January the WTO rejected a Chinese appeal to a 2011 ruling when the WTO declared that Chinese restrictions on the export of 9 raw materials had broken the global rules of trade, giving Chinese manufacturers an unfair advantage over their foreign competitors.  Following the rejection, the US and the European Union have threatened to issue a formal allegation at the WTO over the restriction of rare earths.  The European Commission in Brussels claims that EU manufacturers rely heavily on Chinese imports, and—as a result of the export quotas—many have relocated their manufacturing operations to China in order to buy raw materials at competitive prices.

Apart from concerns over international trade, the need for rare earths is significant because one cannot assume an infinite growth of wind turbines and solar panels. Jack Lifton, a rare earth metals industry specialist, cautions wind power enthusiasts by stressing that neodymium is a limiting natural resource for wind power development and essentially all of it is mined in China.  He reminds wind power advocates that “[i]t has been estimated that to build the latest and most efficient one megawatt capacity wind turbine-powered electric generator, requires one metric ton of the rare earth metal neodymium for use in a permanent magnet made from the alloy neodymium-iron-boron.” He also questions whether China‘s rare earth mines can meet the anticipated domestic demand for neodymium, especially if rumors prove true that the China State Council plans to add a total of 330 GW of wind power capacity between 2011 and 2020.

David Fridley, a senior scientist at the China Energy Group (NYSEArca:CHIE), echoes Lifton’s concerns and supports the view that energy independence for the US is a pipe dream.  Indeed, we cannot simply swap coal (NYSEArca:KOL) plants for wind (NYSEArca:FAN) and solar farms (NYSEArca:TAN) without also facing resource constraints and relying on raw material imports from China.  Because of the fragile production and limited reserves of rare earth metals, he contends that we must strive for an ‘energy resilient’ economy that meets future electricity demand through energy efficiency and conservation, not just massive build outs of renewable energy projects.

While it is unclear to what extent we can continue to mine and import rare earths, it is clear that the Chinese have forced foreign manufacturers to relocate to China, further bolstering China’s rise to economic prominence.  It is true that the US still leads in technological research and innovation, but we must remember that China has a firm grip over the raw materials necessary to build high-tech products.

Note: This article was adapted from the author’s thesis: “The Political Economy of Wind Power in China: Challenges and hopes to transform China’s electricity sector,” Senior Thesis, University of California, Berkeley, 2011.

Written By Ryan Landon Swanson For Wall Street Sector Selector

Ryan Landon Swanson is an associate writer for Wall Street Sector Selector. His chief research focus is on the political economy of China’s energy sector, but he also enjoys writing on the political economy of Latin America. He fluently speaks, reads, and writes Spanish and Mandarin Chinese. Ryan has substantial experience living, studying, and working in both China and Argentina. He earned a B.A. from the University of California, Berkeley in Interdisciplinary Studies with a focus on international relations and energy.

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