China's Contentious Rare Earth Elements Market

Russ Islam
December 6, 2015

Submitted as coursework for PH240, Stanford University, Fall 2015

Fig. 1: Neodymium magnet cubes. Neodymium and other rare earth elements are important for many industrial applications, including electric motors and generators (Source: Wikimedia Commons).

China's rapid rise as a geopolitical and economic power has alarmed many countries, and this is especially true in regard to natural resources. Rare earth elements (REEs), which are important raw materials for many advanced technologies produced around the world, are mined almost exclusively by Chinese firms because of their low production costs. China holds considerable political and economic power thanks to its massive REE mining industry, which includes both state-owned and private corporations. Here we consider the various applications of REEs before delving into the economics of the industry and the environmental impact of Chinese mining operations.

The Many Uses of Rare Earth Elements

There are seventeen rare earth elements (REEs): scandium, yttrium, and the lanthanides (lanthanum to lutetium). REEs are actually fairly abundant in the earth's crust, though they are usually found in deposits mixed with radioactive elements. However, processing equipment and management of radiation risk make the separation procedure expensive. They have a high affinity for oxygen, a chemical property exploited in many industrial applications. They also have excellent magnetic properties that make them useful as permanent magnets for electric motors and generators. Neodymium magnets, shown in Fig. 1, are particularly important. [1] Since REEs are crucial for many industries ranging from green tech to defense, countries that import REEs feel uneasy about their dependence on China.

Rare earth elements can be found in a wide variety of products, including: mobile phones, control rods and thermal shields in nuclear reactors, magnets, decolorized glass, catalysts for the steel industry, Pigments for the ceramics industry, pharmaceuticals, gas mantles, night-vision goggles, computer hard drives, televisions, lasers, radars, batteries for hybrid electric vehicles, and wind energy turbines. [1]

China's Market Dominance and Its Implications

Fig. 2: Percentage share of global rare earth element production for the United States, China, and the rest of the world from 1950 to 2000. [8] (Courtesy of the USGS)

Although the Mountain Pass mine in California was the source of the majority of the world's rare earth elements from the mid-1960s to the 1990s, as seen in Fig. 2, China has overtaken the industry since then and now boasts a 97% share of world production. [2] Some Western scholars cite cheap labor and lax environmental regulations as possible reasons for China's ability to mine at lower costs, though Chinese officials insist that they restrict REE production in order to reduce the impact of mining on the environment. [3] China has been accused of using its monopoly on REEs to its advantage by introducing export quotas to drive up prices and to exert political power over countries like the United States and Japan. [3] For instance, in 2010 after Japan detained the captain of a Chinese fishing trawler that had collided with Japanese coast guard vessels, China halted its exports of rare earth elements to Japan. [4] In 2012, the United States, Japan, and the European Union filed a complaint to the World Trade Organization, arguing that China's export quotas on REEs undermined free trade. China ultimately lost the case, and in 2015 the export quotas were finally scrapped. [5]

In an interesting 2015 paper, Schlinkert and van den Boogaart propose an economic model to explain China's behavior as a REE supplier. They argue that the development of the world REE market can be divided into four stages: [3]

  1. Market penetration: With lower production costs, China enters the REE market and overtakes the United States.

  2. Exploitation of market power: China enjoys monopoly status and restricts the export of REEs in order to maximize profit and wield political power.

  3. Decline of market power: China begins to lose its monopoly as production costs increase and foreign mining operations restart.

  4. Transformation from monopoly to oligopoly or polypoly: Foreign competitors increase their share of the REE market, and an equilibrium is reached with Chinese producers.

Stage 1 occurred in the 1990s when China's lower production costs made the American REE mining industry unprofitable, and since that shift the REE market has been in Stage 2 with China having a virtual monopoly. Stages 3 and 4 are predictions that have yet to be realized, though Schlinkert and van den Boogaart argue that much of China's recent behavior signifies that it is making efforts to counteract a perceived decline in monopolistic power. One example of such behavior was a failed attempt by the state-owned China Nonferrous Metal Mining Group to acquire Australia's Mount Weld project. Had the acquisition succeeded, the price of REEs would likely have increased. [3] In addition, China has recently made efforts to consolidate its domestic REE industry, a move that would not have offered significant benefits if China's monopoly were as strong as many believe it to be. [3]

Moreover, China has made attempts to internalize the market demand for REEs (i.e., the Chinese government wishes for Chinese companies to purchase more REEs than foreign companies do). [3,6] If the costs of REEs for domestic companies are substantially lower than those of its foreign competitors, those companies may run its competitors out of business. China's near monopoly on REEs would be complemented by a near monopoly on products higher up the value chain, such as further processed REEs and even manufactured parts like magnets. [3,6] This would increase the world dependence on China for not only raw REEs but also any REE-based products. The other possible outcome Schlinkert and van den Boogaart foresee is a transition to Stage 4, where China gradually loses its monopoly and other countries enter the market, consequently leading to a stabilization of the world REE supply. [3] It is uncertain which one of these outcomes will materialize.

The Environmental Effects of REE Mining in China

Fig. 3: Rare earth element open pit mines and their tailings in Bayan Obo, Inner Mongolia, China (Source: Wikimedia Commons)

Recent research indicates that REE mines and their tailings, such as those seen in Fig. 3, are deleterious to the environment. Concentrations of REE particulates in the soil, water, and air surrounding mining sites in China are significantly higher than those at non-mining sites. Furthermore, catalysts for petroleum cracking often contain REEs, so REE particles often pollute the air near refineries and possibly lead to negative health effects on local residents, though such studies have been scarce. [7] Certain plants near mining sites have also been shown to accumulate high levels of REEs, including sweet potatoes that have ten to twenty times acceptable contamination levels. [7] Although REEs in the environment typically have low mobility, recent research has shown that REEs also exist in exchangeable forms with relatively high mobility, leading to greater accumulation in plants. REEs have also leached into groundwater in dissolved form, posing another health risk to humans. [7] In recent years there has been an increase in the amount of research done on the toxic effects of REEs on humans, though there is still a lack of coherent conclusions. In general, there remains much work to be done in terms of standardizing guidelines for REE toxicity levels and conducting further research, especially for air pollution.

An Uncertain Future

The technological importance of rare earth elements and China's near monopoly makes the REE industry fraught with political and economic uncertainty. China has exercised its control over REEs for political reasons, though recently it has scrapped its export quotas. Whether the country's monopoly on REEs will strengthen or weaken in the near future is unclear, and there is evidence for either side. The environmental impact of REE mining in China is also a cause for concern. However, rather than simply pointing all fingers at China, one should take care to consider the motivations of the dependent countries as well, a topic not often discussed in Western literature regarding the rare earth elements market. China is not the first country to have had a near monopoly on valuable resources and used it to its advantage, so China's current behavior should be placed in historical context.

© Russ Islam. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.


[1] A. R. Jha, Rare Earth Materials: Properties and Applications (CRC Press, 2014), pp. 13-30.

[2] A. Moir, "The Chemistry, Economics and Politics of Neodymium," Physics 240, Stanford University, Fall 2010.

[3] D. Schlinkert and K. G. van den Boogaart, "The Development of the Market for Rare Earth Elements: Insights from Economic Theory," Resour. Policy 46, 272 (2015).

[4] K. Bradsher, "Amid Tension, China Blocks Vital Exports to Japan," New York Times, 22 Sep 10.

[5] "China Drops Its Export Limits on Rare Earths," New York Times, 5 Jan 15.

[6] N. Mancheri, "World Trade in Rare Earths, Chinese Export Restrictions, and Implications," Resour. Policy 46, 262 (2015).

[7] T. Liang, K. Li and L. Wang, "State of Rare Earth Elements in Different Environmental Components in Mining Areas of China," Environ. Monit. Assess. 186, 1499 (2014).

[8] G. B. Havel, J. B. Hedrick, and G. J. Orris, "Rare Earth Elements - Critical Resources for High Technology," U.S. Geological Survey, Fact Sheet 087-02, 2002.