Turning Natural Resources To Strategic Assets: China’s Rare Earth Monopoly And Lessons For The Philippines – Analysis

Control over natural resources can be a major national objective which, if successful, can bring enormous benefit to a country. One illustrative case in point is China’s virtual monopoly of rare earth metals (REM). Rare earths are a group of 17 elements known as the lanthanide series, with the addition of scandium and yttrium. Although they are abundant in the earth’s crust, these elements are widely dispersed and only very few highly concentrated and economically viable deposits are available, thus earning the name “rare.” REM is used for a wide range of applications from renewable technologies (e.g. in wind turbines), to electric/hybrid vehicles (e.g. catalytic converters and batteries) and sophisticated aerospace and defense equipments (e.g. night vision goggles, guidance systems, laser range-finders, precision-guided weapons, stealth technology). A long term vision, sustained political will and a little shrewdness enabled China to turn what used to be any other natural resource to a coveted strategic asset that it is today. As a country endowed with immense mineral wealth, the Philippines should take time to study China’s experience and draw useful insights and lessons from the same.

China did not start as a major producer of rare earths. India and Brazil were among the first principal producers after World War II, extracting rare earths from placer sand deposits. In the 1950s, South Africa became a dominant supplier when rare earth-bearing monazite was discovered in great quantities in the country. From the 1960s to the 1980s, it was the US’ turn with the Mountain Pass mine in California getting centerstage as a chief producer of REM. China only possesses 37% of the world’s reserves of REM, mostly located in Inner Mongolia, but it began to control 97% of world production since the 1990s. This amazing feat was done gradually overtime and so subtly that it avoided suspicions of other countries, including the US. Initially, China flooded the market with cheap REM shutting down foreign competitors and cultivating world reliance on Chinese supplies. China then began shifting from mere mining and production to processing, penetrating both the upstream and downstream REM sectors. Beginning the 1980s, China commenced to control supply by clamping down on smuggling, illegal production, consolidating operating REM mining companies, imposition of production and export quotas and taxes and restrictions on the issuance of new mining permits . From 2003, China began to decrease exports leading to increased world prices of REM. It was too late for the world to realize what China had achieved and even countries with known REM deposits, like the US, may take years to revive their home-grown REM sector back to its glory days . Hence, for the time being, the world will have to contend with whatever rare earths China will be willing to sell in the market.

China is now riding high in the position to set prices and dictate its own terms when it comes to the procurement of rare earths. Instead of allowing foreign mining companies to simply use China as a base from which they can exploit local REM for their own profit, Beijing saw an opportunity in controlling the flow of these strategic metals in the long run. Unable to compete with cheaper rare earths coming from China, many rare earth mining companies based in other countries began to transfer operations to China. Beijing welcomed this move and entered into joint ventures with foreign investors but the state retained control over the sector. In time, China had become for rare earths what Middle East is to oil and, by the same token that Arab nations had used oil as a political weapon against Israel and the West in the 1970s, China is also using REM to serve its geostrategic and geopolitical ends. For instance, China cut down on rare earth exports to Japan in 2011 amid a diplomatic row over a ship collision in the contested Senkaku/Diaoyu Islands . Japan had already expressed alarm over China’s REM export controls in WTO and in October 2011, Japan, US and EU met in Washington to discuss China’s rare earth export restrictions and its impact on global supply. REM forms an essential component in many high-end technology products giving China a golden opportunity to develop expertise and global competitiveness in the manufacture of such high-end goods since local manufacturers have the first crack on one of the world’s most sought-after commodities, rare earths. And as world demand for greener energy (i.e. wind power) and state-of-the-art defense systems continues to escalate, rare earth’s importance will continue to soar and so will China’s place in international affairs.

China’s rare earth success should serve as an inspiration to the Philippines. Despite not being the biggest producer from the start, China was able to prove that state resolve can transform an ordinary natural resource to a potent strategic treasure, turning a developing country-supplier into a monopoly power. Foreign policy can no doubt open a window by which foreign investments can be funnelled to develop such a crucial industry as the mining sector. But the Philippines should take the cue from China and adopt a long term plan with respect to its mining resources. Manila should not feel beholden or be subservient to foreign investors. Instead, Malacanang should map out its national interest in the mining industry and put foreign capital in proper perspective. The country should try to look for areas where it can possibly gain and develop competitive, as well as strategic, advantage over time.

Of the Philippines’ 30 million hectares of land, 9 million hectares or roughly 30% is found to have high mineral potential and, of this, only 3.17% are covered by mining tenements. This leaves much vast mineral riches intact, waiting to be tapped with the help of foreign capital. The county is rich in gold, copper and nickel. In fact, as early as the 1980s, in terms of mineral deposits, the country was already ranked second in gold, third in copper, fifth in nickel and sixth in chromate respectively. But a lack of a clear long-term policy on mining, legal and bureaucratic impediments and the inability to attract investors stunted the growth of an otherwise promising economic sector. Mining is a capital-intensive activity, requiring sophisticated technology and infrastructure and huge financial backing that may not be readily available at home. Hence, one major foreign policy thrust of the government should be to attract foreign investments so that the country can benefit from this bounty. Mining laws that make it difficult to attract foreign investments should be reviewed and safeguards must be put in place to mitigate damage to the environment, ensure that affected indigenous peoples and local communities are provided for, and ensure that the greater share from this mineral wealth will be returned to the Filipino people. The necessary workforce and infrastructure support must also be laid out. Joint ventures and production sharing wherein national government or local mining companies can enjoy majority or controlling share can be one mode of attracting foreign capital, while at the same time ensuring domestic control. Unnecessary delays, legal bottlenecks, and negative popular perception are among the issues that must be addressed in order to harness the country’s immense mining potentials. Hence, there is a need for foreign policy to work in tandem with its domestic counterpart to promote better synergy.

Like any other minerals, rare earths are finite non-renewable resources and China knows this. Beijing’s export restrictions, more than protecting the environment, allow the country to maximize the benefits and advantages that it can exact from controlling world REM supply. The window of opportunity that the country was able to build is considerable as former producing countries may take another decade or more to counter China’s monopoly and restore supply stability. Moreover, China had already boosted its capacity to process rare earths to high-technology products so that, by the time other major countries already restore their REM self-sufficiency, China may have already effectively scaled the value chain and moved from a mere raw material provider to a finished good exporter.

The Philippines can draw a lasting lesson from this Chinese practice – it does not pay to be a mere raw materials supplier in the long run. Many mineral-rich countries in Sub-Saharan Africa, such as Sierra Leone and Congo, for instance, remain underdeveloped and, instead of bringing prosperity, their diamonds, gold, oil and other mines only fomented war, rebellion, human rights abuses and widespread oppression. Only the ruling elites and big Western mining multinationals partake from this divine providence. As in all mining projects, environmental damage and social dislocation accompany rare earth extraction in China, but what made China different is the fact that they were able to put their rare earth deposits to its utmost utility, generating not only handsome revenues, but also huge world political clout.

This article originally appeared at FNPFP and is reprinted with permission.