212MTAMount Durham University Bachelor's Diploma in Technology
China's Crumbling Rare Earth Monopoly
1. Economics for your Classroom from
Ed Dolan’s Econ Blog
How Natural is Natural
Monopoly? The Case of China
and the Market for Rare Earths
Posted May 12, 2015
Terms of Use: These slides are provided under Creative Commons License Attribution—Share Alike 3.0 . You are free
to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like
the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishing.
2. A Collision Jars the High-tech World
On September 7, 2010 a Chinese fishing
boat collided with a Japanese Coast Guard
vessel near a disputed chain of
uninhabited islands in the East China Sea
The collision sparked a diplomatic row and
led to a temporary cutoff of China’s
shipments to Japan of rare earth elements,
used in many high-tech products
Western officials confronted the alarming
possibility that China, then home to some
97 percent of rare earth production, had
natural monopoly in these strategic
elements
Senkaku (Diaoyu) Islands
Photo source: Ministry of Land, Infrastructure, Transport and Tourism (Japan),
National Land Image Information
http://commons.wikimedia.org/wiki/File:Okinokitaiwa_of_Senkaku_Islands.jpg
May 12, 2015 Ed Dolan’s Econ Blog
3. What is a Natural Monopoly?
Economists define a natural monopoly as
an industry in which long-run average cost
is at a minimum when just one firm serves
the market.
Sources of natural monopoly:
A technology such that limiting suppliers to one
minimizes cost. For example, delivering natural
gas to homes is least expensive when there is
only one set of pipelines.
Ownership by a single producer of a unique
natural resource that allows it to operate at a
lower cost than any competitor
Does rare earth production fit this
definition?
May 12, 2015 Ed Dolan’s Econ Blog
4. What Are Rare Earths?
Rare earth elements (REEs) are a
group of 17 related elements near the
middle of the periodic table of
elements
They have many important
applications in the high-tech world:
Magnets for electric car motors
Computer memories
Lasers
Superconductors
Catalysts
Lenses
and more . . .
May 12, 2015 Ed Dolan’s Econ Blog
5. Rare Earths are Not Really Rare
Despite the name, rare earths
are not really all that rare
All of them are more common in
the earth’s crust than gold, and
some are as common as lead
However, they are hard to mine,
because unlike gold or lead,
they are never found in highly
concentrated deposits
May 12, 2015 Ed Dolan’s Econ Blog
6. China’s Dominance of REEs is Relatively Recent
Until the 1960s, most REEs came
from “placer sands” in India, Brazil,
and South Africa
In the 1964, the rich Mountain
Pass Mine in California became the
largest producer
China’s dominance is relatively
recent, dating from the 1990s when
US production declined and world
demand grew
What economic forces allowed
China to become the world’s
leading producer?
May 12, 2015 Ed Dolan’s Econ Blog
7. The Role of Extraction Costs
In part, China’s dominance of REEs
came from lower extraction costs
At any given level of output, producers
naturally draw from the lowest-cost
sources first
China’s ore deposits are good, but not
uniquely good
However, the combination of good ores
with low labor costs helped China take
market share away from US producers
May 12, 2015 Ed Dolan’s Econ Blog
8. Tolerance of Environmental Damage Added to China’s Edge
Mining REEs can cause serious
environmental damage
Measures to protect or clean up the
environment add greatly to the cost of
production
Radioactive spills and costly pollution
control regulations contributed to closing
California’s Mountain Pass mine
Until recently, China tolerated severe
pollution from primitive, low-cost, often
illegal mining operations
Willingness to turn a blind eye to
environmental damage contributed to
China’s REE dominance
May 12, 2015 Ed Dolan’s Econ Blog
9. Short-run vs. Long-run Supply
Short-run supply of REEs is much less
elastic than long-run supply
In the short run, supply can increase
only through more output from existing
mines
However, in the five years since 2010
several new suppliers have entered the
market
California’s Mountain Pass Mine reopened
and began shipping in 2013, using much
more efficient technology than before its
previous closure
Australia’s Lynas Corp. began production in
Malaysia about the same time
Other projects are underway in Canada,
Kazakhstan, and South Africa
May 12, 2015 Ed Dolan’s Econ Blog
10. Short-run vs. Long-run Demand
Similarly, short-run demand is much less
elastic than long-run demand
In the short run, existing technology
severely limits substitution for REEs
Over the past five years, however, new
technologies have come on line
Better flash drives reduce need for REE-
using hard drives
Ways have been found to build ulta-strong
magnets with less of the REE dysprosium
Gasoline refining techniques have been
modified to decrease use of REEs at only
slightly reduced efficiency
May 12, 2015 Ed Dolan’s Econ Blog
11. Low Short-run Elasticities Mean Volatile Prices
Given low short-run elasticities of supply
and demand, China’s attempts to restrict
REE exports in 2010 sent prices soaring
However, prices peaked in early 2011.
Since then, they have fallen by more
than half
They remain higher than before the
2010 crisis, providing sufficient
incentives for increased long run supply
and substitution efforts
Neodymium
April $41/kg
October
$36/kg
Cerium oxide
April $4.70/kg
October
$92/kg
Source: Bloomberg, http://www.bloomberg.com/news/2010-10-20/china-
pledges-to-maintain-rare-earth-sales-official-says-exports-may-rise.html
May 12, 2015 Ed Dolan’s Econ Blog
12. The Bottom Line: China Never Had a True Natural Monopoly
The bottom line:
Despite its 97% market share, China
never had a true natural monopoly
Attempts in 2010 to exert tighter control
over world supplies backfired by
providing incentives for substitution
away from REEs and entry of new
producers
Like many monopolies or near-
monopolies of the past—Polaroid,
Xerox, Microsoft—China’s dominance of
the REE market eventually succumbed
to the forces of competition
May 12, 2015 Ed Dolan’s Econ Blog
13. Click here to learn more about Ed Dolan’s Econ texts
or visit www.bvtpublishing.com
For more slideshows, follow Ed Dolan’s Econ Blog
Follow @DolanEcon on Twitter