After China’s Rare Earth Embargo, a New Calculus

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BAOTOU, China — When Japanese mineral traders learned in late September that China was blocking shipments of a vital commodity, the word came not from a government announcement but from dock workers in Shanghai.

And on Thursday, the traders began hearing that the unannounced embargo of so-called rare earth minerals was ending — again, not from any Chinese government communiqué, but though back-channel word from their distributors.

Throughout the five weeks of the embargo, even when China expanded the rare earth shipping halt to include the United States and Europe, Beijing denied there was a ban.

Whatever it was called, a shipping suspension that started amid China’s diplomatic dispute with Japan over a wayward fishing trawler escalated into a broader international trade issue.

The episode alarmed companies around the world that depend on rare earths, minerals that help make a wide range of high-tech products, including smartphones and smart bombs. China currently controls almost all of the world’s supply of rare earths, for which demand is soaring.

To many outsiders, the undeclared embargo looked like a pure power play — a sign China would wield its growing economic might and apply its chokehold on an important industrial resource with little regard for the conventions of international trade. The export quotas China continues to impose on rare earths, even when it does let ships leave the docks, are restricting global supplies and causing world market prices to soar far beyond what Chinese companies pay.

From the Chinese perspective, though, the issue looks very different.

China feels entitled to call the shots because of a brutally simple environmental reckoning: It currently controls most of the globe’s rare earths supply not just because of geologic good fortune, although there is some of that, but because the country has been willing to do dirty, toxic and often radioactive work that the rest of the world has long shunned.

Despite producing 95 percent of the world’s rare earths, China has only 37 percent of the world’s proven reserves. Sizable deposits are known to exist in the United States, Canada, Australia, India and Brazil, among other places.

Many of those countries, responding to the rising demand for rare earths and alarmed by the recent embargo, are now scrambling to develop new mines or renovate ones long considered not to be worth the effort. That includes an abandoned mine in California that the American company Molycorp is trying to refurbish.

But experts say that any meaningful new production from outside China is at least five years away, and that it will come with its own environmental cost calculus.

“China’s rare earth output cannot be raised fast enough to meet the entire world’s needs, as there are environmental factors to be taken into consideration with an increase in rare earth production,” said Zhang Peichen, the deputy director of the government-backed Baotou Research Institute of Rare Earths, the main research group for the Chinese industry.

Across China, rare earth mines have scarred valleys by stripping topsoil and pumping thousands of gallons of acid into streambeds. The environmental costs are palpable here in Baotou, a smoggy mining and steel city in China’s Inner Mongolia, where the air this week had an acrid, faintly metallic taste.

Half of the global supply of rare earths comes from a single iron ore mine in the hills north of Baotou. After the iron is removed, the ore is processed at weather-beaten refineries in Baotou’s western outskirts to extract the rare earths minerals.

The refineries and the iron ore processing mill pump their waste into an artificial lake here. The reservoir, four square miles and surrounded by an earthen embankment four stories high, holds a dark gray, slightly radioactive sludge laced with toxic chemical compounds.

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The deadly lake is not far from the Yellow River watershed that supplies drinking water to much of northern China. The reservoir covers an area 100 times the size of the alumina factory waste pond that collapsed this month in Hungary, inundating villages there and killing at least nine people.

Even before the Hungary disaster, Baotou authorities had begun a program to reinforce the levee here. Huge bulldozers are adding a thick surface layer of crushed stone to the embankments to protect them from the region’s harsh weather.

But the bottom of the reservoir was not properly lined when it was built decades ago, according to a rare earth engineer who insisted on anonymity because of the Chinese government’s sensitivity about the problem. The sludge, he said, has caused a slowly spreading stain of faint but detectable radioactivity in the groundwater that is spreading at a rate of 300 yards a year toward the Yellow River, seven miles to the south.

Much of the radioactivity associated with rare earths comes from the element thorium, which is not a rare earth but is typically found in the same ore. With the exception of unusual clay formations in southern China that contain medium and heavy rare earths with virtually no thorium, every other known commercial-grade rare earth deposit in the world is laced with thorium.

In Australia, engineers and lawyers have been working for three decades to find a safe, legal way to produce rare earths from a very rich deposit in the center of the country at Mount Weld. The mine’s current owner, Lynas Corporation, hopes to begin small-scale production there late next year, although technical challenges remain.

The only American rare earths mine, the Molycorp complex at Mountain Pass, Calif., was at one time the world’s leading producer. That was before it leaked faintly radioactive fluid into the nearby desert in the late 1990s, causing a costly cleanup that contributed to the mine’s closing in 2002. By then, very low Chinese prices had made the mine less economically viable.

Now Molycorp, which raised money in a public stock offering this past summer, is hoping to re-open the mine with higher safety and environmental standards. And it is betting that new technologies can drive its operating costs lower than the level of Chinese mines. Large-scale production, though, may still be several years away.

The mines of southern China are essentially free of thorium and have rare earths that are easily separated from the clay by dumping the ore in acid. But this relatively easy process, and soaring prices on the world market, has led to the development of many illegal mines, which sell to organized crime syndicates that pay for rare earth concentrate with sacks of cash.

Beijing officials have sent out police squads since May to shut down the outlaw mines, arrest their operators and destroy their equipment with blowtorches, rare earth industry officials said.

“The damage that has been done in south China is considerable,” said Judith Chegwidden, a managing director specializing in rare earths at the Roskill Consulting Group in London.

To point out China’s environmental and supply concerns is not to overlook the economic benefits the nation accrues by restricting exports. The global shortage gives foreign companies a reason to move even more of their rare earth-dependent operations to China, to produce key components for a wide range of products.

A Chinese official has acknowledged as much. “To use moderation in the control of the production of rare earth resources and reduce exports to an acceptable level is to attract more Chinese and foreign investors into the region,” Zhao Shuanglian, the vice chairman of Inner Mongolia, said last year, according to China’s official Xinhua news agency.

Meanwhile, China’s own fast-growing manufacturing industries now consume more rare earths than the rest of the world combined. And Beijing has done nothing to curb that domestic demand.

That apparent double standard could prove important if, as some trade experts have predicted, the United States, Europe and Japan bring a World Trade Organization case accusing China of unfairly restricting exports through a system of quotas and duties.

Alan Wolff, a former American trade official who now heads the international trade practice at the law firm Dewey & LeBoeuf in Washington, said China might face a skeptical audience at the W.T.O.

“A panel would sympathize with a genuine environmental objective,” Mr. Wolff said. “But I do not think it would sympathize with cutting off supply disproportionately to foreign users in the name of saving the environment.”