Policy Brief to address the issue of South Korean access to rare-earth minerals

Eleonora Nam
201232133

"China controls about 95% of the global supply of rare-earth minerals, which are used in everything from consumer electronics to batteries to defense systems. In recent years the government has reduced its export quotas to secure greater control over prices...China's export restrictions on rare earths have been the focus of the international policy and market pressures in recent months." - Wall Street Journal
Issue: China is the "world leader" in the reserves and "production" of rare earth minerals - raw material for the production of metals. It produces 95-97% of all rare earth elements on earth. Moreover, China does not allow the export of rare earth elements as raw materials, only finished products that are made in China.
China's monopoly power in the REE market allows to influence "international affairs". As Elliot Brennan pointed out, with the increasing demand, reduced exports of Beijing in recent years is forcing high-tech companies to move to China and governments to invest in their "exploration" and "production."
Most importantly, this power allows China to manipulate the prices of the rare earths, for the demand is increasing each year. Nowadays, none of the technology industry can do without the use of the rare earths, which are necessary for the production of products such as smart phones, wind turbines, batteries for electric vehicles, as well as the manufacturing of jet rockets. According to Kim Dong Hwan, since 2005 China has consistently reduced export quotas to increase the prices. The author provides timeline to show the tendency : "for example, according to Deloitte report, in 2011 the price of europium oxide, the major component of liquid crystal displays and fluorescent lamps, increased by 180 percent, dysprosium oxide, which is part of the nuclear reactors, hybrid cars, lasers and sound system, increased by 137 percent, and neodymium oxide, which is used in mobile phones , hard drives and wind turbines rose by 74 percent."
Current Policy: On April 23 2012, the government reported that South Korea has provided supply lines and emergency supplies to cope with the sudden deficit of the rare earths, which are vital for the industry. Involving WTO to influence the decision of China on export quotas has led only to insecurity. Nevertheless, the Ministry of Knowledge Economy assured that South Korea would not have any complications in meeting the demand.. "State-run Korea Resources Corp. (KORES) has successfully secured 1,000 tons of the element through two joint venture projects in China, the ministry said. KORES has also reached a deal to develop 6,000 tons of the industrial material in South Africa." "The ministry in charge of the country's industrial policy added the country is moving to increase its rare earth reserves "up to 1,500 metric tons" to meet 100 days of local demand by 2014, from just 10.8 days this year. The country has earmarked 11.4 billion won (US$10 million) to increase its strategic reserves in 2012. Last year, Asia's fourth-largest economy imported 3,596 tons of the rare earth elements worth US$203 million. This is a 9.4 percent on-year gain in volume and 245.1 percent spike in import cost." "Bloomberg reported that the country imports 96 percent of its energy requirements, as South Korea is heavily reliant on China and Japan for natural resources. The nation is also looking to South Africa for imports of the commodity."
As discussed by Kim Dong Hwan in the his book "희토류 자원 전" ("War over Rare Earth Minerlas"), currently, South Korea imports 80 percent of REE from China and the rest of France, and Japan. "While the market for these strategic assets is very limited, I expect in the coming months to see the increase in mergers and acquisitions of Korean companies," said Mike Elliott, Ernst & Young. Korea's largest steelmaker POSCO (Pohang Iron and Steel Company), in a joint effort with Korea Resources Corporation, acquired a 60% of Chinese coal miner "Yongxin Rare Earth Metal" in Baotou. The company has invested $ 21 million last year for better access to rare earth elements such as neodymium, one of the key ingredients that produce electric cars and wind turbines. In addition, five conglomerates together with Samsung C & T and Hyundai Motor in cooperation with the state-run Korea Resources Corporation (KRC) in December on 2011 has agreed to buy a 10 percent stake in a rare earth mine in South Africa. "The refurbished Steenkampskraal thorium and REE mine may be the first non-Chinese new producer in 2012–2013. The Zandkopsdrift development in Northern Cape is less advanced, but is among the largest prospective new REE mines."
"On Tuessday, January 4, 2011, the South Korean government announced that it had authorized a new prospecting program in Kyrgyzstan. Kyrgyzstan is known to have significant gold, uranium and other previous metal deposits already and it has been poorly prospected by geologists compared with neighboring Russia, China and Kazakhstan.
The South Korean government is not limiting its search for new supplies of rare earths to Kyrgyzstan. It’s looking to mine them in Vietnam, Australia and South Africa as well.
South Korea announced in December, it would try to boost its supply of rare earths and lithium from deposits it controlled directly to 26 percent by 2019 -- almost four times the figure of 7.3 percent in 2009."
As was reported on January 3, 2013 in Rare Earth Investing News, "South Korea’s dependence on rare earth elements (REEs) from China fell last year as the country diversified its import base, according to a report by China’s Global Times.
For the January to November period, REE imports from China accounted for 54.4 percent of total imports, down from 78.4 percent in 2011, according to the Korea Customs Service.
The report adds that the drop in imports was the result of the relatively high price of REEs imported from China — prices averaged $39.21 in 2012, “equal to 101.3 percent of the average price of total imports. The ratio was higher than 91.3 percent in 2011.”
Options: South Korean government started planning to reduce the dependence on importing rare earth elements from China since early 2009. However, the government is very passive in finding alternative possibilities to secure access to rare earths: within 4 years, it could only lower the dependence by 24% according to China's Global Times. Whereas according to Korea IT times, "South Korea has been treading water in securing relevant technologies as government policies on rare earth metals made little headway. Though the Ministry of Trade, Industry and Energy (MOTIE) unveiled Comprehensive Plan for Development of Rare Earth Metal Industry back in 2009, the plan fizzled.(May 30th, 2013)"
Korean government can be proactive, for there are other options, aside from importing the resources from China, Japan, and France.
1. More aggressive and strategic diversification
Today, South Korea imports REEs from the countries that do not have deposits of the resources (meaning, Korea imports imported rare earths elements), which, first of all, limits the amount possible for import and, secondly, increases the purchase price. South Korea should think more globally and strategically in deciding which countries to import REEs from. Rare earth minerals are not a scarce resource per se. There are deposits of rare earths in many different countries, but the biggest concentration of REEs is located in China. According to the article "Rare Earth Metals & China", the "distribution of rare earths per country" is a s follows: China-50% of world REM, CIS (Russia, Kyrgyzstan and Kazakhstan)-17%, USA-11.8%, India-2.8%, Australia-1.45%, Brazil-0.44%, Malaysia-0.27% and other-20%.
Advantages: In general, having a diversity of countries to import from, the government lowers its dependency on one particular country, which in return increases state security and industry security. Having options to access the resources gives political freedom to the government in decision making. For example, no state will be able to use resources as an instrument to solve any political disputes. And the industry is also secure (which also relieves pressure from the government), because if there is a conflict with one state, there is another option to supply the necessary rare earths elements.
Disadvantages: To discuss the disadvantages of this option, it is necessary to look at each country separately.
1) None of these countries alone have enough reserves to meet the demand. Hence, South Korean number of options is reduced (because to supply the necessary amount of REEs will require to combine the countries to import from). * Malaysia: because the concentration of the resources is so small, South Korea will not be able to stop importing rare earths from China completely. * Developed countries, like USA and Australia, have a big disadvantage: because mining of rare earths minerals is a "complex" and "radioactive" process, mining will be more expensive (compare to China) due to various environmental regulations and rules. Prices will not be cost-competitive. Another disadvantage is the location of the countries: compare to China, they are located further away, which will increase the transportation costs. * Kyrgyzstan and "India at present lacks the capability for processing REEs. " The minerals can be extracted but the process of refining is yet to be discovered, which means that in a meanwhile the minerals will have to be processed somewhere else. * Russia processes and supplies less than 1%. Moreover, even if Russia increases the supply up to "10% by 2020", it will not be able to supply all 10%, because most of the REEs will be used in the military production. 2) South Korea is still dependent and vulnerable. Diversification brings only one change: players in the market. If South Korea is to choose diversification as a strategic solution to issues of REEs, I will advise to import from Kyrgyzstan and India. Kyrgyzstan is a friendly country, which does not produce military weapons and needs FDIs for its development. Moreover, the country is the closest to South Korea, which means lower transportation costs. Plus, the country will be the first to the market. To import from India, South Korea will have to cooperate with Japan, since they have already invested in India. The alliance with Japan will also help Korean government to fasten the mining in Kyrgyzstan (for example, use of the same technology of refining the metals in Kyrgyzstan, as Japanese will use in India). 1-1. Invest in research of other deposits of REMs and ways to recover the reserves
Using the example of Chevron, oil company that till today is looking for oil deposits in other countries around the globe. As was pointed out in the academic paper "Contrasting Perspectives on China’s Rare Earths Policies: Reframing the Debate through a Stakeholder Lens", "there is considerable uncertainty about the quantity and location of rare earth reserves." For example, in Brazil, there are more than 50 mil (in tons) of rare earth reserves, but they all are "not proven and recoverable", in Australia and Vietnam-more than 10 mil of unproven and unrecoverable reserves of rare earth minerals. To find more deposits of the REMs will give more options for strategic decision making. However, research and development will be costly and time consuming.
2. Urban mining
South Korea can follow the steps of Japan and use the technology that allows to retrieve the rare earths from old electronic devices. By definition, urban mining means to extract necessary elements from old products, in the case of rare earths, from old technology, like computers, cell phones etc.
Advantages: Because South Korea will not be dependent on importing the resources from any country, this option will increase state security.
Disadvantages: No matter how good this option might sound, there are more drawbacks to it than benefits.
1) Unlike Japan, South Korea started to take actions in addressing the issues of REEs very late and passively. Where many Japanese companies have already started to apply urban mining, Korean companies do not have the technology to do so. Which means that it will take time to develop one or to learn from the Japanese companies, which might never happen, because Japan and Korea are main competitors in the technology market.
2) Urban mining provides only a short term solution, because there is a limited amount of old electronics. Moreover, China has already forbidden to import of old technology and electronic devices.
3. Move operations to China to assure a supply of rare earths.
Because China most likely won’t back down from their stance and other global supplies are scarce, it may be best for companies to move their operations into China.
Because of China’s lack of technological expertise they are seeking to bring in international companies with such expertise in order to refine the metals. The export taxes/curb are helping to bring in foreign investment companies into China.
Advantages:
Relocating the operations to China brings following advantages:
1) Having the production and the raw materials (in this case, rare earths in technology industry) in one place lowers the costs of production, which makes the final products cheaper and it might ease the competition in the market (especially in nowadays, when there are so many products in the market that price became the main reason in the decision making by consumers which product to purchase).
2) Eliminate a risk of having a "conflict relationship": "proximity and diffusion". When resources are closely located and in one place, it is easier to control and to avoid unnecessary conflicts and disputes because of separatism (for example, cultural differences).
Disadvantages:
To relocate the production seems like the easiest and the cheapest way to resolve the issue, however, there are greater consequences due to downsides of this solution.
1) Regardless of what other countries are doing, China will continue to have over half the world’s rare metal reserves. The countries that Japan and possibly in the future South Korea are investing in have some rare earth reserves, but they still dwarf the amount that China possesses. It is quite possible that mining operations in those countries could potentially deplete their resources unintentionally making China even stronger in the rare earths industry.
2) Relocating the technology and car industry, for example, to China is like giving a key to achieving Chinese dream of becoming an absolute leader on a golden plate. Chinese are very good at coping and producing things at a lower costs. Nevertheless, in the auto and high-tch industry, they cannot copy and produce goods of their own, because they do not have the technology and they do not know the process. One of the main reasons, China is cutting down the export quotas is to attract foreign companies to learn from them and then drive them out of business.
Recommendation: Product development using less or no rare earth
South Korea should ally and cooperate with Japan on developing technological know-how to reduce the use of the rare earth elements in the production of electronic devices, cars, displays.
Companies shouldn’t stop innovating their products to use less rare earth but they should keep investing in rare metals. The reason is that innovation takes time and a good amount of money and investment; it may be cheaper just to make a business venture with China or Mongolia and use the metals they know already produce results rather than innovate or wait for new mining industries to enter the market while China increases their domination of the industry. Companies should be active on more than one front, meaning: they should innovate their products for the future and at the same time keep buying rare earth metals to ensure their success for the present.
Advantages: Innovations kept, are keeping and will keep Korean companies (or any other company) competitive and, in some industries, a leader. But aside from being the best, innovations in resources will bring following benefits:
1) Independence, which saves time, money, citizens (no conflict) and economy, because there will be no reasons to do otherwise. Being independent from importing REEs allows the government not to worry about "responses to supply disruption". Avoid conflicts and disputes due to scarce resources.
2) Resource innovations will reduce Chinese monopolistic power and its influence.
3) Resource innovations is the long term solution that provides independence and state security.
4) Korean companies will remain competitive. Because if South Korea does not start invest in resource innovations now, Japan that has already started investing will become the ultimate leader, who it will be hard to compete with.
Disadvantage: Unfortunately, R&Ds and innovations mean a lot of money and time. To invent a technology that will allow to produce green products, electronic devices and even military instruments in the future with no or little use of the rare earths will cost a lot of money and will take a lot of time. Plus, the quality of the products with the substitutes to the rare earth elements is unknown. If the quality is bad, it will mean more money and time will be spent to better the products. Another flaw of this solution is there are some elements that are irreplaceable, which means that South Korea will still have to import some minerals.

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