Fisher Investments Editorial Staff
Geopolitics, Trade

Cutting the Cord

By, 12/29/2010


Story Highlights:

  • China, the globally dominant producer of rare earths, reduced export quotas for 2011—the latest in a long line of cuts
  • Falling export quotas aren't new news, but given China's opaque bureaucracy, investors wonder at their intentions. 
  • There's no way to confirm China's goals, but their actions don't appear to be maliciously motivated. 
  • We might see some price rises, but likely nothing of wide effect. And the end result is probably a world less dependent on China for rare earths.


China made headlines again Tuesday with its latest rare earths quota for early 2011—a 35% reduction from the first half of 2010. At first swipe, it's a frightening prospect. Rare earths make tech and defense gadgets go, and China controls 95% of the global market. But tighter quotas aren't new news. We've covered the topic in depth recently. China has reduced quotas eight years running. In fact, a steep reduction isn't new news either—2010's reduction was 40%.  

To be fair, investors are right to chew over China's intentions. Recently, the official line cites environmental concerns—a perfectly plausible reason. Rare earths extraction requires a harsh chemical process. But China tightly controls communications, and their true intentions are usually relatively opaque. Will China use its corner of the market malevolently? There's no way to know from official communications alone.  

However, while we can't confirm intentions, observing actions yields insight. China's market corner is not due to sole possession of rare earth supply. Abundant supplies exist elsewhere (like in the US, where we have approximately 1,300 years of reserves at current domestic consumption rates) and are constrained only by environmental regulation. Quota-induced price shocks force legislatures to choose between economic and defense factors and the environment—and when push comes to shove, most typically choose the former. In fact, the US is already restarting its biggest rare earth mine in California. And consumers are looking to other countries like Mongolia, Australia, Thailand, and even Kazakhstan to diversify away from China.  

Bottom line? China can manipulate supply in the short term—but only in the short term. With each passing month, their leverage lessens. If the quota reductions were somehow malevolent, they'd want to exercise them in full force to maximize the effect. But instead of a sudden, complete supply cut, we see them reducing quotas relatively gradually. That lends credence to their official line—or at least seems to indicate their intent is not particularly ill-willed.

As in other trade matters, China has little incentive to goad its neighbors—especially not when the government's survival is still so dependent on economic growth. In the near term, we might see some price rises, but probably nothing that widely affects the global economy. And the end result will be a world less dependent on China for rare earths. Very likely their intention all along.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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