China’s Rare-Earths Bust: A new Honda engine shows the limits of Beijing’s coercion

From The Wall Street Journal.

"Honda says it has co-produced the world’s first hybrid car engine that doesn’t use heavy rare-earth metals, allowing it to cut reliance on imports from China. This innovation, to debut in Honda minivans this fall, illustrates how far we’ve come since the great rare-earths panic of 2010.

Back then, China produced 95% of global rare earths and thought it could hold markets hostage by restricting exports. So it cut export quotas by 40%, partly to push foreign buyers to move factories onshore, and then temporarily blocked shipments to Japan over a territorial dispute in the East China Sea. Prices shot up tenfold as consumers and officials world-wide feared for supplies of 17 obscure elements they learned are used in high-tech gizmos from missiles to smartphones, wind turbines and electric cars.

But no apocalypse was nigh. Beijing’s mercantilist gambit had predictable effects—predictable, at least, for anyone familiar with the work of Julian Simon. The economist taught that fears over natural-resource scarcity often underestimate the flexibility of markets and the ingenuity of the human brain, which Simon called the ultimate resource. Those who warned about “peak oil” were blindsided by fracking, and rare-earth doomsayers failed to foresee how Beijing’s supply squeeze would spur overseas investment in new supplies and substitutes.

With rare-earth prices high, new mining ventures became economical in Australia and the U.S. Metals firms began recycling more lanthanum, dysprosium and other coveted elements from industrial waste. And companies like Siemens, Samsung and Honda accelerated research on how to use less of the minerals, especially the “heavy” rare earths found overwhelmingly in China.

Inside China, high prices led to even more rare-earth mining, despite Beijing’s desire to consolidate the industry and curb pollution. Many firms dodged export restrictions by mixing their rare earths into alloys or smuggling them out.

By 2012 a glut of rare earths caused global prices to collapse. Two years later, China failed to export enough even to hit its quotas, which it scrapped last year after losing a case at the World Trade Organization. Mines shut down in China and overseas. Yet around the world Beijing’s supposed rare-earths power can still send shivers down spines.

So Honda’s new engine should be a helpful reminder. After starting work on replacing rare earths a decade ago, the car giant’s apparent turning point was a tie-up with fellow Japanese firm Daido Steel in 2011, prompted by China’s squeeze. The result today is a new technique for designing crucial engine magnets that avoid heavy rare earths and are 10% cheaper and 8% lighter, Honda says.

There are lessons here for Chinese mercantilists too. Their rare-earths gambit hurt the country diplomatically, stoked a badly polluting domestic industry and spurred technological innovation among rivals. Rare earths can be valuable as exports for tech manufacturers around the world, but as a tool of economic coercion they’re a bust."