West's only rare earth mine closes. Yet Chinese monopoly fears are baseless As El Reg's dodgy metals dealer it's incumbent upon me to tell you all that Molycorp has just closed Mountain Pass, the western hemisphere's only rare earth mine. This will, of course, mean disaster because we've suddenly no source of those lovely minerals with which to build all sorts of exciting gadgetry. Prepare for a …
Was China able to profit enough during its monopoly to have made its behaviour worthwhile?
So whilst I would tend to agree with Tim that the sky isn't falling in and we are going to have RE shortages and no shiny shiny, the last point about Monopolies not being good doesn't necessarily stack up.
Or to put it another way - what was the financial benefit to China (if any) from China's transitory monopoly, and can we extrapolate whether they are about to be rolling in the clover again?
We can also see that there are definitely localised impacts due to the monopolistic behaviour that have benefited the Chinese economy (more mining and manufacturing) to the detriment of the American and German ones (less mining and manufacturing) - assuming that Seimens plant was originally in Germany).
So from an economic PoV the world economy might be a net beneficiary - but the local economies outside of China certainly aren't.
Therefore in certain lights we can say a Chinese RE monopoly is bad M'Kay.
Gordon 10,
The Siemens factory, and the CFL one menitoned, didn't move to China. They just thought about it.
As I recall they managed to double prices at one point. The problem is that most rare earths are only selling in the low thousands of tonnes a year, if that. Didn't Worstall say at one point that global annual demand for scandium was only something like 40 tonnes?
So they made some extra profits, but prices for some things are now less than half what they were before the whole monopoly game started. So as that only lasted a couple of years, they're almost certainly in loss. Of course this was more about the Chinese government playing silly-buggers than it was the producers trying to make a quick buck. Hence the idea that they'd stop exports, and force all high tech manufacturing using rare earths to move to China.
Also, as global supply has increased and prices have dropped, anyone with any sense should now have got a stockpile of the things they need. After all, you're only talking a few tonnes of the stuff - so it's pretty easy and cheap to salt away in the corner of a warehouse somewhere. That way, you'll be covered if this happens again, until non-Chinese production ramps up.
" The problem is that most rare earths are only selling in the low thousands of tonnes a year, if that."
The bigger problem is the amount of waste that RE mines produce - particularly that pesky thorium stuff.
There's a barrier to using more REs, in that they are relatively expensive even at the prices Tim's quoting and a lot of that comes down to the cost of waste disposal/sequestering, not the processing cost of the REs.
The workaround is that if Thorium MSRs can be made practical, ubiquitous and cheap then the REs are effectively much cheaper as the biggest waste product from the mines becomes their primary production product and the REs are a minor output.
Once that happens, uses start showing up that we either haven't thought of yet, or which are simply far too expensive to even consider at the moment.
The economics of RE mining have been discussed here in Tim's past articles, but it boils down to chinese mined REs being so cheap because there's effectively no environmental legislation to drive up waste handling costs - with a result that a chinese RE mine is one of those places you don't want to live near (but it's still nowhere near as bad as living downstream of a chinese Photovoltiac manufacturing plant)
It wouldn't surprise me if the chinese govt started hoovering up thorium output in the event of environmental rules being toughened. It would be a sound long-term strategic move and there is plenty of sparsely inhabited, geologically stable space even in China to put it out of the way until needed.
Maybe I'm missing something, but the article didn't seem to quite address the points it raised- both explicit and implied.
Whether or not it meets the technical definition of a "monopoly", surely if China is able to sit out intermittent competition until that fails- or at least stops producing- and they regain their former position, as seems to have happened here, isn't this A Bad Thing?
After all, much predatory pricing by monopolists against smaller and weaker would-be-competitors involves a short-term loss the monopolist can afford to weather knowing their rival can't. That doesn't mean they lose out over the long term- and presumably it discourages other competitors from doing the same in the future, reinforcing the monopoly.
If China is losing money on their "good mix" of low and high value rare earths, then- as the article states- the US producer is losing even more on their low-end-heavy mix when the La and Ce price collapses. So I'm not sure what point was being made there; it means that China can outcompete any temporary competitor until they go under- or at least they did in this case?
But the main problem with the article as I'm interpreting it is that while it acknowledges that the point of China flexing its monopoly was mainly to strongarm manufacturers into locating in China (or to give an advantage to their own manufacturers) rather than increase the price, the rest of the article goes on to focus on that fall in price as if it *was* the raison d'etre.
If the Chinese government was enacting this restrictive legislation to give an advantage to their economy as a whole- even if it negatively affected their own rare earth producers- I would assume there would some sort of kickback or mutual benefit- especially given that their producers are probably tied to the government anyway- and thus the price fall might not be such an issue.
Despite much bellyaching, there is no such thing as a natural monopoly. If you look at the historical examples of monopolies they were all local to a government which artificially created it within its confines. Cartels are even more difficult to maintain. Since China is selling RE's on the world market, by definition it isn't within the confines of their country.
As for the end of the article, you seem to have missed the bit where the attempts to force relocation failed miserably too.
Is there a problem with China processing all the REs? Probably. But it's not economic. The issue as pointed out upstream is that China is notoriously lax on pollution controls. Now, if you're a western country worried about that sort of thing there's a relatively easy fix: pass a law that says the purchasing of such materials is either taxed at 1 to 5 times (depending on the cost of implementing appropriate pollution controls) or comes from a facility that your government has certified passes the pollution standards (possibly with one of your government's inspectors being onsite to make regular or surprise inspections).
@gordon 10
Your conclusion does not follow your argument. It does affect 500 people in the US, maybe a few hundred in Germany and probably some several thousand in China. But the rest of the 6.6bn people benefit from lower prices. The needs of the many...
I am curious about what physical action the phrase “care and maintenance” actually translates into. Presumably MolyCorp will have had to set aside some amount of money to cover future maintenance etc?
This week there was a ban on using domestic well water from wells in the Animas river floodplain (New Mexico) after three million gallons of toxic mine waste spilled from the Gold King mine in Colorado.
The mines are no longer worked so repairing the damage will probably be met by State funds while the last known operators argue about the extent, if any, of their responsibilities.
Right on the old mines, wrong on the thus part.
"That river problem" was entirely the fault of the EPA. They promoted a stupid plan as safe. While the situation pre-breach wasn't ideal, it was far safer than their plan. In fact a retired geologist predicted the plan would fail in precisely the way it did and almost to the day that it happened. I'm not saying the EPA planned it that way, but I can easily forgive the tinfoil hat types who think it was.
"This week there was a ban on using domestic well water from wells in the Animas river floodplain"
Gold mining uses a _lot_ of cyanide and mercuric compounds thanks to the metal's famous inertness and these materials were so cheap that miners never bothered recycling until forced to. One small mine can produce a staggering amount of pollution.
RE mining is several orders of magnitude less toxic than gold mining. The issues in China come from the scale of the operations and are compounded by the wastefulness of the extraction methods (the famous toxic lakes are still very high in REs and constitute a resource all in themselves), plus the massive coal powered plants providing the energy to do it all.
Cleaner, cheaper energy sources (electricity and heat) would make a big difference. There's a lot of secondary extraction (reprocessing) which can be done and it'd make recyling the acids used a lot more feasible. Time will tell if this can be done.
I know this is not a technical journal, but surely the tag line "Monopolies just don't matter as much as many people seem to think they do." is a bit misleading?
The mathematics behind economics is complex, and hence I am constantly badgering for some maths to be included with all "subject air conditioning" (i.e. hand waving) articles.
A monopoly exists because of some artificial barrier that prevents the "independent actors" from seeking the best price. In the physical world we call this an "energy landscape" and the appropriate language that sits well with those that studied PPE is "peaks and troughs and slopes". To overcome the barrier a certain amount of energy (e.g. cash to be spent on diggers - both physical and metaphorical in this case) is need to overcome this barrier.
In the case of China and these minerals, the artificial barrier might well be the paperwork that makes it difficult to do business unless you are, y'know , Chinese.
But anytime you have a "free" market, a monopoly can be a transient state between the availability of an item and the ability of the market to supply this item. (think pressure, if you have a leaky market barrier, some might be dispersed e.g. pre-production Iphones).
Hence, the term monopoly is really a proxy to indicate the number of independent providers to the free market.
e.g if N is the number of providers , and N<2, then state = monopoly.
But this clearly is not sufficient, as it is totally possible to have N==0 (think time machine sellers), and therefore no monopoly. But in factual fact it is possible to set N==0 by artificial means, y'know, by passing laws and make something illegal. So you can see that different variables are needed to deal with black markets..
And that brings us back to potential surfaces and the maths missing from economics, and the complete lack of feedback that is accounted for.
It very much depends upon your *local* barriers how important a monopoly is. e.g. sitting in a house with DSL. Want cable? Sitting in a country that doesn't have sun? Think of the energy barrier of moving house...thinking in $$$? See, the maths is the same... and if you add in the time-delays you get very nice differential equations to solve, and this can really make things complicated.
In this highlighted example, the material being sought is far down the pipeline, hence not really a monopoly. Just "required to be cheap enough to support a market", and so really a nice example, but not "visceral" enough for my tastes!
If you had chosen diamonds to analyse for comparison, I would have been much more impressed...but perhaps that is your next article?
P.
Most of this is buried in the assumptions that are being made about "contestable" in the jargon.
You can have a monopoly just because no one else has caught up yet. That's contestable, obviously. Because no one else can be bothered (ie, you're the lowest cost producer, as China was). Because one global supplier is still gaining economies of scale (Much of Krugman's work was exploring this). Because copyright or patent law says you've got a monopoly. And finally there's natural monopolies: water pipes in a city say.
What the economists want to say is that only that last is a real, real, monopoly, one that we've got to use the law to regulate. What the politicians say (and many business people who would get fat off subsidies) is that any and all of them deserve regulation.
Thus this idea of contestable. If it's possible to set up in competition then it's not really something we need to worry about. Only if it's not actually possible do we need to act.
Or at least that's the free market end of economics discussion of it.
@Tim Worstal: Yes I would agree the jargon is another one of those "barriers" we might want to think about, impeding the free flow of ideas.
You are not *wrong* in this case, but the whole system of "declaring" a monopoly as a political exercise rather than *calculating* it , is my point.
China can be cheapest because they have loads of warm bodies that they can abuse in ways that *other* economies cannot. The available geography to mine the materials is a bonus.
The obvious example of water, however is actually not so simple because we *actually* need clean water to live - but we as yet don't need rare Earths!! (Yes, I'm sure you can find examples of life saving technology that does, but the default constraint of humans is biological first, society second...). Water is also a price we pay to live in cities to gain the advantages of population density etc..
Hence, in places where water is *scarce* (like Sicily), it is *rationed* by not allowing mains to run 24 hrs. You must drive to a spigot and fill up to fill the tank on your roof... That is why bottled water is a European thing...
This is a reason why the term "free market" is IMHO, complete rubbish. There should be an objective metric for "free marketness" based upon measurable parameters.
e.g. mobile phones. We have constraints of software, licensing region, physical infrastructure before we even get to the idea of "price".
How about internet service here in the USA?
Oil?
It does not take long to realise a great deal of the modern economics is based upon the essential assumption of vector inertia (the ability to lobby and change laws to skew the market) and obfuscation (not allowing the hidden relationships to be revealed that set the prices), and only a little bit on "free market".
The next time you go to the supermarket, try and work out how many brands you put in your trolley.
Now try and work out how many of them are independent of one another.
Beer, because it's much more obvious in the pub...(well in the UK it is)
P.
I live in Bristol and for a certain commodity N (the number of players) is vastly greater than one, yet without argument it is agreed a truly unfair monopoly exists.
And if you're British I have no doubt you too are experiencing this.
Water, the stuff that comes out of your taps and is also sold in bottles from very many suppliers.
Basically the number of players in a market isn't the best indicator of how competitive that market is, but rather what share of the market does the main player have.
In the case of water, the local supplier has a natural advantage, and has no problem in pitching its price to dissuade all but the heavily marketed bottled water pushers. So. many players fighting over a fraction of one percent of the market, while one player controls over 99% of the market.
In China's case, the price it charges for the low hanging fruit that is lanthanum and cerium need only be low enough to hurt its competitors. It can charge what the hell it likes for the higher grade elements knowing full well no other producer could match that price and satisfy total demand.
And let's not forget, we live in a world where the market plays with us. China's economy is such that it can chose to play with the market as it wishes.
So looking at water, how much does the tap cost to fill a bottle?
We all know bottled water is a ripoff...well in countries with functioning sanitation.
As to the example you give where there is N>>2 and no competition, a refinement in my examples is the ease with which you can change provider, but also the inertia for new players entering the market.
This is practically the definition of incumbent deployment, and pretty much *all* connected systems follow the same economics due to the same physical impediments e.g. laying cables/pipes etc, building housing....
P.
There are quite a few places in the US with significant deposits of rare earths - and some of those are in the "scoop up and start processing" range for accessibility. If someone is smart enough to stock a few months of rare earths to use while getting production online, a Chinese shutdown wouldn't do much more than raise prices.
There are also - in theory - some other options. You can recover a fair amount from the waste products left over from other mineral extraction processes. The "red mud" from bauxite processing, for example, can be used as a source of rare earths.
Just remember: "rare earth" elements aren't that rare - just hard to extract.
>> Having a monopoly isn't all that useful a thing if, when you try to exercise your monopoly power, other people can come in and contest your monopoly.
Tell it to Microsoft, they haven't noticed.
>> Monopolies just don't matter as much as many people seem to think they do.
Tell it to Microsoft, they haven't noticed.
The article does indeed show that contestable monopolies aren't a problem in the longer term (although the short term effect in this case does seem to have been the loss of German jobs to China, obviously a problem if you work for Siemens). Presumably an uncontestable monopoly would be a problem?
Many people claim that all monopolies are always very bad. If in fact it is only uncontestable monopolies that are very bad and contestable ones (which is most of them) aren't a big problem, then monopolies just don't matter as much as many people seem to think they do.
I think a contestable/uncontestable division is a bit too binary. After all, the Microsoft or Google (near) monopolies are eminently contestable in principle, except that they have too much cultural and financial momentum and to make them easily contestable. Other in-principle contestable monopolies might (e.g.) be in-effect uncontestable because of agressive and well-funded lawyering, or other factors.
Rare earth mining might easily contestable from a technical point of view, but might be hard from a raising-finance, or environmental-permissions perspective.
It would be better to focus on whatever makes the monopoly under discussion most-hard (or least easy) to contest, rather than claiming that it is "contestable" in some idealized sense.
Part of the assumption is that someone with a contestable monopoly won't take the piss too much because they know that will call into being that competition. The Chinese rare earth disaster being a lovely example sufficient for a few decades perhaps.
We've seen much of this before... Anyone remember the Hunt brothers and silver? They only trying to corner the market and failed. Currently, the Sauds have cut the price of oil way back. This will drive some producers out of the market. Once the price goes back up, those producers will be pumping.
If you want to have a monopoly on a commodity in today's world economy, you had some how best make damn sure that you can control ALL the supply. Other than certain proprietary and probably patented things, there really isn't that much out there that can be controlled.
Actually they aren't, particularly with the current sentiment about IP in the western court systems and the US system in particular. The US government granted MS an uncontestable monopoly position vis-a-vie copyright. Through various legal mechanisms this effectively extends to all Western worlds. You can't do a clean room implementation of Windows and sell your product.
Here in the good ol' US of A, we commonly refer to anything "Western" (when we don't mean the Western US, of course) as anything from about Germany and westward. What we really mean is:
Anything in Europe that was West of the Iron Curtain.
The US and Canada.
Everyone else is a Savage, or, at least, not Western. Sorry, Estonian Savages and Spies.
"Blue is generally the colour round those parts if you look at the national and district election results."
Well, obviously- but getting to call half of the Home Counties and nearby "Git orf moi land" diehard Torygraph shires in south-east England "commie" and "pinko scum" just because they lay to the east of the meridian was kind of the joke ;-)
@ graeme leggett; I know where Norfolk is- technically you're probably more "south east" than Manchester is "oop north". Yes, I appreciate that you're still not *that* far south relative to what the London-centric establishment commonly means by "the South East", but it's still near enough and splotched Tory blue, so whatever. :-)
And FWIW, looking at a map, it's shocking how far south Manchester actually is within England.
This all says as much about the distortion of geographical perception within the UK as it does about anything else- defined with respect to London, differences in distance exaggerated the closer they get to the centre of importance, "it's all far away, there be dragons" for anything north of Manchester. (And let's not even get into the fact that "The North", "south east", "south west" etc. always implicitly refer to England even when used by the nominally "UK" media.)
Did I mention that I live in Scotland? :-)
You're all "daaarn saaarf" as far as I'm concerned. ;-P
"Norfolk and Suffolk are East Anglia. We certainly don't think of ourselves as South East."
It's actually called the East of England, as a region. It's one of those weird things nobody knows, but the SE doesn't include London or Essex/East Anglia. East of England is (from memory) everything north of the M25 and east of the M40, all the way around to the Thames Estuary.
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