The ban China effectively imposed on exports of rare earths over a diplomatic row with Japan has had the unintended consequence of prompting Japanese companies to develop alternative technologies to avert resource security risks. Research fellow Hikaru Hiranuma argues that nations should think twice before politicizing supplies of energy and other resources—a move that will only lower their value.

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On July 12, 2016, Daido Steel and Honda Motor announced that they had succeeded in developing the world’s first high-performance magnet containing no dysprosium or other heavy rare earth elements (HREE) and that it would be used in the driving motor of a hybrid vehicle to go on sale in the fall. [1] The achievement was significant for having the potential to alleviate Japan’s resource procurement risks.

The adoption of the Paris Agreement to mitigate greenhouse gas emissions at COP 21 has prompted the auto industry to turn increasingly away from internal combustion engines and to embrace hybrid and electric vehicles, which use electric motors to generate power. The motors for such next-generation vehicles require high-strength permanent magnets, such as those made from an alloy of neodymium, iron, and boron. One problem is that they tend to lose their magnetism at high temperatures. Because car motors can reach over 200 degrees Celsius, dysprosium—a heavy rare earth element that preserves its magnetic properties even at high temperatures—has, until now, been alloyed with the other metals for use in hybrid and electric vehicles.

Being able to manufacture such vehicles hinges on a steady supply of magnetic rare earths for use in the motors. China is the chief source of dysprosium and other rare metals, putting companies at risk when they are unable to procure the resources from that country. In fact, Beijing effectively imposed an export ban on rare earths in September 2010, after a Chinese fishing trawler operating illegally in Japanese waters near the Senkaku Islands rammed into a Japan Coast Guard patrol boat, dealing a major blow to Japanese industry. Since then, risks have been mitigated for light rare earth elements thanks to resource-conservation efforts, the development of substitute materials, and the diversification of procurement sources, but the situation for heavy elements remained at high risk. The only commercially mined deposits for HREEs are in China, and alternative technologies had been difficult to develop. The recent announcement of an HREE-free permanent magnet is thus a landmark development that can help reduce industry’s overreliance on supplies from China.

Resource Nationalism’s Unintended Consequences

At the same time, it correspondingly lowers the value of rare earths both for industry and as a political bargaining chip. Ironically, it was a Japanese invention that originally turned the metals into an indispensable resource for manufacturers worldwide. The neodymium magnet was developed in 1983 by Japanese engineer Masato Sagawa, who is now chief technology consultant at Intermetallics Co., Ltd. It had been produced without interruption—despite the fact that China was the only source of dysprosium—until the September 2010 trawler incident near the Senkakus. The value of rare earths is based on their (1) superior features that cannot be substituted by other materials and (2) accessibility by all those who seek them. By turning to resource nationalism and effectively stopping shipments to Japan, China cut off access to the resources, undermining the very conditions that had made them valuable.

The unavailability of fresh supplies sparked efforts to conserve the use of the resources and to develop alternative materials, leading to the commercial application of a new, HREE-free permanent magnet in hybrid Honda vehicles. Demand for rare earths could subsequently decline; in an ironic twist, a Japanese invention once boosted the market value of the metals, and now another Japanese technological breakthrough could wipe out much of that value.

Lessons for Resource Diplomacy

China has only itself to blame should the value of rare earths plummet, since it was by withholding access to the elements that Beijing compelled Japanese manufacturers to look for alternatives. Using resources to gain a diplomatic advantage in a territorial dispute will naturally trigger a hedging response out of resource security concerns and is unlikely to facilitate a resolution of the dispute. Since China’s embargo, massive deposits of rare earths, including dysprosium, have been discovered off the Japanese island of Minami-Torishima. The usefulness of the elements to the electronic, auto, and environmental industries remains unchanged, so had supplies from China continued in a sustained, predictable manner, rare earths would no doubt have continued to bring benefits for both exporters and importers, and the seabed discovery may have been of even greater value.

One can only hope that countries will refrain from resource nationalism in the future, but continued vigilance is needed, inasmuch as Japan is heavily reliant on imports of fossil fuels like oil, coal, and natural gas. The adoption of the Paris Agreement by all parties at COP 21 clearly portended a major shift in global energy trends, as nations will increasingly be required to reduce greenhouse gas emissions and pursue carbon-free alternatives. [2] Progress is being made to lower the cost of generating energy from renewable sources and to stabilize supply so as to match demand; to achieve greater efficiencies in energy consumption; and to commercialize noncarbon energy systems, such as those using hydrogen as fuel. There is no denying the fact, though, that fossil fuels remain indispensable resources for humankind. Efforts will therefore be needed to lessen their negative impact through the active use of such technological innovations as carbon capture and storage.

The fossil fuel market today is quite volatile, with the monthly average price of crude oil (West Texas Intermediate) falling to $30.35/barrel in February 2016, the lowest since 2003. Factors include slumping demand—caused by economic slowdowns in China, Europe, and elsewhere—and a glut in supply as a result of the shale oil revolution in the United States. The Medium-Term Oil Market Report published by the International Energy Agency on February 22, 2016, projects that supply will exceed demand by 1.1 million barrels in 2016 and that a balance will not be achieved until 2017. Prices may not return to their former levels until much later, moreover, given the current high levels of oil inventories. The report notes that investment in oil production contracted by 24% in 2015 and is likely to decline by a further 17% in 2016. If production falls too low, though, a sudden surge in demand could force prices to spiral upward. At the same time, there could be a further erosion of price levels should the lifting of Western economic sanctions on Iran spark renewed oil exports by that country.

Fossil-fuel-producing countries should note that resorting to resource nationalism could be just as self-defeating as was the case for China’s rare earths. Politically motivated attempts to control the flow of resources will inevitably compel those who depend on such supplies to hedge against security risks, thereby accelerating the devaluation of those resources. With efforts to develop alternative energy sources gaining momentum in the light of the pledges made in Paris to reduce greenhouse gas emissions, countries risk seeing the value of their resources collapse should they attempt to gain a diplomatic edge by restricting exports. The lesson we should take to heart is that resource nationalism produces no winners and brings no benefits.

[1] The 17 rare earths elements are broadly classified as being either heavy (including dysprosium) or light (including neodymium).

[2] See “Five Key Perspectives for Japan’s Energy Mix: Need for Close Attention to Shifting Domestic and Global Realities,” on this website, https://www.tkfd.or.jp/en/research/detail.php?id=440 .