The Giant Panda in the Room
In my last couple of posts ( here and here), I talked about problems surrounding the U.S. solar panel manufacturing industry and more directly, Arizona-headquartered First Solar. To sum-up, U.S. manufacturers have seen the world price of solar panels decline precipitously as Chinese manufacturers flooded the market with low-cost panels. Coupled with diminishing government subsidies for solar power in Europe, the oversupply of solar panels has forced several companies into bankruptcy (e.g. Solyndra, Evergreen Solar, SpectraWatt). Other companies, like First Solar have been forced to cut-back production at their plants throughout the world and develop new business models for selling their products. First Solar's Mesa plant was one of the casualties as the company has now pushed back its opening date to sometime in 2013.
Well, the Chinese are now the focus of another worldwide commodity issue. This one has to do with the export of rare earth metals for which the Chinese control 95 percent of the world market. If you're unfamiliar with rare earth minerals, they are used extensively in the manufacture of magnets and electronic gear like flat screen televisions, smart phones, medical equipment and electric car batteries. Rare earths are valued for their chemical, magnetic and fluorescent characteristics.
The Chinese rare earth market episode is opposite that of solar panels. Rather than glutting the market with supply as the case with solar panels, China is restricting its world supply of rare earth metals. China has imposed quotas on its export of rare earths, reducing its exports by more than half - from 65,000 metric tons to 30,000 tons. As a result of the Chinese supply restrictions, the price for rare earth metals has increased dramatically and is now at historically high levels. The U.S., together with the European Union and Japan filed a complaint against China with the World Trade Organization.
Will the complaint force the Chinese to free up supply? Not likely.
An editorial appearing in China's state run news organization Xinhua opined that the complaint would trigger a backlash from China, thus further damaging trade relations rather than settling the affair. President Obama has defended the WTO complaint as necessary to protect U.S. workers from unfair practices. According to Mr. Obama ". . . if China would simply let the market work on its own, we'd have no objections. But their policies currently are preventing that from happening. And they go against the very rules that China agreed to follow."
So, on the one hand China could be viewed as exercising market power in the two markets, but in different ways. First, as a very large producer, by oversupplying the global market for solar panels, it lowers the price and drives higher cost producers, i.e. competitors, from the market. Second, by restricting the supply of rare earth metals, given its 95 percent market share, it drives up the price of these essential materials and reaps additional profits.
The Chinese see it differently. China has a comparative advantage in producing low cost solar panels, for which there exists global demand. And, on extraction of rare earth elements, China has expressed environmental concerns about exploitation of limited mineral resources and resulting toxic wastes from refining. Thus, it desires to conserve a natural resource and produce less.
It seems to me, though, that any economic disadvantage attributed to China's actions (whether nationalistic or monopolistic) for U.S. workers and consumers is only temporary and could result in greater economic benefits for us over the long-term. Just look at what's happening. Those U.S. manufacturers continuing to produce solar panels are trimming costs, increasing productivity and developing new business models to sell their products in markets less dependent on government subsidies. The cost for businesses and homeowners to move to solar power are declining.
Increased prices for rare earth minerals and metals will lead to greater exploration and mining activity throughout the world, including locations within the U.S. For example, MolyCorp, a Colorado company engaged in rare earth extraction is re-opening a California mine and other companies are moving to open and expand mines across the globe. MolyCorp also recently announced a deal to acquire Neo Material, a rare earth processing company, thus expanding its supply chain reach.
And, let's face it. China's economy is over-heating and cannot sustain the torrid pace it's been on for the past decade. China has increased interest rates, thus slowing economic growth from an annual rate of 10 percent to a target of 7.5 percent. And, as Chinese workers demand a greater share of the country's economic growth, wages have increased, thus increasing the cost of products produced in China. It's likely that this trend will continue.
So, the Giant Panda in room (as one the frequent commentators to this blog has termed it) may not be that vexing after all.