Japan urges resolution on nationals held in China

Japan urged China today to quickly settle the case of four detained Japanese and said Beijing would also suffer from a worsening of ties in a bitter territorial feud between Asia’s two biggest economies.

Tokyo and Beijing have been bickering over Japan’s detention of a Chinese fishing boat skipper whose trawler collided this month with two Japan Coast Guard ships near uninhabited islands in the East China Sea that both sides claim.

The trawler captain was released on Saturday, but Beijing wants compensation and an apology, a demand Japan has rejected.

In a sign that tensions might be easing, a Japanese trading firm source said China had ended a de facto ban on exports to Japan of rare earth minerals vital to products from electronics to cars.

Japan’s foreign minister called on Beijing to deal quickly with the case of four nationals held in China since last week on suspicion of violating a law protecting military facilities. Tokyo has said the incident was not linked to the islands row.

“It is important to seek a smooth and swift resolution of this issue,” Seiji Maehara said in an interview with Reuters and other media.

The four, employees of a construction company, were in China in connection with a project to dispose of chemical weapons abandoned by the Japanese military at the end of World War Two.

Maehara also said it was important for the two sides to nurture a “win-win relationship”, adding: “The Chinese side would lose greatly if ties with Japan do not go well.”

Japanese Prime Minister Naoto Kan is set to attend an Oct. 4-5 Asia-Europe summit in Brussels but it is unclear whether he will meet Chinese Premier Wen Jiabao -- who snubbed the Japanese leader at the United Nations last week -- on the sidelines.

The islands, called the Diaoyu in China and Senkaku in Japan, are near rich fishing grounds and potentially large oil and natural gas reserves.

EXPORTS STILL DELAYED

The spat has raised concerns about damage to Sino-Japanese trade ties. China has been Japan’s biggest trading partner since 2009 and bilateral trade reached 12.6 trillion yen ($150 billion) in the January-June period, a jump of 34.5 percent over the same time last year.

China has denied imposing an export ban on the rare earth metals, essential for a raft of products from electronics to cars, in retaliation for the fishing boat captain’s arrest, but Japan’s government has been investigating the situation.

The Japanese trading firm source said China had ended a de facto ban, although exports were still being delayed by preshipment checks. “There is a long line at the customs office,” the source told Reuters.

China accounts for about 97 percent of the world’s total production of rare earth elements, about half of which are exported to Japan.

Total export quotas for 2010 had already been cut by about 40 percent from last year’s level, raising concerns not just in Japan but Europe and the United States, since a ready supply is crucial to several key industries.

Japanese prosecutors’ decision to release the Chinese skipper followed mounting worries about worsening ties between the region’s two biggest economies and high-profile pressure from Beijing, including a halt to top level diplomatic contact.

Zhou Jimo, a researcher at the China Centre for International Economic Exchanges in Beijing, expected relations to come back on track because Japan needed China’s economy.

“China has a vibrant and enormous emerging market with all sorts of possibilities. It has already become Japan’s most important source of overseas economic growth,” Zhou wrote in the Global Times, a popular tabloid with a nationalist bent.

Japanese Trade Minister Akihiro Ohata said on Tuesday that Japan should minimise the risk of supply shortages by diversifying rare earth mineral suppliers to other countries including Canada, Vietnam and the United States.

“We haven’t put enough effort into risk management,” Ohata told reporters.



       

China fans concern over supply of rare earths

Beijing's unofficial embargo on shipments of rare earth elements to Japan may spell good news for miners developing new, non-Chinese sources of a group of metals used in products as diverse as iPhones and Prius hybrid cars.

Japan is the main importer of rare earth oxides, accounting for about 17 percent of the market, while China mines and produces more than 90 percent of the world's supply, and uses 51 percent internally.

Currently, only a few facilities process rare earth oxides outside China - accounting for less than 10 percent of the market.

The trade spat, which was triggered by the detention of a Chinese fishing boat captain whose trawler collided with a Japanese patrol boat, will likely fast-track projects by Molycorp (MCP.N), Lynas (LYC.AX), Great Western Minerals (GWG.V) and other non-Chinese companies.

"Whether (the ban) is real or not, it indicates that China is willing to use the supply of rare earths as one of the hammers that they wield to make other governments behave as they see fit," said Byron Capital Markets analyst John Hykawy.

"It's going to convince many investors in the market that they need to look at rare earth supplies outside of China."

Rare earth-based metals, magnets and alloys are used in smartphone and computer motors, in LCD screens and in powering electric vehicles, among other applications. A ready supply of is crucial to manufacturing industries such as electronics and automobiles that keep Western economies ticking.

On Thursday, reports surfaced that China had banned all exports of rare earth products to Japan, with the Japanese government confirming a halt to shipments.

But Beijing told Tokyo there was no official embargo.

Either way, the most tangible outcome of the incident is likely to be a further emphasis on securing alternative supply as quickly as possible, analysts say.

"I think that what they've done is a game changer," said rare earth consultant Dudley Kingsnorth, referring to the Chinese export cuts.

"I do believe, that as a result of this, there will be more non-Chinese projects brought to market than I thought there would have been three or four months ago."

The issue has been percolating all summer. In August, China cut general exports of rare earths for the second half of 2010 by 70 percent. For the full year, that represents a 40 percent reduction compared with the 2009 quota.

That immediately pushed up prices on the individual oxides, as companies that depend on rare earths scrambled to secure supply.

"When you've got uncertainty, people want to move toward certainty," Hykawy said. "The easiest way to have certainty in this space is to make sure there's supply of rare earths outside of China."


Well before the summer, China's monopoly on the sector had pushed mining companies in Australia, Canada and the United States to start work on bringing new rare earth mines to market.

Since the beginning of August, shares of Molycorp have risen over 112 percent, while Great Western's shares are up almost 90 percent and Lynas has jumped more than 68 percent. Avalon Rare Metals (AVL.TO) shares are up 35 percent in the same period, while Rare Element Resources (RES.V) has soared 174 percent.

To be sure, you can't build a mine and rare earth separation facility overnight. Even with three or four projects moving forward, it will still take at least two years before producers outside China have much impact on the market.

"It takes a woman nine months to have a baby, if you put three women on the job, you still can't do it in three months," Kingsnorth said.

MADE IN THE USA

While bureaucrats in China are busy denying there is any ban, 10,000 miles away in California, production is rolling forward at Molycorp's Mountain Pass facility.

The Denver-based company, which mined rare earth from 1952 until the late 1990s, currently produces about 3,000 metric tons of rare earth oxides a year from old concentrate.

Since the quotas were introduced in July, Molycorp has pushed to increase production to 5,000 metric tons by January 2011, and then to 20,000 metric tons annually by the end of 2012.

"The faster we can accomplish this build-out, the sooner the U.S. will move to a position of greater security with regard to the supply of these critical materials for defense systems, clean energy technologies and many high-tech products," said Molycorp Chief Executive Mark Smith.

The Mountain Pass mine shut down in 2002 as the Chinese moved into the sector, heavily undercutting prices and flooding the market with cheap rare earths.

But with prices of rare earth oxides like praseodymium soaring 400 percent this year alone, the old mine is suddenly looking profitable again.

Smith is quick to point out he is not banking on high oxide prices alone.

"We're bullish on prices into the future, but do I think the prices of today are going to last? Probably not," he said.

While it is apparent that more suppliers of rare earths are needed, analysts are confident that the most recent battle between the two Asian superpowers will resolve itself before consumers buying smartphones feel the pinch.

"This is not a substantial dispute," Hykawy said. "It's one fishing captain that should have known where he was."

US seizes chance as China rattles Asia

For years, US policymakers have watched uneasily as China grew more assertive, fearing that the emerging power would cut into Washington's clout in one of the world's most dynamic regions.

But in recent weeks, China's rise has instead offered a golden opportunity for the United States, which has swiftly rallied behind the growing number of Asian nations that have butted heads with Beijing.

After China piled pressure on Japan to free a captain captured near disputed islands, the United States said it considered the chain -- known as the Senkaku in Japanese and Diaoyu in Chinese -- to be under Tokyo's administration, meaning that US forces would be obliged by treaty to defend Japan in an attack.

Somein the US say they accept that China will expand its military but hoped it would use its forces in a positive way




With Southeast Asian nations voicing alarm over Chinese attempts to exert sovereignty in disputed waters, President Barack Obama and regional leaders in a summit Friday called for freedom of navigation in the South China Sea.

The United States also defied Chinese warnings and carried out joint war games with South Korea after accusing Beijing's ally North Korea of sinking a South Korean vessel.

"It's always bad when an American lectures someone on arrogance, but the Chinese should beware of premature arrogance," said Ralph Cossa, president of the Center for Strategic and International Studies' Pacific Forum.

"The more they flex their muscle in the South China Sea, the more people dial 911 and hope the (US Navy's) Seventh Fleet will answer. And the same thing with the Japanese," Cossa said.

In Japan, where a left-leaning government swept to power last year pledging to be more "independent" from the United States, Prime Minister Naoto Kan has thrown his support behind a US base plan and appointed one of his party's most hawkish figures, Seiji Maehara, as foreign minister in a recent reshuffle.

The United States has also built growing partnerships with Southeast Asia, particularly Indonesia and former war foe Vietnam, two countries with historically tense relations with China.

The Obama administration insists it has no grand designs to encircle China. Since taking office, Obama has sought broader relations with China, including cooperation on reviving the global economy and fighting climate change.

But Kurt Campbell, the assistant secretary of state for East Asia, said he has recently seen a shift in views in the region among those convinced of US decline.

"I see more and more in Asia a recognition that the United States is going to be a dominant, key player in Asia for at least the better part of the next 40 or 50 years," Campbell said.

Asia has a growing recognition that "yes, China's role on the global stage has grown much larger in recent years, but the truth is the United States has never left the stage and we're going to be a main actor on that stage for decades to come," Campbell said.

The United States stations some 100,000 troops in Asia excluding Afghanistan, the vast majority in Japan and South Korea. The US defense budget for the fiscal year beginning in October is 700 billion dollars, far above China's 150 billion dollar budget last year as estimated by the Pentagon.

Deputy Secretary of State James Steinberg said the United States accepted that China would expand its military but hoped it would use its forces in a positive way -- praising as an example Beijing's naval deployment to fight piracy off Somalia.

"There are ways in which China's military modernization can contribute to and enhance regional and global security, and there are ways that could pose some risks to that," Steinberg said.

However, a Pentagon study in August found that China's military had already secured a strong edge over Taiwan, which Beijing claims, and that it was increasingly looking to exert its influence throughout Asia.

Walter Lohman, director of the Asian Studies Center at the conservative Heritage Foundation, said the changing dynamic in Asia has been China's growing assertiveness, not any shift in US policy.

"The Chinese really believe that we are rallying against them," Lohman said. "They're missing a very important point -- the Vietnamese are coming to us and the Japanese are coming to us, not the other way around."

Map showing the disputed Spratly and Paracel islands in the South China Sea

 Southeast Asian nations have been voicing alarm over Chinese attempts to exert sovereignty in disputed waters