El Reg man: Too bad, China - I was RIGHT about hoarding rare earths

A monopoly isn't enough, you have to be able to use it


So this is where El Reg's rare earths spiv gets to do the victory dance. That would be me then, bopping around the dance floor as only a middle aged white man can. For I've been saying for years now that this "China will control all the rare earths" thing is nonsense and so it has turned out to be: nonsense.

Not that it hasn't tried to control it all, mind, it's just that it has failed. Failed for the reason we'd expect from communist state: its officials don't understand free market economics. Specifically, it's possible to successfully exercise monopoly power only if that monopoly is not contestable.

The proof of the failure comes in these two snippets:

Lanthanum oxide, a rare earth used to refine gasoline, has dropped 53 per cent this year, according to Shanghai Steelhome Information data. Cerium oxide, used in glass polishing, has declined 56 per cent and neodymium oxide, used in magnets, has fallen 46 per cent, the data show.

Hmm, why's that then?

"We remain very concerned about what will happen as new supplies from Molycorp and Lynas totaling 57k tonnes hit up against a ROW (rest of the world) demand estimated at 40k tonnes in 2011 ...," JP Morgan analyst Michael Gambardella said in a note to clients.

Interestink. So let's just run through the story again. Until recently China provided 97 per cent of the world's rare earths. A bit of a problem as all our whizzy shiny shiny depends upon them to operate. As long as they're producing all we want at prices we're willing to pay, that monopoly is just fine. But then they started to throw that monopolistic weight around. As I said here in January 2010, this policy just wasn't going to work. For rare earths aren't rare (nor are they earths) and if the current supplier decides to try and rook us all we'll all go off and use another one. If there isn't another one then one will be along soon enough: the lust for profit will see to that.

In November 2010 I pointed out (here again) that two mines, Molycorp and Lynas, could alone provide a goodly portion of demand, replacing the Chinese production. We're in December 2012 as I write and as the first quotes show, those prices have been falling fast as the Chinese hold over supply is broken. Even to the point that the largest Chinese mine itself was closed for November of this year in an attempt to maintain prices.

OK, dance, white boy, dance. For while we had every news outlet on the planet insisting that this was a massive problem and all the wealth of the ages would drain away to the Orient, there were a very few of us who kept pointing out the obvious. China may well have a stranglehold on the current production capacity of rare earths. But if we're being rooked, then let's go build some more capacity of our own. After all, there's rare earth ores all over the place.

We were also continually reminded that China has 30 per cent of the world's reserves: which simply shows that people don't know what a reserve is. It's not, as just about everyone assumes, the amount of something that's available. It's an amount whose exact location is known, which we've measured, drilled, sampled and baked a fluffy cake from - and which we can mine with current techniques AND with which we make a profit at current prices. Miss any of those steps (except maybe the cake) and it is not a reserve: it's a resource. And resources of rare earths are vast: several are individually more common than copper for example. China has 30 per cent of the proven fluffiness, not 30 per cent of all that is available.

I will admit to a certain suspicion that the stories we heard were rather more a well-organised PR campaign to allow a couple of companies to suck subsidies out of the US taxpayer. Or perhaps even, given the conversation I had with a lobbyist about how to try to get on that gravy train, a plot to enrich lobbyists via companies paying to try to suck subsidies out of the US taxpayer.

So, now that I have finished puffing out my chest to “We Will Rock You”, on to what to economists is the blindingly obvious point of this story and what it means for the tech business. You might well have a monopoly: but it ain't going to do you much good if, when you try to exercise your monopoly power, people come along and successfully contest your monopoly. We thus need to divide monopolies into two classes: those that are contestable and those that are not.

There are most certainly those that are not: absent two sets of input and output pipes, your water and sewage supplier really does have you by the short-and-curlies. Legislation and regulation, to make sure they don't manipulate you or prices with such a natural monopoly, are therefore both useful and apt. There's only one National Grid: regulate it. There are many power stations and if one tries to rook us then another will undercut it: allow the market to deal with that.

Tech monopolies and regulation

Which brings us to the tech business and the various companies that are not being so regulated. I've certainly seen people beginning to describe Facebook as a utility, one that therefore needs to be regulated. But whether it's a utility or not isn't the point: it's whether it abuses its position and whether someone will come along and be able to successfully challenge it. I think I would argue that someone could: after all, Facebook doesn't have anything other than network effects going for it in exactly the same way that Bebo, MySpace and Friends Get Divorced didn't manage to defend themselves against BitchBook itself.

Or Google and search engines: we've got two investigations going on right now about whether Google is abusing its market position - one in the US and another in the EU. But this isn't the correct question at all. Sure, they're market-dominant: but if they really try to rook their customers can someone come along and challenge them? I would argue yes they could: not that anyone's been successful particularly yet but there's no obvious legal or technical reason why someone couldn't. It would only need a change in consumer taste for a competitor to beat them.

Looking back a bit, I have to admit that I'm not quite sure about Microsoft. That dominance of the desktop that Windows gave it, given the technological background, I'm not entirely sure that someone could have come up with an OS that could have successfully taken Redmond on. Obviously, someone has now, but that's because of the move to tablets and phones.

And those economists do differentiate between, actually, three types of monopoly. The one that just is but is contestable if abused, the one that isn't shiftable currently but will be over time as technology changes, and the one that just isn't going to get shifted at all (although clearly, given a long enough time period, technology will change enough that no monopoly is stable).

This actually was part of the respectable argument around the Netscape/Microsoft stuff. There were those like the just-departed Judge Robert Bork who agreed that Redmond did indeed have a current unshiftable control of the desktop but that's OK as technology would change and then it wouldn't. Others thought that the decade or two of that monopoly would allow too much rooking of the consumer. The latter group won that argument and I'm still not sure if they were right to do so.

But what the economists tend to be rather more sure about is that if a monopoly is contestable then it's not going to get abused very much. And while any abuse is a bit off the course, intervention by government to prevent a little abuse can often be worse than the problem supposedly being solved. For if it is contestable and you do start abusing your market position, then someone will contest it and you won't have that monopoly power to abuse any more. It's a self-solving problem.

The great trick here though is which is a monopoly that can't be contested? Apple's iPhones? Nah, Samsung's shown that can be contested. Facebook's Ts&Cs? If they really get bad enough, Google+ is only a couple of clicks away. Google pleasuring company-owned results in the listings? Microsoft's “Scroogled” campaign is certainly trying to challenge that. Ebook pricing? I can't see that anyone would be able to exploit a monopoly there for any length of time: maybe on the back catalogues perhaps, but not on the new material.

In fact, in the current state of flux I'm not sure that I can see any non-contestable positions in the general computing market. There's enough VC money out there that anyone at all truly trying to exploit a monopoly position is going to face someone contesting it.

Which rather makes me think that we shouldn't really be worrying about them. As with the Chinese attempt with rare earths, once you face market competition these positions turn out to be all too scrutable. ®


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