Moving forward: India to replace China

Rare earths will add new dimension to Indo-Japanese political and economic relationship other than already deepening cooperation in the area of defence and strategic issues.

The agreement with India’s Department of Atomic Energy for cooperation in the production of the rare earths in India was to be signed during the postponed visit of Indian Prime Minister Dr Manmohan Singh to Tokyo from November 15-18 which was preceded by very high level interactions between the two nations.

Tokyo decided to ink the agreement even without the Prime Minister’s visit. In a significant move, unmindful of the protocol the Japanese Foreign Minister Koichiro Gemba signed the agreement on cooperation in rare earths production with the Indian Ambassador in Tokyo Ms Deepa Wadhwa.

Cooperation in rare earths will have special connotation in Indo-Japanese relationship, as till now Japan was importing 90 percent of its rare earths requirements from China.

India will now partially replace China in supplying rare earths to Japan. India reacted to the unprecedented Japanese move by saying that the conclusion and signing of the agreement will further enhance and strengthen the India-Japan Strategic and Global Partnership.

Nuclear cooperation

Though Indian Atomic Energy Department was also waiting for the Indo-Japanese nuclear cooperation agreement, the domestic political developments in Japan, compelled the Japanese leaders to postpone its operationalization.

Nuclear energy has now become a sensitive issue in Japan because of the Fukushima disaster and the politicians find it difficult to face the public on nuclear issues. In fact, the Japanese nuclear industry which has been a major bread winner for the country now faces the wrath of the common people.

Hence, the Japanese government continues to dither on finalizing the Nuclear Cooperation Agreement with India.

But the rare earth agreement will provide sustenance to the Japanese high tech industry and also bring benefits to India.

Both the countries are now engaged in very high level discussions ranging from economy and trade to mutual security concerns and other international issues.

This process has now become a regular feature in India-Japan relations. During last one year the two foreign ministers have engaged in strategic dialogues, discussing issues ranging from South China Sea to other hot spots created by China and other regional and international issues.

Besides the foreign ministers level dialogue the defence ministers of the two countries have also met and during last November the two countries have held 2+2 dialogue involving the defence and foreign secretaries of the two countries.

The two countries are already working out a comprehensive economic partnership agreement, which will bring Japanese business to India in a major way. These political and economic dialogues were to be culminated by the annual summit level interaction which unfortunately had to be rescheduled probably for the early next year.

As China is turning the rare earths in rare commodity and prices soar, Japan will increase its dependency on India for rare earth supplies.

The two countries have ensured that the postponement of the Prime Minister’s visit will not put a brake on Indo-Japan cooperation. The postponement of the visit was announced just on the eve of the Prime Minister’s departure to Tokyo.

In accordance with strategic partnership, India agreed to operationalize the agreement in absence of the Prime Ministers visit.

Since rare earths materials are the most important input in all the high tech products like smart phones and other civilian and defence applications, the major advanced economies like Japan, Europe and US were facing great supply constraints.

They have already lodged strong complaint with the WTO against China for taking advantage of their monopolized production of these minerals. China possesses 30 per cent of the world’s rare earth resources but produces 90 percent of the world’s demands.

But China has justified the restrictions on its exports and production on the grounds of adverse impact on environment and now issues annual production and export quota.

The Chinese Ministry of Commerce announced last August the second batch of rare earth export quota for the year 2012 totaling 9,770 tonnes.

The latest quota, including 8,537 tonnes of light rare earth metals and 1,233 tonnes of medium and heavy rare earth metals, brings the full-year export quota to 30,996 tons, an increase of 2.7 percent from last year.

Japan as one of the largest importer of rare earths will be greatly affected by this decision. Hence the country is now working on a diversified source of imports, including India.

New player

The entry of Indian rare earth material in the Japanese market in a significant way will not only deepen India-Japan partnership but will also encourage other advanced countries to source their requirements from India.

Japan normally imports 30,000 to 40, 000 tons of rare earth materials annually, 90 percent of which comes from China. But from next year onwards Japan is likely to import more than ten percent, around 4100 tons, of its annual needs from India, which will gradually rise as the production capacity increases.

However, Japan will not solely depend on India. They plan to source 9,000 tons of rare earth from Australia and 400 tons from Kazhakastan from next year.

The Indian Rare Earth Limited is India’s only rare earth producing company and has developed expertise in the production of rare earths but working with Japanese companies will help them acquire new advanced technologies in their processing and production.

Last year, the company exported minerals worth Rs 1000 million, out of a total sale of Rs 3600 million. This explains that India is already a major player in the rare earths market. Japan’s assistance to India in setting up joint ventures for rare earths production will add new chapter in India-Japan relations.

Japan’s woes have increased after the recent tensions over the Senkakau Island in the East China Sea, though the country is still reeling under March 2011 impact of Tsunami, earthquake and nuclear disasters.

All these factors have led to the new phase of recession in the country. Hence, there is a rethinking in the country how to recast its international relations and it is reported that India has been ascending in the priority list with whom the country should promote closer partnerships.

Doing business with India in the nuclear sector was one of the options to promote the Japanese nuclear components industries which would be worth many billions dollars.

There is a pragmatic feeling now emerging among the business class and the policy makers that they should shed their inhibitions in the promotion of nuclear energy.

But the Tsunami ridden Japanese and also as the only victim of the nuclear attack, this would not go down well with the ordinary Japanese voters who want a very rigid nuclear  policy against  the  non-signatory of the NPT.

The impending election in Japan was perhaps not the right occasion for Indian Prime Minister who wanted to take forward the discussion in nuclear cooperation agreement to its logical conclusion.

Since the outgoing regime in Japan would not have been able to commit India in the nuclear field, the Prime Minister’s office perhaps thought it is proper to defer the trip to Tokyo for the  next mutual convenient date.

Since the Japanese companies like Hitachi and Mitsubishi are major suppliers to American nuclear power companies, the Americans would also not be able to invest in Indian power companies, without the Indo-Japan nuclear cooperation agreement.

Thus, the success of Indian nuclear program much depends on Japanese government lifting all export bans to a non-NPT signatory.

Though South Korea is also finalisng nuclear cooperation agreement with India, Japanese companies fear losing the race in India.

The Japanese government seems to be in dilemma as it does not want its nuclear industry to be left behind in the race to grab the bids for setting up nuclear power stations in India.