Digging into the Rare Earths Predicament

It’s hard to resist getting caught up in the intriguing tale about China’s control over the all-important supply of rare earth elements (“REs”).  It turns out that these tiny, mysterious substances are necessary to make everything from cell phones to guided missiles and smart bombs.  So just how did something so small with a relatively modest global market of about $1.2 billion get to be such a big problem?  We’ll get back to sorting out the details of the rare-earth stuff in a minute, but let’s first consider some foreign policy context.

U.S.-China Relations and Foreign Policy

For its own sake and arguably the global greater good, the U.S. ought to be trying its hardest to hang onto its position as the leading world power.  World knows there are more than enough challenges to that status already that we don’t need to make it any harder on ourselves.  The prolonged Iraq-Afghan saga, housing debacle, and scary rightist extremism are just a few that come to mind.

To complicate matters, the U.S. increasingly finds itself linking horns with one’s of the world’s historical heavyweights.  China has recently been demonstrating its power by throwing its weight around in disputes over currency valuations, trade policies, and territorial claims, among others.

To be sure a lot of this is probably gamesmanship and saber rattling that might be expected from a reawakening power.  But it still isn’t something that the U.S. and other governments can afford to take too lightly, as they seem to have so far.  The proceedings to date have already cost considerable money, diplomatic capital, and peace of mind.  Action must be taken quickly to address immediate as well as medium- and longer-term solutions and prevent a much bigger toll.

Rare Earth Elements

So what exactly are these funny rare-earth things and how do they fit into the picture?  REs are 17 elements from the periodic table that you might recall studying in school.  According to a report by the U.S. Geological Survey (“USGS”), “the diverse nuclear, metallurgical, chemical, catalytic, electrical, magnetic, and optical properties of REs have led to an ever increasing variety of applications.”  REs are characterized by highly specific and highly versatile usages, low toxicity, high unit value, and few, if any, substitutes.  The names and symbols of the REs are shown below.

17 Rare Earth Elements (REs)
La Lanthanum Tb Terbium
Ce Cerium Dy Dysprosium
Pr Praseodymium Ho Holmium
Nd Neodymium Er Erbium
Pm Promethium Tm Thulium
Sm Samarium Yb Ytterbium
Eu Europium Lu Lutetium
Gd Gadolinium Y Yttrium
Sc Scandium

REs are used to make everything from cell phones to lasers to mini-hard drives for laptop computers.  REs help protect the environment and enable clean energy by going into catalytic converters, electric-car batteries, wind turbines, and solar panels.  REs are also critical for things like radar, guided missiles, and smart bombs that help maintain national security.  In 2008, about 37 percent of global demand for REs was used in magnets for products such as hard drives, hybrid vehicles, and guided missiles.  Another 31 percent went for phosphors to make energy-efficient lights.

China’s Supply Restrictions

China’s supply restrictions threaten not only the competitiveness and survival of downstream companies but also the economic and national security interests of China’s major trading partners.  The U.S., Japan, and Germany import nearly all of their annual requirements of REs from China.  The chairman of Germany’s BDI believes that the future of German innovation, industry, and jobs hangs in the balance.

Due to China’s export quotas and export taxes on REs and rising global demand, the price of REs has sky-rocketed in recent times.  Since 2006, China has regularly increased the restrictions on the supply of REs to foreign customers.  In July, China cut its RE export quota for the remainder of the year by another 72 percent.  China began blocking all exports of REs to Japan last month in response to a maritime dispute.  It is expected to tighten export controls again next year.

Rare Earths Pricing

The chart below from the Economist illustrates the steep increase in the composite price of 10 REs.  In the last six months alone, prices have gone up seven times for the RE cerium oxide.  According to USGS, “cerium is the most abundant and least expensive RE” and “has dozens of applications,” including polishing semiconductors.  Prices for neodymium, used in magnets, have risen 224 percent from $41 in April.

What’s behind China’s aggressive export controls?  Chinese officials contend that restrictions are necessary to limit the pollution from RE mines and protect exhaustible resources.  But there seems to be far more to the story.  According to the Economist and a recent NYT article by Paul Krugman, as far back as 1982, Deng Xiaoping, the leader of China’s economic transformation, declared, “There is oil in the Middle East; there is rare earth in China.”  (Incidentally, Deng was also the one who realized that China had to let “making money be glorious” among the people to avoid a public backlash that might undermine the Communist Party.)

China’s Industrial Policy

Since around 1992, China seems to have set about using REs as a cornerstone of an industrial policy aimed at developing strategic industries.  The 2002 USGS paper reports that, in 1998, the Chinese Ministry of Science and Technology made “Basic research in rare earth materials” the first group of 15 high-priority national research projects.  China has sought to develop clean energy sectors, including wind turbine manufacturing, and others that rely on China’s supply of REs.  Another motivation for China’s RE stance likely involves forcing foreign companies in these industries to move to China.

U.S. Rare Earths Supply

So, if these REs are so important, just how exactly did we get into this predicament in the first place?  Curiously enough, it hasn’t always been this way.  Only about 37 percent of RE deposits are located in China.  The remaining 63 or so percent are found elsewhere, with the U.S. holding about 13 percent of total known deposits.  From about 1965, when demand for REs began to take off, to the mid-1980’s, the U.S. Mountain Pass mining area in California supplied nearly all of world demand for REs.  Around 1985, China began to build a presence in the RE supply industry.  By around 2000, the situation had completely reversed, and China supplied almost all of U.S.’ companies RE needs.  Going back to Krugman, “in at least one case in 2003 … the Chinese literally packed up all the equipment in a U.S. production facility and shipped it to China.”

It’s hard to see how the U.S. could have let the entire RE industry slip away under its nose just as REs were becoming increasingly important to a wide range of key industries and future technologies.  Maybe there were doubts about how much of a global force China would really become, hard as that is to believe from the perspectives of both hindsight and history.  Costs and the business bottom line appear to be one key driver.  China was able to undersell U.S. RE suppliers thanks to lower extraction and processing costs.  U.S. companies were presumably happy to be able to lower their costs and pad profit margins with cheaper inputs.  U.S. businesses have also shown a reluctance to challenge China for fear of jeopardizing access to the Chinese labor and consumer markets.  In some sense, it sounds a bit like another version of the mortgage mess where everyone just looked the other way while times were good.

There doesn’t seem to be much evidence in the media of key government agencies and policy-making bodies really taking notice of the issue until earlier this year.  In April, a GAO report pointed out that China’s control of the RE market gave it “market power over the U.S.”  On September 29, the U.S. House of Representatives voted 324 to 92 to approve legislation to establish an R&D program at the Department of Energy (DOE) “to assure the long-term, secure, and sustainable supply of rare earth materials in the U.S.”  It’s just hard to understand why this didn’t happen a little sooner, say somewhere between 2003 when China was packing up U.S. factories and 1982 when Deng was laying claim to his RE fortune.

Germany seems to be the most proactive in taking on the issue so far.  On October 19, it adopted a strategy to secure the supply of REs and other strategic raw materials. It is also organizing an emergency conference with international policy leaders including Pascal Lamy, director general of the World Trade Organization, to be held next week.

Japan responded to China’s RE embargo by immediately giving into China’s demand to return a Chinese trawler captain detained by the Japanese Coast Guard.  Japan is thought to keep larger stockpiles of REs than its western counterparts, so it may be better off in the short run.  Japan also benefits from being a key component of U.S. military strategy in Asia.  On the other hand, Japan seems to have as much interest in collaborating to secure a reliable, long-term supply of REs as the U.S. and Germany.

Policy Recommendations

Here’s a brief list of other actions that the U.S. and other RE users could take to help move toward a more reliable, predictable supply chain for REs.

  • Collaborate with other partner nations to present a united opposition to China’s approach to RE policy and, thereby, avoid being dragged further into bilateral tit-for-tat exchanges, such as China’s reactions to U.S. trade policies and Japan’s seizing of a Chinese trawler over disputed territory claims.
  • Develop alternative sources of supply from the approximately two-thirds of RE deposits that are held in the U.S., Australia, and other places outside China.
  • Monitor and be prepared to respond to China’s attempts to invest in mining RE deposits outside China.
  • Krugman suggests “urban mining” or “the recycling of rare earths and other materials from used electronic devices” as a compelling alternative.
  • Promote home-grown research and expertise in REs.  There are reportedly at least 6,000 researchers and other experts who focus on rare earth science in China, versus about 20 in the U.S.
  • Implement and enforce a reliable reporting system between strategic industry sectors and the relevant government agencies to make sure there is a clear understanding and advance notice of excessive supply consolidation before it can become such a costly, difficult problem.
  • Establish a process to assure effective communication and coordination between government agencies to make sure that valuable research insights from places like the USGS and GAO make it to the right people at places like the Department of Defense (“DOD”), State Department, and Department of Energy (“DOE”).

Fortunately, a few challenges are already also working in favor of some of these changes.  For one, high prices, rising global demand, and strong investor interest have given ample incentive for business to develop alternative sources of supply and meet the important, growing need for these all-too-elusive rare earth elements.

Related articles and content:

China’s Development Plans Lead World, BRICs

Global Science Research and Collaboration

China in Africa: South Africa Joins BRICs Summit

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Sources:

Bradsher, Keith.  China Said to Widen Its Embargo of Minerals.  New York Times.  October 19, 2010.

Dempsey, Judy.  Decline in Rare-Earth Exports Rattles Germany.  New York Times.  October 19, 2010.

Drajem, Mark and Gopal Ratnam.  Rare Earth Prices Soar Even as China Pledges Supply.  Bloomberg.  October 20, 2010.

Economist.  Digging In.  September 2, 1010.

Economist.  Dirty Business.  September 30, 2010.

Haxel, Gordon B., James B. Hedrick, and Greta J. Orris.  Rare Earth Elements – Critical Resources for High Technology.  USGS Fact Sheet 087-02.  U.S. Geological Survey.  U.S. Department of the Interior.  2002.

Krugman, Paul.  Rare and Foolish.  New York Times.  October 17, 2010.

Scott, Jason and Elisabeth Behrmann.  Rare Earth Curbs May Prove Windfall for Molycorp, Lynas as Prices Surge.  Bloomberg.  October 20, 2010.

Trager, Rebecca.  US Concerns about Rare Earths Scarcity Gain Momentum.  Chemistry World.  RSC.  October 5, 2010.

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