It’s All About The Minerals: Why America Shouldn’t Fear China's Rare-Earth Monopoly

Another month, another rare-earth supply scare.

Last week, the Chinese government released its first official report on its domestic rare-earth element, or REE, industry, and for many it made very uncomfortable reading.

China -- producer of between 90 percent and 98 percent of the world's rare-earth supplies, according to various estimates -- warned that a decline in its rare-earth resources was "accelerating."

"After more than 50 years of excessive mining, China's rare earth reserves have kept declining and the years of guaranteed rare earth supply have been reducing," the report said. "In Baotou [the largest rare-earth industrial base in China] only one-third of the original volume of rare earth resources is available in the main mining areas."

For China's biggest rare-earth customers -- the U.S., Japan, and Europe -- the report was nothing more than an excuse to justify rare-earth export quotas imposed by Beijing in March of last year.

So-called rare earths (they are in fact not so rare, just very hard and environmentally risky to mine) are a group of 17 elements essential for the manufacture of most high-tech gadgets, military hardware, and renewable energy equipment.

Their superdurable and highly conductive properties make them indispensable in a range of applications, including the lining of jet-fighter engine manifolds, flat-panel television sets, and the magnets used in wind turbines.

China maintains that the quotas are not intended to hurt other nations, and that they are only in place to protect the environment and conserve its supplies.

Regardless, the quotas have had a huge effect on the price of these essential elements.

Shortly after the export squeeze last year, dysprosium oxide -- used in lasers, magnets, and nuclear reactors -- rose to about $1,470 a kilogram from between $700 and $740 in just one month, Bloomberg reported.

Faced with potential supply bottlenecks and costly price hikes, the U.S., the European Union, and Japan took China to the World Trade Organization, or WTO, in March in a bid to force Beijing into dropping the rare-earth quotas.

The U.S. has been especially vocal in its opposition to the Chinese rare-earth policy, with President Barack Obama telling reporters in March he expected China to "play fair" when it comes to international trade.

"We want our companies building those products right here in America," Obama said. "But to do that, American manufacturers need to have access to rare-earth materials which China supplies. Now, if China would simply let the market work on its own, we'd have no objections."

The White House's anger is echoed by U.S. industry bodies and the Defense Department, which fears future supply cuts could affect its ability to purchase and maintain everything from fighter aircraft to night-vision goggles.

According to a Defense Department report released last year, the U.S. military has been carefully monitoring the situation, and it recommended a re-evaluation of the U.S. position regarding rare earths.

"China supplies approximately 97 percent of the world's RE," the report said. "It is essential that a stable non-Chinese source of REO [rare-earth oxides] be established so that the U.S. RE supply chain is no longer solely dependent on China's RE exports."

The paper calls for a re-establishment of the Critical Minerals Program, abandoned in the 1990s, which kept the U.S. Congress abreast of potential supply shortages and impending materials shocks.

The report also suggests stockpiling key rare-earth elements to "increase the security of the domestic U.S. supply for rare earths," and funding more research into the processing and handling of rare earths.

Congress has been even more vocal in its concerns, with three senators writing to former Defense Secretary Robert Gates in January of last year saying that the current rare-earth supply chain represents a "serious vulnerability to our national security. ... Yet early indications are the DOD has dismissed the severity of the situation to date."

But, in spite of the hyperbole emanating from Washington, the Defense Department report notes: "As capital investment plans for additional non-Chinese capacity become a reality, prices should significantly trend downward on a similar path as in the 1988-1933 period, when market dynamics were very similar to what they are today."

Meanwhile, the Chinese have also been at pains to downplay their own dominance of the market. Last week's official report took an almost mocking tone toward what it said was an unnecessary fear in the U.S. and other worried nations.

"For some time now, some countries have been particularly fretful about the situation of China's rare earth industry and related policies, doing a lot of guesswork and conjuring up many stories," the report stated.

And -- according to Karl A. Gschneidner Jr., the holder of a doctorate in physical chemistry, the founding director of the Rare-earth Information Center, and an expert who has testified before Congress on the issue of rare-earth supply -- China may just be right.

"The industry in terms of supply is not perfect yet, but it is slowly coming together," Gschneidner said. "We can see the light at the end of the tunnel, and domestic suppliers, such as Molycorp are going as fast as they can to make up supplies."

Molycorp Inc. (NYSE: MCP) -- owner of the Mountain Pass, Calif., rare-earth mine, which once supplied most of the world's rare earth elements -- is just one of a growing number of North American mine operators aiming to break the Chinese stranglehold on rare earths.

The company's $781 million "Project Phoenix" expansion of the Mountain Pass facility is due to come on-line this year, boosting annual production to as much as 10,000 tons.

Elsewhere in North America, drilling at the Rare Element Resources Ltd. (NYSE: REE) Bear Lodge Project in Wyoming got under way in June. Bear Lodge contains one of the largest disseminated rare-earth deposits on the continent.

"There's always going to be some competition with China," Gschneidner added. "The main problem is we don't have enough experts, but I think they are going to start coming back in. For the U.S. it's a matter of time working it out. It's not over, but I'm not worried China is going to dominate this country [using REEs]."

In June, the advisory shop Technology Metals Research pointed out that China could be about to lose its REE monopoly, citing 35 rare-earth mining projects in various stages of development or production in other countries.

"It's possible that 15-20 percent of rare earth minerals could be mined outside of China by the end of 2020," supply expert Paul Martyn noted in a piece for Forbes magazine this month.

Even the Defense Department report cited Molycorp and others as examples of how, in the not-too-distant future, America will be free of its overreliance on China for its supplies of rare earths.

As if on cue, Japan announced on Friday it had found a massive deposit of rare-earth minerals in its Pacific seabed.

According to reports, the 6.8 million-ton discovery is enough to supply Japanese industry for the next 200 years, according to Tokyo University professor Yasuhiro Kato.

"Specifically on dysprosium, I estimate at least 400 years worth of Japan's current consumption is in the deposits," Agence-France Presse reported Kato as saying. "We can start drilling in the mud, using oil extraction technology, within three years at the earliest and start producing rare earth minerals within five years," he said.

Added to this, the statistics that critics base their arguments on can be misleading, to say the least.

According to Beijing's figures, China holds 23 percent of the world's rare-earth reserves. In contrast, the U.S. Geographical Survey puts this figure at 36 percent, while a congressional report released in June warned that China's share of world reserves was as high as 50 percent.

Those are differences of 9 and 27 percentage points, respectively.

"Reserves are wild guestimates," said Andre Geim, a professor at the University of Manchester in the U.K. "In addition, rare earth materials are nothing like oil. The reserves are not limited to a certain depth: The deeper you dig, the more you find, becoming more and more expensive."

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