China and the World

Homeland insecurity

Changes in demand for rare earth mean California may start digging

Homeland insecurity

Useless without rare earth

During the Cold War era, the US government kept a close watch on supplies of rare earth minerals – 17 valuable metals that have special electromagnetic properties vital to military technologies. But as the Berlin Wall came down, and the Soviet Union crumbled with it, so did much of the monitoring of rare earth supplies.

Talk about a rude awakening. A report this month published by the Government Accountability Office (GAO), a US federal government auditor, warned that the oversight needed to be beefed up again. China’s dominance in rare earth resources – the country now supplies over 97% of the global rare earth market – has far-reaching implications for the Pentagon supply chain.

That’s because rare earth elements are currently irreplaceable components in devices like missiles, satellites and radar systems. They also crop up in a wider range of goods –anything from wind turbines to your iPod player.

According to the report, China may choose to increase export taxes on rare earth materials to 15-20% and use production quotas to limit supply.

“China’s dominant position in the rare earths market gives it market power which could affect global rare earth supply and prices,” warns the GAO.

Some smell conspiracy. “The People’s Republic of China is not an ally of the United States,” says Congressman Mike Coffman, one of those who called for the GAO report in the first place. “They feel increasing leverage. This gives them another tool.”

The issue first gained wider attention last year when China’s Ministry of Industry and Information Technology said domestic demand for dysprosium and terbium – two rare earth elements used in hybrid cars – might outstrip supply. Critics claim that this is part of a wider policy in which Beijing has been steadily reducing the rare earth material available for export.

The reason China is curbing exports is “not that they are trying to screw us,” Andrew Lubin, a lecturer at the online American Military University, told CNN. “They [China] have a huge middle class that didn’t exist 20 years ago. They need the rare earths for themselves.”

Beijing grasped the strategic importance of rare earths very early on. Former Chinese leader Deng Xiaoping famously declared in 1992 that while the Middle East had oil, China had rare earth resources.

Industry observers doubt Beijing’s desire is for a price cartel around rare earth exports (in fact, as we reported in WiC13, the industry structure makes pricing power difficult). What Beijing probably wants is to ensure that it has the materials it needs to feed its own ambitions in advanced and green technology industries like electric cars. Chinese industries already consume about two-thirds of rare-earth production and analysts predict domestic demand will absorb almost all of China’s output within a few years.

With a dwindling surplus of the coveted metals, the Chinese government has even been stockpiling rare earth minerals. Baotou Iron & Steel Group – the state-owned rare earths supplier – gained official approval in February to begin building a strategic reserve, says People’s Daily.

Last year, state-owned China Nonferrous Metal Mining tried but failed to acquire a majority stake in Lynas Corporation, one of Australia’s leading rare earth mining projects at Weld Range in Western Australia.

Energy experts and lawmakers are now urging the Obama administration to mobilise quickly for what some say could be one of the most critical raw material imports of the 21st century.

But it is going to take time. The problem is not that US doesn’t have rare earth ores of its own. In fact it does – in California. But after relying on cheaper rare earth imports from China for more than a decade, the country has fallen behind in material refining capacity. Rebuilding the supply chain will take as long as 15 years, says the Wall Street Journal.

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