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Revisiting Rare Earths: The Ongoing Efforts to Challenge China’s Monopoly

 
 

At the Senate Intelligence Committee hearing held in May 2017, Senator Joe Manchin (D-WV) and the acting Central Intelligence Agency (CIA) Director Mike Pompeo expressed their strong concern over the United States’ excessive dependence on foreign-produced rare earth elements and its potential impact on national security.

According to the United States Geological Survey, the United States relied 100 percent on imported rare earth elements in 2016, and more than 70 percent of those were from China. The Department of Defense is estimated to require 800 tons of such elements each year, and Congressman Duncan Hunter (R-CA) addresses a vulnerability in the Department’s acquisition system in a recent bill.

Despite concern from Congress and the CIA, it was only one and half months after the hearing that a U.S. court ruled in favor of allowing a consortium of rare earths suppliers (including a Chinese mining company) to purchase the Mountain Pass mine in California — the only ready-to-be-operated rare earths mine in the United States.

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Back in 2010, “rare earth elements” became a hot topic in the national security and foreign policy fields, mainly because of the political, economic, and security turmoil that followed China’s defacto embargo of those elements. In September of that year, China (the major supplier of rare earth elements) suddenly reduced its export quotas by 40 percent — not long after the collision of a Chinese fishing ship and a Japanese Coast Guard vessel in the East China Sea. Due to the export restriction, Japan found it difficult to fill its domestic rare earth demands, and as a result the world market price of the elements skyrocketed.

Many countries which had relied on low-price rare earths from China quickly began exploring different solutions to try and compensate for the diminishing supply. For example, they secured other supply routes, examined recycling methods, and developed advanced manufacturing technologies which did not require those particular elements. The countries, led by the United States, also simultaneously filed a complaint against China with the World Trade Organization (WTO). Eventually, when the WTO ruled against China’s export restriction in 2014, and the market price went back to the original (or even lower) level, media coverage on rare earths declined dramatically.

Are the risks in the rare earth supply chain really gone? Probably not.

Called “the vitamins of modern society,” rare earth elements play a critical role in our daily life — in both the economic and security domains. These elements are key components of a vast array of products, including smart phones, computers, light bulbs, electric cars, wind turbines, satellites, cruise missiles, and stealth aircrafts. Some elements, like neodymium and dysprosium, are highly demanded for the production of permanent magnets, which are used for sensors and motors of these products. The most noteworthy fact is that the more we go green and technology-oriented, the more important these elements become to our society.

Today, China enjoys a monopoly in the rare earths market. It is estimated that in 2016, more than 80 percent of rare earth elements produced in the world were excavated in China. The country is also believed to hold more than 30 percent of the planet’s remaining rare earth element reserves. While many stopped paying attention to rare earths after the dispute settlement at the WTO, the market has been preparing for more potential turmoil. For instance, Australian companies have been working to open rare earth mines in Australia and Tanzania for producing elements such as neodymium and dysprosium. Likewise, Canada, through collaboration with the national government and industrial associations, seeks to gain up to 20 percent of global rare earth production by 2018.

Japan has also explored non-Chinese suppliers of rare earth metals, reaching co-development agreements with countries like Australia, India, Kazakhstan, and Vietnam. A research group from the University of Tokyo in 2012 even found a significant amount of rare earth minerals around Minami-Torishima, the easternmost island of the country (located in the Western Pacific). In 2016, Japanese auto giant Honda invented an advanced motor which does not require rare earth elements. More recently, in June 2017, Japanese scientists discovered a massive amount of cobalt-rich crusts, which often contain cobalt, nickel, and some rare earth elements. Even if it is very challenging and costly to extract those minerals from the deep sea, Japan will seek to do so in order to boost its long-run natural resource self-sufficiency.

For the United States, re-opening the Mountain Pass mine in California has been a strategic goal. After the shutdown of the mine in 2015 (following the bankruptcy of then-owner Molycorp), several companies expressed interest in purchasing the mine. There has been discussion of the economic and security considerations of the U.S. giving a Chinese-affiliated company some control over the mine, even before the court made its final decision. It is still unclear whether any higher U.S. authority such as Congress will step in to stop the deal, although several experts have address potential risks surrounding the court’s decision.

China has not been unaffected during and after its rare earth embargo. The higher prices of rare earth attracted many miners, both legal and illegal. After the end of the export restriction, the increased supply caused a steep price decline, as well as pollution, hazardous waste, and health risks for the miners and smelters. China turned out to produce rare earth minerals in the least cost-effective manner. Since 2015, China has actively engaged in removing smugglers and controlling the production of rare earths by consolidating authorized suppliers into six large companies, which it then requires to coordinate with each other. The handful of companies are required to stabilize market prices as well as to stockpile some amount of elements in the motherland, given the forecast that China will need to import rare earth from overseas by 2025 in order to fulfill its rising domestic demand for clean-energy products.

It is costly to find alternatives to low-priced Chinese rare earths, whether those alternatives are opening and reopening mines, inventing new recycling process, or developing substitutes. Nonetheless, in the current situation, where China not only has major control over global supply but has also begun stockpiling in preparation for future market demand, continuing efforts to diversify the supply chain portfolio are critical for the United States and its allies — from both economic and security perspectives. It is not sustainable to rely on Chinese rare earths, although they look very cost-effective in a very short term. Now is the time to revisit the powerful dynamics of rare earth elements and to establish a strategy to win the soon-to-be-more-competitive battle of the market.

Mayuko Yatsu is Project Manager/Senior Research Analyst at Washington CORE, L.L.C., an independent research and consulting firm located in Bethesda, Maryland.

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