China Is Beating the US in the Rare-Earths Game

How to view China’s recent threat to limit domestic production of rare earths, those 16 elements that make our cellphones and smart bombs work? It’s the latest move in a game that began before the United States realized it was even playing, that has grown more complex than U.S. leaders realize, and that is nearing a very unfortunate ending.

The game began in earnest in 1980, when the United States made two moves that gave its opponent an advantage it has never relinquished. One was industrial: Molycorp, then the country’s largest rare earth mining and processing company, began transferring its processing technology to China (as detailed by Boston University professor Julie Michelle Klinger in Rare Earth Frontiers). The other was regulatory: although rare earths are most easily and cheaply obtained as a byproduct of mining for other minerals, the Nuclear Regulatory Commission and the International Atomic Energy Agency in 1980 more or less inadvertently placed this activity under the same regulations as mining nuclear fuel. Within a decade and a half, all U.S. producers of heavy rare earths shut down. Today, China gets most of its rare earths as a no-cost byproduct of iron ore mining, while the U.S. runs one expensive, low-value specialty mine: the Mountain Pass operation in California.

Over the following two decades, China raced to cement its global dominance in the field. It established the world’s largest rare earth research facility, a development that generally escaped U.S. notice, save in a single issue of the Ames National Laboratory rare earth newsletter. Chinese researchers filed for their first international rare earth patent in 1983; within fourteen years, the total number of Chinese patent filings in the field exceeded that of the U.S., which had been working in the field since 1950. And Beijing was using its leverage as the world’s top producer of rare earths to acquire or import U.S. technology companies specializing in metals, alloys, magnets, and integrated rare earth components.  

Perhaps our worst blunder came in 1995, when Congress allowed China to buy Magnequench, the only U.S. producer of magnets for our most advanced guided missiles; and GA Powders, a producer of rare earth magnetic powders. Acquired by the family of Chinese leader Deng Xiaoping, Magnequench shut its U.S. facility seven years later, ending America’s ability to produce magnets key to missiles and other weapons.

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But the mistakes didn’t stop there. In 1998, the U.S. National Defense Stockpile sold off the last of our nation’s strategic reserve of rare earths, including all rare earths previously held by the Energy Department. That same year, Rhodia Incorporated, the last integrated U.S. producer of rare earth metals and alloys, closed its rare earth separation facility in Texas, announced plans to build a new one in China, and signed a deal with Baotou Rare Earth Development Zone to construct a metal and alloy facility in Mongolia.

By 2002, Molycorp closed the last rare earth mine in the United States. It restarted operations around 2010, closed again five years later, and restarted once more this year.

Our leadership failed to note any of this because they did not understand the strategic significance of these materials.

In August, China announced that it would reduce rare earth separation and smelting by 36 percent through the end of the year, putting it on track to produce 45,000 tons of the various elements — only enough for domestic production, with none left for export. The word reached most Western ears only last week, when Adamas Intelligence, a corporate advisory firm that specializes in rare earths and other metals, told Reuters about it. An Adamas analyst said that the cost of one rare earth mineral, PrNd oxide, is on track to double within next five years. Overall, Reuters reports, “Chinese exports typically supply around 80 percent of the globe’s rare earth needs, about 156,000 tonnes annually.”

Reuters noted that “the U.S. military is worried about China’s dominance of the rare earths market, calling it a ‘significant and growing risk,’ according to the Pentagon’s recently released industrial-base study.

But there appears to be little concern evinced — at least in public — by the White House, the Departments of Energy or Commerce, or Congress. Instead, U.S. policy makers appear to be counting on a quick ramp-up of private mining operations to cover the absence of Chinese rare earth concentrates and oxides. Regrettably, mining cannot solve the problem. To start with, mine permitting and development typically takes 7 to 10 years in the United States, according to one industry-backed study. Moreover, no one is rushing to fund new rare earth mines.

But — and this is what few in the U.S. government appear to understand — China’s grip on the world’s rare earths is not limited to its 80-percent share of raw materials. It also controls almost all of the world’s processing facilities that transform raw concentrates and oxides into useful forms: metals, alloys, magnets, garnets, and the like.

Apparently, the official U.S. plan is for the private sector to respond to the market opportunity. But in 2010, a U.S. Government Accountability Office study concluded that developing the requisite metallurgical capabilities could take up to a decade and a half.

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Will U.S. technology companies weather a 15-year supply disruption? No. Instead, they will move their factories, and all related technologies, to China. We know this, because it happened in 2010. The target then was Japanese companies — which knuckled under to Chinese demands and sold or moved their factories to China.  

This time it’s a global threat. And it’s a threat that shows just how deft China has become in coercing the world. After the Reuters report hit the wires, China quietly issued a clarification, suggesting that they simply reweighted the output quota, and nothing has actually changed. That’s what happened with Japan eight years ago; there is little evidence that any single Japanese customer was actually “embargoed.” China’s actions mostly amounted to the threat and some shipping delays. Their effects were no less substantial.

Congress has failed to act or even understand the underlying issues.  It is time for the Administration to use its powers under the Defense Production Act to establish a fully integrated resource value chain that can guarantee our technology and defense industry delivery of rare earth metals, alloys, magnets and other value added materials. 

Failure to do so will help China pull our remaining tech sector into its hand and deepen our defense industries’ dependence.