Executive Briefings

Why China's Action on Rare Earth Minerals Might Backfire

With great power comes great responsibility, or so they say. I'm not sure that's a lesson that China understands, at least when it comes to international trade.

China raised a ruckus back in September when it temporarily halted exports of rare earth elements to Japan. The move was in response to Japan's arrest of a Chinese fishing captain, whose boat had collided with a couple of Japanese coast guard vessels in disputed waters.

Within days, the captain was released, and the crisis defused. But the incident set off alarm bells among China's trading partners, not least the U.S., which was also reported to be experiencing a suspension of rare earths shipments from China, the likely result of an ongoing dispute between the two countries over the artificially low value of the Chinese yuan.

The problem is that China today accounts for nearly 97 percent of the world's production of rare earths, which are essential to a number of high-tech items, including computers, military hardware, hybrid automobiles and wind turbines. Given this near-monopoly of supply, it's shocking that China would so cavalierly use its position as a weapon in unrelated economic or diplomatic matters. It raises the question of how seriously the country wants to play a leading role on the stage of free trade.

In the end, China's actions against Japan and the U.S. could prove to be a self-defeating blunder. It appears to have jolted Americans into hastening the development of domestic rare earths sources. Last month, the House of Representatives passed H.R. 6160, the Rare Earths and Critical Materials Revitalization Act of 2010, by a vote of 325-98. Among other things, the act seeks to subsidize creation of a rare earths materials program in the U.S. The chief sponsor is Rep. Kathy Dahlkemper (D-Pa.); she has six co-sponsors, two of them Republicans. And the U.S. Department of Defense is wrapping up work on a report examining the military's reliance on rare earths. So there's action on the home front at last.

Experts in the mining of rare earths point out that it takes years to develop new sources of supply, given the cost, technology and environmental concerns involved. But the U.S. won't have to wait that long. It already has an existing site, in the form of the currently shuttered Mountain Pass Mine in California's Upper Mojave Desert. (The operation was shut down in the 1990s, following the explosion of a pipe carrying radioactive wastewater.) I wrote in a previous post about the efforts of mine owner Molycorp Minerals LLC to get the site reopened and back into full operation. Last week, I spoke with Jim Sims, the company's director of public affairs, about how the project is progressing.

Molycorp needs about $511m to realize steps one through four of its plan, which will take it from a resumption of active mining at Mountain Pass to the production of alloys. (A fifth step will make those alloys into permanent rare earth magnets, which can be used in wind turbines.) The company raised about $380m in an initial public offering back in July. It has several options for generating the rest of the cash. One is traditional project financing, although interest rates are still "fairly burdensome," thanks to the continuing fallout from the 2008 credit-market meltdown, Sims says. Another possibility is vendor-based financing, to cover the $110m cost of installing two large pieces of equipment at the mine. Vendors appear willing to offer 80-percent notes, says Sims, generating between $80m and $90m. Additional money could come through loan guarantees by the U.S. Department of Energy, based on the mine's potential to support the development of clean wind power. Finally, says Sims, the company is talking to the Department of Defense about potential partnerships to raise the last bit of funding.

"We're very optimistic," says Sims. "It's really just a question of which of those [financing] paths, or what combination, we take."

Molycorp insists it will stick to its timeline for breaking ground at the rebuilt Mountain Pass facility on January 1, 2011, with an accelerated, 18-month construction period. By the end of 2012, it expects the mine to be operating at the full production rate of 20,000 tons of rare earths per year. (Currently the facility is processing some 3,000 tons annually of materials that are stockpiled at the shut-down mine.)

That volume pales in comparison with China's production of 125,000 tons per year, but it would still make the U.S. the world's number-two supplier of rare earths, and would be sufficient to meet domestic needs of the moment. U.S. consumption of rare earths is currently estimated at between 15,000 and 18,000 tons a year.

Still, a lot more of the stuff is going to be needed, both by the U.S. and the rest of the world. Sims says Molycorp's 30-year operating license from the State of California allows it to double production to 40,000 tons without the need for a new permit. But even that won't be enough to cover future requirements. Total worldwide demand for rare earths is expected to double to 225,000 tons by 2015, and that number doesn't even account for all the needs of the burgeoning wind-power industry. One 2.5-megawatt permanent magnet generator (PMG) wind turbine requires half a ton of rare earths, Sims says. China alone plans to deploy 300 gigawatts of wind turbines by 2020.

So it turns out that everyone's sources of rare earths - China, the U.S. and possibly Australia as well - will be needed in years to come. "We [Molycorp] can get up to that production level faster than anybody on the planet," says Sims, "but even if we do, and the Australians get up to speed, it will still be a constrained market."

Our increasingly high-tech global economy can't survive without a steady source of rare earths. It seems like a poor area in which to be playing political games. In the wake of their recent embargo, Chinese officials vowed that they wouldn't use rare earths as a "bargaining chip" in world trade talks. Let's hope they mean it.

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With great power comes great responsibility, or so they say. I'm not sure that's a lesson that China understands, at least when it comes to international trade.

China raised a ruckus back in September when it temporarily halted exports of rare earth elements to Japan. The move was in response to Japan's arrest of a Chinese fishing captain, whose boat had collided with a couple of Japanese coast guard vessels in disputed waters.

Within days, the captain was released, and the crisis defused. But the incident set off alarm bells among China's trading partners, not least the U.S., which was also reported to be experiencing a suspension of rare earths shipments from China, the likely result of an ongoing dispute between the two countries over the artificially low value of the Chinese yuan.

The problem is that China today accounts for nearly 97 percent of the world's production of rare earths, which are essential to a number of high-tech items, including computers, military hardware, hybrid automobiles and wind turbines. Given this near-monopoly of supply, it's shocking that China would so cavalierly use its position as a weapon in unrelated economic or diplomatic matters. It raises the question of how seriously the country wants to play a leading role on the stage of free trade.

In the end, China's actions against Japan and the U.S. could prove to be a self-defeating blunder. It appears to have jolted Americans into hastening the development of domestic rare earths sources. Last month, the House of Representatives passed H.R. 6160, the Rare Earths and Critical Materials Revitalization Act of 2010, by a vote of 325-98. Among other things, the act seeks to subsidize creation of a rare earths materials program in the U.S. The chief sponsor is Rep. Kathy Dahlkemper (D-Pa.); she has six co-sponsors, two of them Republicans. And the U.S. Department of Defense is wrapping up work on a report examining the military's reliance on rare earths. So there's action on the home front at last.

Experts in the mining of rare earths point out that it takes years to develop new sources of supply, given the cost, technology and environmental concerns involved. But the U.S. won't have to wait that long. It already has an existing site, in the form of the currently shuttered Mountain Pass Mine in California's Upper Mojave Desert. (The operation was shut down in the 1990s, following the explosion of a pipe carrying radioactive wastewater.) I wrote in a previous post about the efforts of mine owner Molycorp Minerals LLC to get the site reopened and back into full operation. Last week, I spoke with Jim Sims, the company's director of public affairs, about how the project is progressing.

Molycorp needs about $511m to realize steps one through four of its plan, which will take it from a resumption of active mining at Mountain Pass to the production of alloys. (A fifth step will make those alloys into permanent rare earth magnets, which can be used in wind turbines.) The company raised about $380m in an initial public offering back in July. It has several options for generating the rest of the cash. One is traditional project financing, although interest rates are still "fairly burdensome," thanks to the continuing fallout from the 2008 credit-market meltdown, Sims says. Another possibility is vendor-based financing, to cover the $110m cost of installing two large pieces of equipment at the mine. Vendors appear willing to offer 80-percent notes, says Sims, generating between $80m and $90m. Additional money could come through loan guarantees by the U.S. Department of Energy, based on the mine's potential to support the development of clean wind power. Finally, says Sims, the company is talking to the Department of Defense about potential partnerships to raise the last bit of funding.

"We're very optimistic," says Sims. "It's really just a question of which of those [financing] paths, or what combination, we take."

Molycorp insists it will stick to its timeline for breaking ground at the rebuilt Mountain Pass facility on January 1, 2011, with an accelerated, 18-month construction period. By the end of 2012, it expects the mine to be operating at the full production rate of 20,000 tons of rare earths per year. (Currently the facility is processing some 3,000 tons annually of materials that are stockpiled at the shut-down mine.)

That volume pales in comparison with China's production of 125,000 tons per year, but it would still make the U.S. the world's number-two supplier of rare earths, and would be sufficient to meet domestic needs of the moment. U.S. consumption of rare earths is currently estimated at between 15,000 and 18,000 tons a year.

Still, a lot more of the stuff is going to be needed, both by the U.S. and the rest of the world. Sims says Molycorp's 30-year operating license from the State of California allows it to double production to 40,000 tons without the need for a new permit. But even that won't be enough to cover future requirements. Total worldwide demand for rare earths is expected to double to 225,000 tons by 2015, and that number doesn't even account for all the needs of the burgeoning wind-power industry. One 2.5-megawatt permanent magnet generator (PMG) wind turbine requires half a ton of rare earths, Sims says. China alone plans to deploy 300 gigawatts of wind turbines by 2020.

So it turns out that everyone's sources of rare earths - China, the U.S. and possibly Australia as well - will be needed in years to come. "We [Molycorp] can get up to that production level faster than anybody on the planet," says Sims, "but even if we do, and the Australians get up to speed, it will still be a constrained market."

Our increasingly high-tech global economy can't survive without a steady source of rare earths. It seems like a poor area in which to be playing political games. In the wake of their recent embargo, Chinese officials vowed that they wouldn't use rare earths as a "bargaining chip" in world trade talks. Let's hope they mean it.

Comment on this article