We're all familiar with the supply-chain risks posed by this country's heavy dependence on imported oil. We've seen what happens when big producers like Saudi Arabia temporarily turn off the spigot that feeds our insatiable appetite for petroleum-based products. But there's another looming crisis of supply for manufacturers, one that is just beginning to get the attention of major media. It's the issue of so-called rare earth minerals.

With names like terbium, dysprosium and neodymium, these exotic materials are essential to many of the high-tech products in existence today, including computers, cell phones, automobiles and military hardware. They're also key to many environmental protection initiatives, including wind and solar power, and hybrid cars. Up until the mid-1980s, the U.S. obtained most of its raw earth minerals from domestic sources, primarily the Mountain Pass mine in California's Upper Mojave Desert. Then China got into the business, and things started to change. Fast. 

In a matter of a few years, China ascended to the position of world's biggest supplier of key rare earth minerals, accounting for more than 90 percent of global production. Several things happened to bring about that state of affairs, including the shutdown of the Mountain Pass mine due to radioactive wastewater leakage, broader worries about the environmental impact of such activities, and a plummeting of the price of materials thanks to the availability of cheap Chinese ore. 

Now China has global manufacturers over a barrel - one that isn't filled with oil. In recent years, it has been tightening up on the availability of rare earth minerals, claiming a sudden concern for the environment (a heartening awareness by the country that dammed the Yangtze River to furnish hydroelectric power for industrial development), as well as a need to hold back the ore for its own commercial and economic needs. 

The situation promises to get worse. Each year, China further cuts back on exports of rare earths. In response, multinationals could be forced to set up their own mining operations in China, only to face the possibility of having them nationalized at a later date. In fact, China's State Council reportedly is planning to restrict mining to a small number of state-owned companies.

"Long-term shortage or unavailability of REE [rare earth elements] would force significant changes in many technological aspects of American society," according to a fact sheet issued by the U.S. Geological Survey in 2002. That's putting it mildly. Europium, which had been mined at Mountain Pass, is the basis for the color red in TVs and computers. Neodymium is essential to Toyota's hybrid Prius. REE-based magnets are found in miniaturized disk drives. The list goes on and on.

The political ramifications of the dilemma are obvious.  China holds yet another card in the high-stakes game of international diplomacy, especially with respect to its uneasy relations with the U.S. China is already our primary source of cheap manufactured goods, as well as the holder of huge amounts of American debt, thanks to the ever-widening U.S. trade deficit. Now it could cripple our nation's high-tech sector, simply by denying access to rare earth minerals. So why should China listen when the U.S. lays out its demands for a stronger yuan, or more equitable treatment of American exports? 

The U.S. does have one card to play - the reopening of the mineral-rich Mountain Pass mine, which is exactly what current owner Molycorp Minerals is out to do, notwithstanding the huge costs involved. (Despite their name, rare earth minerals aren't so much "rare" as they are expensive to mine, and tough to find in sufficient concentrations.) I'll have more on those efforts in another post.

In the meantime, what can manufacturers and distributors do to cope with the problem? Adrian Gonzalez, director at ARC Advisory Group, urges companies to view the question of REE supply as "a supply-chain risk management issue, with national security implications." Unfortunately, companies can't easily diversify their raw-material supply base - not, at least, until sufficient alternative sources exist. (Russia, Congo and Brazil are said to hold some REE deposits.) The main place for action right now is on the political front. 

Industry can put pressure on government to resume domestic production, Gonzalez says. At the same time, it can raise awareness about the sensitivity of dealing with China diplomatically. The U.S. is inching closer to passing cap-and-trade legislation for curbing global greenhouse gas emissions, but China has already said it won't go along with that plan. So any attempt to impose a retaliatory carbon tariff could not only spark a trade war, it could prompt China either to raise the price of its rare earth minerals or shut off exports altogether.

Science might one day come to the rescue, by discovering alternative materials that are cheaper to produce, but that's not likely to happen anytime soon. (At least not as easily as Tony Stark created a new element in Iron Man 2). A shorter-term strategy is doing a better job of recycling critical materials, a proposal contained in a recent European Commission study on shortages of 14 minerals and metals that are crucial to high-tech producers. The European Union is already ahead of the game, with its Restriction of Hazardous Substances (RoHS) and Waste Electrical and Electronic Equipment (WEEE) directives. 

"Depend upon it sir," Samuel Johnson famously told his biographer James Boswell, "when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully." Perhaps this looming crisis, and major source of global supply-chain risk, will finally spur action in the U.S. government and private sectors. "Does the Administration fully appreciate [the gravity of the situation]?" asks Gonzalez, speculating that "it hasn't reached the radar of the President to really understand there's a serious risk in the green economy." 

Make that the economy, period.

Comment on This Article