The Rare Earth Crisis Of The Second Decade Of The Twenty-First Century: A Threat Or An Opportunity?

by Jack Lifton on January 16, 2010 · 1 comment

in China, Legislation, News Analysis, Rare Earths

Allow me to pose a question: with regard to the rare earths, is there a global threat of supply interruption by China – or is any threat really due to a failure of the American way of doing business?

America was actually self-sufficient in its supply of rare earth metals until 2002. In that year, due to predatory pricing from China, Molycorp shut down its mining and refining operations at the world’s best known and best documented high reserve high grade rare earth mine at Mountain Pass, California. In 2002 all of America’s needs for the rare earths then being used, could have been met by the existing production capacity at Mountain Pass. There were even then in 2002, other operations within the USA refining and purifying rare earth metals, alloying them, and making magnets, batteries, catalysts, and laser components from domestically produced rare earths, principally mined in California but with some also then produced in Florida. The supply and value chains for manufacturing rare earth dependent products within the US were complete.

In 2002, China’s pricing, even delivered within the USA, dropped below that of Molycorp’s costs and the company elected to shut down the rare earth mining facilities rather than operate at a loss. Washington and the National Association of Manufacturers were blissfully unaware of, or disinterested in, these events either in California or Inner Mongolia. although a 5% tariff on imported rare earths had been enacted and, incredibly, is still in place, to help Molycorp, but alas in the clueless rush of 2002 by short-sighted Americans to outsource everything to China, it looked like a brilliant idea to even source their critical raw materials within China. Congress was careful though not to allow rare earths to be deemed critical or even given the lowly title of strategic, for fear that this might make waves in the commercial world of the lobbying vote buyers or generate a “Buy American” ripple among in the somnolent voters.

Why have American companies systematically ignored long term risks of supply interruption so easily insured against? One answer is to examine the use of the word “guidance” in Stockpicking Land, otherwise known as Wall Street. Often meaningless, because they fail to take into account real contingencies, are the exact figures given as “guidance” by public companies. Share prices then actualize these made-up figures by going up if they are met and down if they are not. This means as it has always meant, that the actualization of long term planning is of little or no interest to corporate financial officers, except as the actual ongoing capitalized costs of such planned operations may reduce earnings in the quarter for which guidance is being sought. Such impact is to be avoided at all costs – excuse the pun – if earnings are to be maximized and so long term projects with high front-end costs, such as mining and refining, are to be avoided by prudent bean-counters. This “the share price this quarter is all that counts” mentality has now brought on the rare earth supply crisis, which, since it has carried over from 2009 to the present day and grown ever more ominous, I now christen “The Rare Earth Crisis of The Second Decade of the Twenty-First Century.”

This nonsense approach based on share price being more important than long term survivability, has basically eliminated projects that are high cost with long time for return on capital, such as securing supplies of rare metals from the core “competency” of Fortune 500 corporations.

Although there is no present or near term military threat status, or even posture, between the United States and the People’s Republic of China, there is a long term threat to American economic independence, which, down the road, could indeed impact the threat response capability of the United States military; it is this long term threat that has been ignored until it has become a shorter term threat. Continuing to ignore the threat of supply interruption of strategic and critical materials is now foolhardy at best and may be dangerous to more than our economic well-being.

Yet even today, both the New York Times and the House Armed Services Committee seem to be unaware of the results of American financial, industrial, and political myopia and seek to personify a threat of supply interruption as being by China rather than being on account of American inaction. Washington’s politicians are charged with the common defense, yet they ignore a grave threat to the ability of the United States to maintain economic independence and military superiority while showing grave concern only for special interest group projects. Incredibly, they vote billions to create green jobs in industries where Asia has clear superiority such as battery development and manufacturing, but they ignore the one investment that could give US technology and know-how a clear advantage; the production and refining of rare earth metals and their end products. This industry could be revived and built to a world class level in less than 5 years by a government guarantee of seed money of less than 2 billion dollars – just one day of current Defense Department’s expenditures, or, a better measure, less than 2 hours of the Federal Government’s total expenditures. Note well that if the US gives up permanently its productive capacity for rare metals such as the rare earth metals, then it will be Chinese bureaucrats who decide the future of American industry.

Please go to the web site of the U.S. House of Representatives, House Armed Services Committee, and read and view the details of the 01/13/10 hearing on China - the exact title of the hearing was: “The Full Committee will meet to receive testimony on China: Recent Security Developments”.

One hour and 27 minutes into the hearing, Representative Coffman (R-Co) asked that a question about the rare earth supply issue be asked of the (military) witnesses. Although the question was not put directly to a witness, it was put into the record of the hearing so as to be answered later. It was a very good, very well thought out question.

If you wish to read the text of Colorado Representative Coffman’s question, I reproduce it in its entirety here:

Proposed Question for HASC Committee Hearing on China - 01/13/10

“I’d like to ask the panel to address what I believe has become a very serious emerging national security threat as it relates to China. It has to do with industrial base supply issues controlled by China, and not any specific military threat. But I am hoping – given your backgrounds and your current positions focusing on Pacific Rim nations – to garner the benefits of your thoughts and comments.

Worldwide demand for rare earth elements is escalating rapidly. Rare earths are used in a number of applications including emerging green technologies, and many of us on this dais have concerns as to what that means for American innovation and domestic job growth. But the fact that so many national security and defense systems require these materials to function and operate is of greater concern for us here at this hearing.

Ninety-five percent of worldwide rare earth reserves being accessed today are located in China or controlled by Chinese-led interests. Today, there is no rare earth element production of significance taking place in North America or anywhere outside of China, and Chinese domestic demand for rare earth elements could easily equal Chinese production as early as 2012. Furthermore, in October 2009 an internal report by China’s Ministry of Industry and Information Technology disclosed proposals to ban the export of five rare earths and restrict supplies of the remaining metals as early as next year.

I ask both witnesses to comment on these developments and address their entities’ situational awareness of this reliance, what they feel are the strategic implications, and how they plan to develop appropriate policy to mitigate this impending supply crisis as it relates to national security and defense.”

As I said above, the panelists requested that the question be submitted into the record for response at a later date. That basically means they either didn’t know enough about the issue and/or were concerned about responding and saying the wrong thing. They were obviously not prepared for that line of questioning.

But I believe that the cat is out of the bag, and I urge my readers to write, email, or phone their Congressmen and ask when the question will be addressed and answered.