China corners vital market

by Michael Richardson

In the race to build advanced industrial and military products, China has a key advantage: the world’s biggest reserves of rare earth minerals that are essential to many of these products.

China dominates mining of the obscure but strategically vital rare earth elements (REEs) used in an increasing array of commercial and defense applications, ranging from batteries, magnets and electric motors to satellites, lasers and precision-guided munitions.

Last year China produced about 97 percent of the world’s rare earth oxides. Just as important, Chinese companies, many of them state-controlled, now have a near monopoly on processing rare earth metals into finished materials.

This stranglehold is starting to alarm the United States, Japan, the European Union and other major economies that depend on supplies from China. Since 2005, it has been restricting output and exports, pushing prices higher.

The Pentagon is due to finish a report by the end of this month on the risks of U.S. military dependence on rare earth elements from China. Their use is widespread in the defense systems of the U.S., its allies including Japan, and other countries that buy American weapons and equipment.

Apart from satellites, lasers and precision-guided munitions, U.S. defense systems that incorporate REEs include communications, radar, avionics, night vision equipment, jet fighter engines, missile guidance, electronic countermeasures, underwater mine detection, antimissile defense and range finding. Some civilian components, such as computer hard drives, that contain REEs also have widespread military applications.

In a report to the U.S. Congress in April, the Government Accountability Office said that it had been told by officials and defense industry executives that where REE alloys and other materials were used in military systems, they were “responsible for the functionality of the component and would be difficult to replace without losing performance.”

An official report last year on the U.S. national defense stockpile said that shortages of four REEs — lanthanum, cerium, europium and gadolinium — had already caused delays in producing some weapons. It recommended further study to determine the severity of the delays.

China recently cut its REE export quotas by 72 percent for the second half of this year. Shipments will be capped at just below 8,000 metric tons, down from nearly 28,500 tons for the same period in 2009. According to one industry estimate, worldwide REE demand is expected to exceed supply by as much as 50,000 tons by 2012 unless major new production sources are developed.

Japan complained to China late last month that lower export quotas could have a major impact on industrial development outside China. REEs are essential for hundreds of commercial as well as military applications. The former include electric motors and batteries for gasoline-electric hybrid cars, wind power turbines, mobile phones, cameras, portable X-ray units, energy-efficient light bulbs and stadium lights, fiber optics, and glass additives and polishing.

The next high-technology REE application to achieve maturity may be magnetic refrigeration, which is considerably more efficient than today’s gas-compression refrigeration. It does not require refrigerants that are flammable or toxic, deplete Earth’s ozone layer, or contribute to global warming.

The diverse nuclear, metallurgical, chemical, catalytic, magnetic and optical properties of REEs have led to the ever-expanding variety of applications. Small, lightweight, high-strength REE magnets have enabled product developers to miniaturize numerous electrical and electronic components for consumer appliances, audio and video equipment, computers, cars, communication systems and military equipment.

However in replying to Japan’s concerns, Chen Deming, China’s commerce minister, said mass extraction of REEs would cause great environmental damage in China and that was why the government had tightened controls over exploration, production and trade. Poisonous chemicals are used to mine REEs in China, putting local water supplies and public health at risk.

Critics say that having developed a near-monopoly position in REE mining, China will give supply priority to Chinese firms and to foreign companies that are prepared to invest in China’s REE-related industry and transfer technology. China bans foreigners from investing in REE mining but allows them to enter processing joint ventures with Chinese firms. However, officials say that export restrictions apply only to rare earth raw materials and that export of processed REE products, which are more valuable, is encouraged.

Meanwhile, the U.S. appears to be the victim of its own astonishing lack of foresight in security-related industrial policy. Although tagged “rare,” REEs are relatively common and widely dispersed around the world. Yet in contrast to ordinary base and precious metals, REEs are seldom found concentrated in exploitable ore deposits.

Of the nearly 100 million tons of known global reserves that can be economically extracted, over one-third are at opposite ends of China, in the south and up north in Inner Mongolia. Russia and other states of the former Soviet Union have 19 million tons of reserves, the United States 1.3. million tons, Australia 5.4 million tons and India 3.1 million tons.

Until around 1990, the U.S. was self-sufficient in REEs and the world leader in processing and use. Yet within a decade, it had become more than 90 percent reliant on REEs imported either directly from China or from countries that received their plant feed materials from China.

Why? Environmental and regulatory problems made mining and processing unattractive at the main REE site at Mountain Pass, Calif., which closed in 2002. Meanwhile, lower costs in China, continued expansion of electronics and other REE-based manufacturing in Asia, and the size and concentration of Chinese REE deposits drove the shift in comparative advantage from America to China.

The surge in Chinese REE output initially flooded the market, cutting prices and stimulating new applications. Now, with increasing state control as China seeks to capitalize on its advantage, the U.S. and other advanced economies are trying to get alternative REE mines into production to reduce reliance on China and improve security of supply.

But this may take quite some time. The GAO report said that although REE deposits in the U.S., Canada, Australia and South Africa could be mined by 2014, rebuilding the U.S. rare earth supply chain might take up to 15 years.

Michael Richardson is a visiting senior research fellow at the Institute of Southeast Asian Studies in Singapore.