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The Rare Earth Conundrum

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Bob Looney teaches economics at the Naval Postgraduate School in California.

The strategic importance of rare earth elements has skyrocketed in recent years. REEs are vital to the production of a wide variety of must-have products, notably 21st-century electronics ranging from smartphone displays to military hardware. Indeed, over 900 pounds of REEs are required to produce a single F-35 fighter jet. REEs are also crucial to green technologies, where they are used to produce the permanent magnets used in wind turbines and in a hefty majority of hybrid and electric vehicles.

What’s in a Name?

Back up for a moment. Contrary to their name, REEs aren’t particularly rare and are metals (typically found as mineral salts) rather than earths (whatever those are). Of the 17 REEs, all are more common than gold, and some are as common as lead. But because REEs are found in low concentrations with mixtures of multiple elements in the same deposit, mining and processing are best left to the pros. Not only must individual elements be separated out, but also several must be separated from radioactive thorium and uranium, adding to the already extensive environmental risks in mining and processing.

The United States was the world’s largest producer of REEs in the late 1980s. In subsequent decades, however, REEs’ low profitability and environmental burden led the U.S., South Africa and other producing countries to cede most of the market to China. Foreseeing REEs’ potential to jumpstart high-tech industries and less worried than many countries about the environmental mess, Beijing stepped up.

China Ascendant

China was accounting for 97 percent of global REE production in July 2010, when it suddenly imposed export restrictions (binding quotas and taxes) on REEs. Prices shot up; for example, between April and October of that year, the price of neodymium (a key to making powerful permanent magnets) more than doubled to $92 per kilo, and cerium oxide (fuel cells, hydrogen production) skyrocketed from $4.70 per kilo to $36.

Then, in September 2010, China halted all exports of rare earths to Japan for several months after an escalation of their maritime quarrel in the East China Sea. It took three years before the export halt made its way through the World Trade Organization’s Dispute Settlement process and the WTO finally ruled against China.

But the dispute did concentrate a few minds. Rising prices and fears of future export interruptions spurred industrial customers to search for alternatives to REEs. In some cases, this merely accelerated changes in the works: Manufacturers, for example, shifted from fluorescent to LED lighting systems and from nickel metal hydride to lithium-ion batteries. Other industries maintained their stake in REEs, but revamped their production processes to get more bang from a kilo of REEs. Consequently, demand for REEs dropped by nearly one-third through 2016. Indeed, by 2020, around 60 percent of the REE market involved “mature” consumption (in catalysts, glassmaking and metallurgy), with limited growth potential.

But REEs are most definitely not headed for the scrap pile. The real action in the REE markets is expected to be fueled by high-tech ceramics and, especially, permanent magnets. Estimates suggest that permanent magnets, which require neodymium, praseodymium, and dysprosium, will account for three-fourths of REE demand (measured in terms of market value) by 2030, up from 25 percent today. Attempts to find economically viable substitutes in this part of the market have proven unsuccessful, leaving producers of electric vehicles, wind turbines, telecom devices and weapons guidance systems especially vulnerable.

The U.S. currently imports 80 percent of its REEs directly from China, whose state-owned firms control over 85 percent of the world’s capacity to process the raw minerals into usable materials. The situation is akin to the 1970s OPEC oil embargo, with an adversary (frenemy?) dominant in a strategic commodity. The point was certainly not lost on Beijing: a 2019 Chinese government-funded report warned that “China will not rule out using rare earth exports as leverage to deal with” the Trump administration’s trade war.

Last September, with tensions rising, the Trump administration issued an executive order acknowledging the U.S.’s rare earth supply-chain vulnerability and calling for improving U.S. mining and processing capabilities to safeguard against potential REE disruptions. But wishing alone will not make it so.

Rare-earth mining outside China remains challenging, not least because of China’s inclination to selectively raise REE output and cut prices in order to make competing startups unviable.

Fighting Back

Western initiatives have centered on developing REE mining operations outside China. From a near total monopoly in 2010, the Chinese share of REE mining production fell to just 63 percent in 2019, while the U.S. share rose to 20 percent. But rare-earth mining outside China remains challenging, not least because of China’s inclination to selectively raise REE output and cut prices in order to make competing startups unviable. Among the projects launched since 2010, just three account for the bulk of production outside of China: Mount Weld in Australia, Mountain Pass in the United States and ionic clay mining in Myanmar.

Only Australia’s Mount Weld is fully independent of China, thanks to Malaysian processing facilities and strong demand from Japanese markets. The U.S. and Myanmar mines rely on China for technical expertise, capital and market stability. In fact, the Mountain Pass mine in California was purchased from bankrupt Molycorp in 2017 by the MP Materials consortium, of which China’s Shenghe Resources is a member. Mountain Pass still relies on China for processing because no downstream facilities exist in the U.S., while China is the sole market for Myanmar’s ore.

In 2010, the U.S. Government Accountability Office estimated that it would take a decade to reconstruct a viable U.S. “mines to magnets” supply chain to support military needs. But the Department of Defense wasn’t cleared to fund downstream rare earth processing until 2020. Even after the Pentagon selected Australia’s Lynas and the MP Materials consortium to establish processing facilities in Texas and California, funding was briefly halted pending a third-party review of China’s involvement in MP Materials (despite its already owning the Mountain Pass mine). Given the project’s exclusively military focus, the U.S. is still far from constructing a complete REE value chain and effectively “decoupling” from China.

Dwindling reserves of some REEs (notably dysprosium and other “heavy” rare earths with atomic numbers exceeding 62), combined with China’s increased environmental protections and crackdowns on illegal mines, have pushed Chinese companies to begin mining overseas. These include agreements with Tantalus Mining in Madagascar, plus capital investments in Kvanefjeld in Greenland and the Nolans Project in Australia.

As China moves REE investment overseas, Beijing’s domestic focus has shifted from processing to value-chain management. If the 2010 export restrictions were in part designed to motivate technology transfer and relocation of downstream industries to China, they largely succeeded. China today produces an estimated 90 percent of rare earth metals, alloys and permanent magnets, leaving the U.S. in an uncomfortable position of dependence. Even more troubling, China passed a new Export Control Law in October 2020 to provide a legal basis for restricting sales of strategic materials.

If You Can’t Lick ’Em …

The U.S. eventually secured relative energy independence and broke the hold of OPEC through a combination of market forces and tax incentives — not to mention new technology that made the shale boom possible. But the prospect of handsome profits isn’t enough to persuade investors to risk going up against China’s state-supported monopoly on REE technology, mining, metallurgy techniques and supply chains. For the U.S. and other Western countries to build large-scale China-free REE supply chains, more direct government involvement will be needed.

Japan offers a model for how direct government involvement might work. Through its state-run Japan Oil, Gas and Metals National Corporation, the Japanese government guarantees the credit of firms that invest in REE mining operations, as well as in the purchase of existing or construction of new processing facilities. JOGMEC has also made direct strategic investments abroad, notably in Vietnam. This approach has halved Japanese rare earth imports from China.

In the past, the U.S. has generally shunned the idea of establishing state enterprises outside wartime. There have been exceptions, however — for example, the U.S. Enrichment Corporation, which took over the uranium enrichment plants set up during World War II and made commercial nuclear power plant fuel. (It was privatized in 1998.) However, with China’s rise and the growing strategic importance of REEs, we may have little choice but to tiptoe down this road again.

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