China Ups Ante On Rare-Earth Metals

High-stake issues such as defense problems regarding China’s relationship with North Korea and trade concerns over the yuan’s contested value dominated media commentary during Chinese President Hu Jintao’s U.S. this week.

Yet the ante is just as high for another, less ballyhooed matter: China’s plans to dramatically reduce exports of little-known rare-earth elements (REE).

Applications of these REEs, a class of 17 chemical elements that play a critical role in modern technology, range from cancer treatment to cruise missiles, iPods to hybrid cars, and solar panels to oil refineries.

Beijing’s decision last month to cut its REE export quotas by 35% places continued production of all of these (luxuries and necessities alike) at risk. And the best solution will involve not only diplomatic measures, but also an overhaul of hostile regulatory environments that have played a role in driving U.S. manufacturing efforts overseas.

Though the metals are abundant in countries around the globe including the U.S., China has dominated production over the past 20-some years. Despite containing only 37% of proven global REE reserves, China provides 97% of the world’s supply.

Since global demand for these elements has grown so rapidly, Chinese trade officials claim their industry is approaching its current supply capacity — hence, the need for export controls.

Some leaders in other nations worry China may simply be flexing its monopoly muscle. Just months ago, Japan was forced to release a detained Chinese trawler captain after China temporarily halted is Japanese REE sales.

Either way, the situation is making it increasingly expensive to acquire these important metals and is driving up the cost of REE-dependent products and processes. That means the U.S. and other consumer-driven economies now find themselves in a remarkably vulnerable position.

Diplomacy is one option the U.S. could employ to counter this threat and reduce our vulnerability. A thaw in U.S.-China relations, which have become strained throughout the recession, is in both nations’ self-interest. And this week’s visit by President Huprovided President Obama an opportunity to take the first steps toward a trade agreement on REEs.

Unfortunately, a diplomatic remedy, if it can be achieved, offers only short-term relief because China’s own demand for REE will soon surpass its production capacity.

A longer-term solution must involve rebuilding a domestic production capability. Such a goal is certainly doable. Less than a decade ago before being forced to close in part due to onerous environmental regulations, California’s Mountain Pass Mine ranked as the world’s largest REE source — a quality that explains why a govern-ment-controlled Chinese oil company tried to buy it three years ago.

Given the critical role these elements play in refining petroleum and building hybrid car engines, solar panels and wind turbines, the Energy Department should take the lead in a Cabinet-level, inter-agency process that involves the Defense, State, Interior and Commerce departments.

Participating federal officials should consider developing a strategic REE reserve akin to the petroleum version already in place to provide insurance against a supply interruption.

Simultaneously, the administration needs to work with Congress to legislate in-centives for the capital investment needed to restore our REE manufacturing base and develop viable alternatives. Lawmakers must rework current regulatory barriers that make this financially unrealistic.

Once revised regulation and increased investment make U.S. REE manufacturing a reality, we’ll need a work force capable of converting our raw resources into profitable products. As such, our education system will require renewed emphasis on math, science, technology and engineering, and perhaps incentives for those seeking higher degrees.

Cerium, neodymium, samarium and other REEs have played an integral role in our technology boom. Our reliance on them for continued innovation is not likely to diminish soon. As such, the security and economic implications of REE capacity rates as a national priority.

This article appeared in Investor’s Business Daily, p. A13 on Friday, January 21, 2011

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