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How China Came to Dominate the Rare Earths Market

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Did they create a monopoly? Or were they "gifted" one?

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A quick Google search for "rare earths" returns 17,600,000 results, leading to the assumption that the topic has been covered widely enough for most people to know what rare earth elements are.

For the uninitiated, there are 17 rare earth elements on the periodic table and are critical in the manufacture of wind turbine blades and other renewable energy components, as well as everything from Apple (AAPL) iPhones to Toyota (TM) Priuses (Prii?), which contain approximately 23 lbs. of rare earth materials, earning them the distinction of being "the most rare earth energy-intensive invention[s] ever made."

But rare earths are also crucial components in many military applications such as Boeing (BA) and Lockheed Martin (LMT) guidance systems. This makes China's plans to reduce 2011 exports of rare earth minerals by 35%, announced today, all the more troubling.

Domestic deposits of rare earth elements were first discovered in 1949, at Mountain Pass in California's Mojave Desert.

According to the US Geological Survey, "by 1966, this single, world-class deposit (owned and operated by Molycorp (MCP)) had become the paramount source of [rare earth elements]. Early development was supported largely by the sudden demand for Eu (Europium) created by the commercialization of color television."

And now, rare earths are at the center of a new supply panic.

"It's amazing how this issue seems to have caught the country off guard," US Representative Mike Coffman of Colorado, who was a US Marine Corps infantry officer, told Bloomberg in September.

Did it, though?

Lieutenant Commander Cindy A. Hurst, USNR, who is a Research Analyst in the Foreign Military Studies Office at Fort Leavenworth, Kansas, explains how Chinese dominance in the rare earths arena has been brewing for quite some time:

"Through the 1990s…China's exports of rare earth elements grew, causing prices worldwide to plunge. This undercut business for Molycorp and other producers around the world, and eventually either drove them out of business or significantly reduced production efforts."

Hurst continues:

The United States paved the way for many of today's modern technologies that China is now capable of exploiting. Part of that effort has entailed scientists focusing on and dissecting the properties and uses of REEs. From about the 1940s to the 1990s, REEs attracted interest in both the US and Chinese academic and scientific communities. Today, however, there are only a small handful of scientists who truly focus on REEs in the United States. US interest seems to have waned, not due to a lack of resources, but to what Professor Karl Gschneidner Jr. says is a student tendency to gravitate more toward 'what's hot' like biofuel research.

China, on the other hand, has established entire laboratories and teams devoted to the study of REEs… China has a keen forward thinking ability. Its planners pinpoint a potential problem or strength years in advance. Then over time, the country begins to build a strong foundation to achieve its end goal. In 1992, during his visit to Bayan Obo, China's largest rare earth mine, Chinese leader Deng Xiaoping declared, 'There is oil in the Middle East; there is rare earth in China.' Seven years later, President Jiang Zemin wrote, 'Improve the development and application of rare earth, and change the resource advantage into economic superiority.'"


China has, in fact, "changed the resource advantage into economic superiority" through artificial market distortions created by mechanisms such as increasingly more restrictive export quotas that have, for example, raised the price of Samarium from $4.50/kg to $34/kg. (In an interesting twist, gangs in southern China have begun illegally extracting rare earth elements -- the sale of which can be more lucrative than drug smuggling -- as a result of the government's price manipulation.)

It's also easy to forget how quick Americans were to give up "the good old days" back when the word "good" was not yet part of the phrase.

India's Institute for Defence Studies and Analyses notes, "…when big firms were enjoying the availability of cheap rare earth, no one decried the loss of jobs in the mining business in the West. Mining of rare earth is environmentally an extremely hazardous enterprise and the growing environmental awareness in the West also fed into the decision of surrendering the production of rare earths to Chinese control… Thus the present Chinese monopoly on rare earth is not only a result of a conscious strategy on the part of China, but the consumers of rare earth were equally comfortable with this kind of an arrangement where China was performing the dirty work of mining the rare earth and advanced economies were busy making high-tech products. In other words, China was gifted a monopoly, it did not create one."

Molycorp is now hoping to reclaim a portion of the rare earths market by bringing its Mountain Pass operations back online, after a July IPO that raised $394 million. The company hopes to achieve a yield of 3,000 tons next year, 20,000 in 2012, and is aiming for an eventual sustainable annual output of 40,000 tons.

There's no question that Molycorp will be held to environmental standards far beyond its Chinese counterparts, which have rankled the citizenry.

As 45-year-old Liu Shengyuan of China's Jiangxi Province told the People's Daily, "To extract the rare earth elements, they use sulfates, ammonia and other chemicals… We used to drink water in the rivers, but now even fish and shrimp cannot survive in the water."

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