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The Politics of Rare Earth

October 2, 2010

Earlier this week, the U.S. Senate held hearings on a bill to jumpstart domestic production of “rare earth” minerals, in order to break China’s near-monopoly on these little known but essential raw materials.  Yesterday, I was asked to appear on Chinese TV to offer some background and insight on the issue.

“Rare earth” refers to a collection of 17 elements from the periodic table, with Star Trek-sounding names like holmium, europium, neodymium, and thulium.  They tend to be found together, and exhibit similar chemical properties that make them useful — and in many cases vital — for a whole host of high-tech applications, such as superconductors, magnets, and lasers.  Rare earths are essential ingredients in many emerging “green” technologies, including wind turbines and batteries for electric cars.  A lot of advanced U.S. military hardware, including tank navigation and naval radar systems, also depends on rare earth-based components.

Despite their name, rare earth minerals actually aren’t that rare.  They’re commonly found throughout the earth’s crust.  However, there are only a handful of places in the world where rare earths are found in high enough concentrations to make extracting them commercially feasible.  Before the 1960s, the few rare earths that were needed were gathered from sediment deposits along rivers in India and Brazil (like those prospectors washing for gold with pans in Western movies).  Then demand took off, especially for europium for use in making color television sets.  Over half of this expanded global demand was met by a single mine, Mountain Pass, in the deserts of southeast California.

China began mining rare earth minerals in the 1980s, and by the mid-90s was well surpassing the U.S. in production.  China had several competitive advantages over the U.S.  First, it has some of the best concentrations of rare earths in the world, including the huge Bayan Obo mine in Inner Mongolia.  Second, it had cheaper labor costs.  Third, it had laxer environmental rules.  Rare earth minerals are often mixed with radioactive elements, and processing creates low-level radioactive waste.  The Mountain Pass mine, which had been bought in 1977 by Unocal, the oil company, began running into all kinds of regulatory problems concerning waste disposal, just as it was losing market share to cheaper Chinese competitors.  It closed in 2002, leaving the market entirely to the Chinese.  Today, China produce most than 96% of the world’s rare earth minerals; Bayan Obo alone accounts for 45%.  (The neat graph below is courtesy of Wikipedia).

Given the critical reliance on rare earths for national security needs, not to mention promising new technologies, there’s been growing concern over the past few years about this exclusive reliance on China as a sole source of supply.  This concern has been heightened by recent Chinese moves to tighten export quotas, as well as talk (so far just talk) about banning the export of certain rare earths entirely, presumably to favor the development of domestic high-tech industries.  Such worries were heightened even further this week as a result of the latest diplomatic fracas between China and Japan over some disputed islands in the East China Sea.  It has been widely reported that, in retaliation for Japan’s arrest of a Chinese fishing boat captain in the contested waters, China effectively halted shipments of rare earth supplies critical to Japan’s electronics industry.  China officially denied that any embargo had taken place, and shipments have since resumed.  But the episode sent shivers down the spines of leaders around the world, crystallizing unspoken fears that a more powerful China might use its monopoly on rare earths and similar forms of economic leverage as a weapon.  The next time they fall into a disagreement with China, they have to wonder, will China play hardball and cut them off from vital resources?

[When I showed up to speak on Chinese TV about this subject, I was told I could mention export controls but not the recent dispute with Japan, since China denied it had ever withheld rare earth minerals.  I’m always willing to be diplomatic, but I don’t censor myself.  I told them that the Japan incident was a critical part of why other countries are concerned — not recognizing it would be like trying to ignore the 800-lbs. gorilla sitting in the room — and that if they didn’t want me to mention it, they better not put me on.  We finally agreed that I would note the accusations/concerns that supplies had been withheld, as long as I also noted China’s denials.  Fair enough.  But I find it interesting that, unlike most of my other interviews, this one has not been posted on their website.  This is obviously a very sensitive subject in China.  I also find it revealing that, on the same show, I was pointedly not asked to comment on the biggest story they ran that day, on U.S. House passage of a bill labeling China a “currency manipulator.”  The party line on that topic was set in stone, and clearly voiced in the news story — alternative perspectives were not welcome.]

It’s important to remember, though, that while China may have a competitive advantage in rare earths, it does not have a stranglehold.  There are other sources of supply; they may not be as cost-effective, but they are available — and customers concerned about China’s reliability as a supplier might be willing to pay a bit for some alternatives.  The Japanese, who buy the majority of unprocessed rare earths from China, are certainly busy: Sumitomo and Toshiba are both setting up projects in Kazakhstan, and other Japanese investors are looking at buying mining rights in Vietnam.  Lynas Corporation (LYC.AX) plans to start tapping rare earth reserves in western Australia next year.

In the U.S., this July, Molycorp (NYSE: MCP) raised $394 million in an IPO aimed at reopening the Mountain Pass mine in California.  So far, though, it’s been a rocky start.  Prior to the IPO, the company’s first request to the Department of Energy (DOE) for a $280 million government-guaranteed loan was rejected.  Its initial share offering, pitched at the time as a pure “greentech” play, met with weak demand and came in priced below expectations, raising $100 million less than hoped.  But China’s latest little power play may have changed the equation, shifting Molycorp overnight from a greentech to a national defense play.  One bill introduced in Congress earlier this year proposes establishing a strategic stockpile of key rare earth minerals, as well as supporting U.S. production.  Molycorp is hardly the only one standing in line — Lynas is pushing for Australia, as a key U.S. ally, to be included in any plan, and a slew of rare earth start-ups have already been launched to capitalize on excitement over greentech, potentially creating a fragmented market.  But analysts say that only Molycorp and Lynas have the mining licenses and waste disposal experience to move ahead rapidly, and given the preeminent role the Mountain Pass mine once played in global production, Molycorp will almost surely find itself in pole position if Congress decides to act.  [Disclosure: I’ve recently invested in Molycorp stock for precisely this reason.] 

(It’s interesting, by the way, that the Chinese nearly ended up owning Mountain Pass a few years ago, when the oil company CNOOC tried to acquire Unocal, which owned the mine at the time.  Of course, due to political protests from Congress, mainly unrelated to rare earths, the deal was dropped.  Had it succeeded, the options available to Congress today might look very different.]

As for China, in my view it really shot itself in the foot.  By flexing its muscles so eagerly, over a relatively minor incident, it alarmed its customers and possibly frightened them off, when a softer approach might have lulled them into continued and deepening dependence.  There’s no question that China can extract rare earths at the cheapest price, in purely monetary terms.  But now China’s trading partners must be seriously wondering, what could the real price amount to, when the bill eventually comes due?

13 Comments leave one →
  1. colin permalink
    October 3, 2010 1:07 am

    Or it might be that the chinese have gotten tired of doing the dirty work of refining these metals, and decided it’s not worth the trouble. The RE metals have been in the news for sometime before this incident, so I think the CCP has some other plans regarding RE. You’re right, if they really wanted to use RE to strangle the world, why play their hand now over these minor incidents. I think they have another agenda on RE.

  2. Jay permalink
    October 3, 2010 8:21 am

    No, it’s not “investing”, it is “speculating”.

    No, China did the right thing, it doesn’t make sense to export the raw material at such low price, those stuff are not renewable, why luring the westerners for dependence?

    Does CCTV have any other foreign people to interview? I lived outside China for too log to know this.

    Revaluation of RMB doesn’t make any sense other than mutual destruction of both US and China.

    The cliche that Chinese don’t have means to invest is as ridiculous as can be at a time when foreign people are desperately trying to invest in China.

    At the time when I left China, there were world class students, but 3rd class teachers in the universities, it looks like it is still the case as evidenced by their hiring 3rd class foreign people to teach in major universities, sad.

  3. Adam permalink
    October 3, 2010 2:20 pm


    I am glad you maintain your personal integrity. When I saw the suspension of Japanese shipments in obvious response to the Diaoyu incident, it sent shivers up my spine too.

    Unfortunately, there are just too many data points of China using or threatening to use its economic position to promote its political agenda. Take also the quote from the PLA general who (I paraphrase) said “don’t antagonize the military of your biggest creditor”. Meanwhile, the leadership rails against any other country that would dare to politicize an economic dispute.

    I just don’t know how you embrace a “trading partner” like this. I fear the huge domestic market is a mirage, only there for western firms long enough to provide the technology and IP to their domestic partner to a point where not only are they chased out of the market but that partner then starts to export cut rate products based on the technology. With questionable IP enforcement and the Party serving as judge jury and executioner, it is hard not to be pessimistic.

    @ Jay
    China Universities would do well if they could find more instructors like Patrick, someone who tries to impart critical thinking to his students, rather than the typical party line laced with flawed logic, cloudy thinking and a complete denial of any legitimacy of the opposite point of view. If you think Patrick is lying about being told to suppress discussion of the Diaoyu incident, then you are are blind. Alternatively, if you think it was ok for the CCTV to seek such censorship, then I think I know what kind of university professors you would prefer…gutless talking heads who have nothing new to say.

    • prchovanec permalink*
      October 3, 2010 2:45 pm

      Keep in mind that the employees at CCTV have to walk a line between open discussion and the party line. This is simply the environment they operate in, as journalists, and I’m not unsympathetic. To their credit, they respected my position and we were able to work out an arrangement that worked for both sides.

      I should also mention one thing. Because my blog posts are regularly republished on several investing sites, like SeekingAlpha, I am required to disclose any investment position I have in any company or industry I write about. I am not advising anyone to take a similar position. Anyone considering it should only do so after doing their own thorough research and reaching their own conclusions.

  4. Dong Hao permalink
    October 3, 2010 5:23 pm

    Actually I expect more on how the embargo, if happens in the future, affects China’s economy after threatening to Japan, since the businesses nowadays are highly connected and there are so many Japanese factories here in China.

  5. Jay permalink
    October 3, 2010 7:29 pm

    On one hand, folks are blaming China for too much export, so China should raise the value of RMB to curb this as they say; on the hand, China should encourage to export the non-renewable rare -earth material at very cheap level to lure foreign dependence and leave the Chinese people an environmental disaster, as those same folks claim. There are just too many flaws in their thinking or maybe in their philosophy, or maybe in their mindset that China must do things that benefit the foreign people not the Chinese.
    I’m not a fan of CCP, but they sometimes do right things, just not many.

  6. Tom permalink
    October 4, 2010 12:59 pm

    The rare earth thing is just an example of how intelligent and far reaching Chinese policies are.

    Theystarted in the middle of the nineties and by now have not only a monopoly of the stuff they have also forced the main companies producing alloys (German and Japanese) to set up shop in China and thereby part with their technology. Contrast that with American economic policies that are basically non existent. The US seems to be believe that all it takes to prosper in the world is military power. Now the time of reckoning is at hand.
    Are the Chinese stupid for having played their hand so early? Could be. Maybe in Beijing they are also becoming divorced from reality just like inside the beltway. Or maybe it is just a start and we will see much more pressuring in the near future.

  7. Tim Teng permalink
    October 5, 2010 7:02 am

    Personally, I have great respect for the modern Japanese of their work ethic and civility, and rationally speaking, I also don’t believe they’re responsible, or accountable, for their father’s/WW2-sin….Having said that, Japan does occupy a most singularly unenviable position in the ‘collective’ chinese (including mainland, taiwan, HK, and diaspora else where) psyche- one that can bring to boil w/ slightest frictions.

    I believe this embargo, or threat of, is also an exceptional, if not unexpected, response solely reserved for Japan and, most likey, no one else.

  8. tremc permalink
    October 29, 2010 10:39 am

    China has been strategic in trying to control rare earth supplies for years, even Deng Xiaoping said that the middle east had oil and China now has rare earths, something along those lines. Like you stated, China almost had control of Molycorp with there attempt to purchase the Unocal oil company. They also were attempting to take control of Lynas too

    Obviously these obtaining these two sophisticated companies would have given China an even more crazy stranglehold on rare earths. I am just shocked that the US has let China get in such a monopoly position when some much of the US military and other high tech industries depend on these metals. The US gov’t isn’t as strategic as I thought it was, let’s not even get into Iraq strategy…….


  1. China-Japan Rare Earth Fracas Continues « Patrick Chovanec
  2. Our Year End Recap of Top Stories « China Lawyer
  3. China’s Top 10 Business Stories In 2010 - China Tracker - What a superpower wants - Forbes
  4. China Radio: Rare Earth WTO Challenge « Patrick Chovanec

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