US dependence on Rare Earth metals: Why current market structures and strategies cannot prevent but continue to promote Chinese monopoly – Part 1.
What is the issue? The Covid19 global pandemic has cruelly exposed the utter dependence of the US and the world on China’s mass manufacturing capability and supply of critical equipment and materials. In this article we discuss the urgency of inverting the Chinese dependence for a critical family of raw materials, the Rare Earth Elements (REE), required in numerous commercial products and defense systems. REEs are tightly controlled by China by production and delivery quotas. The US has thus far implemented $4T Covid19 economic relief package; a well thought and planned investment of a few billion dollars would have potentially secured national security and economic interests in this area. A worthwhile ROI, one may say! The criticality, supply risk, and the economic impact of the REE supply risk is well documented and Covid19 has pin-pointed the single source rick again.
What is the objective? Establish, via a series of arguments to prevailing positions, that current market structures, beliefs, and strategies based on lowest cost producer sourcing cannot overcome Chinese REE dominance because of their national strategy, vertical integration, lower cost, and small industry subsidy.
What are Rare Earth Elements? REE is a group of 17 elements in the third group of the periodic table. They include scandium (Sc, atomic number 21), yttrium (Y, 39), and the lanthanides which comprise of lanthanum (La, 7), cerium ((Ce, 58), praseodymium (Pr, 59), neodymium (Nd, 60), promethium (Pm, 61), samarium (Sm, 62), europium (Eu, 63), gadolinium (Gd, 64), terbium (Tb, 65), dysprosium (Dy, 66), holmium (Ho, 67), erbium (Er, 68), thulium (Tm, 69), ytterbium (70), and lutetium (Lu, 71). Promethium is not included in this because it is the only radioactive REE and does not occur in nature. REEs have been classified as light REEs (LREEs, La to Nd), medium REEs (MREEs, Pm to Gd), and heavy REEs (HREEs, Tb to Lu and Y). These groups form the basis of the Chinese tax rates differentiation between LREE, MREE, and HREE concentrates. The global production estimate from China is 132,000 MT while for the US it’s about 26,000 MT, with estimated reserves being 44 MMT in China and 1.4 MMT in the US. The estimated raw material and finished goods value are estimated at $4B and $7T, respectively. The REEs are very widely used in many commercial products like smartphones, tvs, batteries, medical devices, and in defense weaponry, such jet fighters.
China’s emergence: China’s industrial policy prioritized the support and development of its rare earth industry as a national economic and security initiative. It aimed three areas of focus: (i) control REE value chain and capture embedding in the high value finished goods, (ii) capture Western IP, (iii) integrate into US defense and commercial systems by embedding into the defense company and contractor supply chains. Companies such as, GE, Northrup, Boeing, and others do not have the capability to process REE oxides into usable components, such as, magnets and alloys. Currently, almost all non-Chinese REE mine ship the concentrates or higher-value oxides to China for processing into rare earth metals, magnets, alloys, and other high-value materials and components.
In addition, the Chinese national strategy provided small business subsidies to vertically integrate the value chain. The one-belt-one-road initiative has further spearheaded the REE strategy by acquiring assets on loan defaults by foreign countries engaged in the belt-road initiative, buying in-country mines to offset country export quotas, buying local technology), collaborating with foreign country academia and research institutions, targeting IP.
US position: The effects from the NRC/IAEA changes in the 1980s in the percentage amount classification of thorium and uranium in mined ores, led to a drastic reduction of mining of the superior REE bearing minerals. Domestic US mines ramped up production of lowest economic valued cerium and lanthanum, whose mother ores were not impacted by the NRC/IAEA guidelines. Subsequently, Molycorp, a major producer went bankrupt and the China gained further foothold by buying Magnequench from GM, replicating the technology, and moving from a basic low-end material supplier to a highly capable producer of magnets, alloys, and metals needed in major industries. This led China to eliminate competition and dominate world supply. The US essentially, ceded capability and control to China, with willful transfer of technology to China, lack of a coherent USDoD, Pentagon, or Administration approach towards considering REEs as a national security and economic strategy. Surprisingly, the DoD classified Beryllium, in 2008, as the “Only” critical and strategic material. This was roundly criticized by the House Armed Services Committee, and DoD retreated its position to include REEs. A 2019 report issued by the US Department of Commerce has outlined six key areas towards a federal strategy for ensuring the supply of critical materials.
Free Market Ideology: The sustained and aggressive stance to follow free market lowest-cost ideology even in national strategic policy decisions at all costs, and a go-it-alone “Marlboro Man” attitude towards individual mine developments has completely missed the strength of a collaborative public-private partnership model to re-position REE sourcing, fabrication, and value chain leadership as a US national economic and security strategy. Prevailing public opinion that lowest cost is an almost impenetrable barrier and that the use of REE in defense systems is less than 5% of total use, also obfuscates the strategic imperative. With this business and policy philosophy, applicable only to commercial free and fair trade, the US will likely cede competitiveness in all major intellectual and strategic national domains. A recent pilot effort to produce Didymium (mixture of the elements praseodymium and neodymium) by Lynas Services in Tasmania mostly used Chinese technological approach to replicate production to meet Western efficiency and environmental standards. It is an urgent national economic and defense imperative to re-think REE self-source value chain and decouple from Chinese single sourcing. And it will not come from the low cost free-market mentality, but re-inventing public-private partnerships with moon-shot projects.
China’s price control: In addition to low labor costs, effective price controls are achieved by subsidizing the small market REE organizations, manipulating local and world events; such as, export embargo to Japan in 2010 and restricting production and exports to reduce environmental degradation; idling domestic plants to reduce over-supply, and securing overseas sources via acquisitions, belt-road initiative, or political influencing. Since it has near-monopoly in sourcing and low labor cost, its current pricing posture will be near-invincible, unless competitors adopt a different source thinking and stance. While current prices are relatively stable, private enterprise driven new mine and exploration-based capacity increases will fail against Chinese pricing and low-cost strategies.
In a series of sequel articles, I will establish the counter-arguments to prevailing market-based approaches to the REE sourcing crisis.