Why current market structures and strategies will continue to promote Chinese monopoly in Rare Earth Elements

In a previous post, I had summarized the background leading to a Chinese monopoly in the Rare Earth Element (REE). There are prevailing positions that promote the current status quo; however, 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.

In this article, I argue against the prevailing position that private investments and opening new mines will solve the supply dominance problem.

Argument 1: Prevailing position- Private Investment and opening of new mines will solve the resource problem. Opening of new mines will not solve the problem for the following reasons. (i) The introduction of new material availability will lead to lowering of prices and affect mine operations, most drastically in advanced economies due to large initial investments and higher operating costs. The bankruptcy of Molycorp is a prime example. If past and current practices are indicators, LREE producing mines take and average of 5+ years to become fully operational. The feasibility, capital cost, and operations analysis completed 5+ years ago may no longer be valid due to price decreases from new capacity, global pricing pressures, or other reasons. On the other hand, prices may rise as well due to various factors. As long as the market prices remain above the entry price, the new mining operation will be sustainable. However, further processing and fabrication of the ore towards high-value added alloys and metals will require additional plant installations with higher cost. It is obvious that this model has failed since the 1980s, with the bankruptcy of Molycorp, Chinese entry and global shipping of ores to China for value added processing. This model will fail again. REEs could be made here in the U.S. as by-product material from other mining activities, such as phosphates and iron ore. (ii) China can manipulate new capacity further by lowering their prices and increasing supply, absorbing losses temporarily to eliminate new entrant “for-profit” companies; they can also control supply as needed. They were very effective in reducing REE exports in 2010 following a maritime dispute with Japan and has explicitly warned the US that it will cut off REE supplies as countermeasure to the on-going trade dispute. (iii) The REEs ores continue to be shipped to China for further processing into high-value added materials, alloys, and finished goods. This is solely due to the “low cost market efficiency” philosophy being followed blindly at the expense of US national interest. While China continues to gain strategically and financially by controlling the higher value-added value chain, the US continues forego a national strategic lever by sticking to unsuccessful practices and not thinking about new strategic models.  (iv) China continues to access the global REE supplies, continues to force high-value added manufacturing into China, and capture IP further bolstering and sustaining their national strategic plan. This aspect of Chinese strategic industrial policy is well known from its desire to dominate industry verticals by forcing IP transfer in return for Chinese market entry. To be able to sell to the Chinese market corporations are forced to relocate manufacturing to China and enter into various forms of IP transfer. In 2017, China enacted a Cybersecurity law requiring network operators to store select data within China and allow Chinese authorities to conduct spot-checks on a company’s network operations. Beijing asserts that the law is intended to bring China in line with global best practices for cybersecurity. The law has raised concerns among some foreign companies over greater data controls as well as increased risks of intellectual property theft. This also means forced switching to Chinese equipment and exposing their systems to Chinese authorities. This is another example of the multi-headed hydra approach that is the Chinese national strategy to which the US REE supply is completely captive.

Thus, attempting to wrestle REE supply from China based on new “stand-alone” mines alone is running a fool’s errand to further bolster US REE loss leadership. A private-public partnership value chain model starting with existing large mine operations downstream tailing collection and processing, is needed to wrest this critical dependency.