Defense, Energy Markets Should Brace for Shortages of Key Materials

Jeff Green, National Defense

The United States is on the verge of trading its dependence on foreign oil for dependence on another key natural resource.

Industry analysts predict that between 2013 and 2015, China, the world’s leading (and virtually only) producer of “rare earth” metals, will no longer have the surplus capacity to export raw materials. That may not seem particularly significant until one considers that rare earth materials such as neodymium, samarium and lanthanum are key elements needed to fuel the “green revolution” and are found in components in countless defense systems.

Multiple scientific organizations including the National Minerals Advisory Board and National Academy of Science have classified rare earths as critical to U.S. national security. Neodymium iron boron magnets (neo magnets), for example, are the world’s strongest permanent magnets and are found in many devices, from the guidance systems of smart bombs down to everyday computer hard drives. Other rare earths such as lanthanum, samarium and praseodymium are critical to hybrid-electric battery production and nuclear submarine technology. Anti-missile systems, jet engines and satellite communications systems represent some of the other technologies that rely on rare earths.

The U.S. Geological Survey says that in 2008 Chinese mines produced 120,000 metric tons of rare earths from an estimated worldwide total production of 124,000 metric tons. More than 95 percent of world rare earth supplies are, thus, produced in China.

In 2003, despite the loud but ignored protests of Sen. Evan Bayh, D-Ind., the last U.S. manufacturer of neo magnets was sold to a Canadian company that moved production from Indiana to China. The U.S. government allowed the sale of this company with little thought to the gaping hole this left in the defense supply-chain, as the factory had until then produced 80 percent of the magnets used in U.S. smart bombs.

Now the Obama administration is touting a revolution in green energy that may be tougher to achieve given this production shift. Massive amounts of neo magnets are necessary to construct the permanent magnet windmill turbines that have become a prominent component of this push for green energy. The magnets are also essential components in the batteries of hybrid cars championed by the administration. Today, U.S. companies are able to purchase neo because China is a net exporter of rare earths. Experts such as Dudley Kingsnorth of the Industrial Minerals Company of Australia project said that in as little as four years, China, which is undergoing its own green revolution, may consume all its production internally and thus create a worldwide shortage of rare earths.

This is worrisome considering that the global rare earth market could at least double in the next 10 years.

Despite these projections, the U.S. government has been relatively silent on the issue. But options exist to prevent the crisis. Multiple deposits of rare earths exist outside of China, with at least three in North America. Thorium Energy has extensive rare earth reserves in its holdings in Idaho and Montana, and Great Western Minerals in Saskatchewan, Canada, has a known deposit of rare earths. Molycorp, formerly a subsidiary of Chevron, has a deposit at its Mountain Pass, Calif., facility, where mining ceased in 2002.

Opening these mines would avoid a total dependence on China and create a new competitive market in North America. With demand for these materials skyrocketing, a rare opportunity exists to reintroduce a manufacturing supply-chain in the United States that has largely migrated offshore.

Simple economics should dictate that this increased demand would drive new investment in production. But the dominant position of the Chinese, including an aggressive strategy of pricing on exports, could easily drive new market entrants from the business. The Chinese use of export quotas and pricing manipulation to keep foreign competitors locked out of the market is well documented. The Times of London reports that Japan is feeling pressure as China has lowered export quotas for rare earths by around 6 percent annually in recent years. Japan is now allotted a quantity that is expected to be used by Toyota and Honda alone in 2009. This will leave many in a severe supply crunch.

With no competitors in the market and no pressure from the U.S. government, it is unlikely that any action to protest actions will be taken. In May 2009, the Chinese announced the nation’s 2009 production plan for rare earths, with an output target cut of 8.1 percent from 2008. This represents a reduction that no other country can offset.

From the 1960s through the 1980s, the United States produced approximately half of the rare earths in the global market. Rare earths were named a top-secret national priority by the Chinese government in the mid-1980s, and it then took only 20 years for the global rare earth market to become a Chinese monopoly.

According to data presented at the Defense Metals Technology Center’s April 2009 Strategic Materials Conference, there were 12 American rare earth magnet producers in 1990, employing 6,000 people in the $600 million global market. As of 2008, there were fewer than 600 employees at only four remaining U.S. facilities, even though the global rare earth magnet market is now estimated to exceed $7 billion.

Of the three major rare earth deposits in North America, the Chinese have already attempted to buy at least one. The failed China National Offshore Oil Company (CNOOC)-Unocal acquisition in 2005 appeared to be a simple purchase of petroleum reserves. Amazingly, the deal also included a major U.S. rare earth deposit. More recently, Great Western Minerals announced a memorandum of understanding with Molycorp to develop resources, but that MOU was canceled.

Perhaps most disturbing is the Chinese government-influenced acquisitions of two major Australian deposits. Both Arafura Resources and Lynas Corp. are now majority owned or controlled by the Chinese, with the latter being acquired as recently as May 2009. This puts all of the world’s known supply of rare earth materials outside North America under Chinese control.

It is important to remember that multiple proven deposits of rare earths exist in the United States and, if dealt with responsibly, they could ensure a long-term competitive rare earth market to support U.S. industrial requirements.

Congress should take immediate action. By comprehensively examining China’s strategic interest in rare earths, a U.S. strategy could be developed to ensure a competitive domestic supply of material. This policy review must also include plans for investment in the development of U.S. rare earth resources and investment in the entire value-chain of our defense and energy sectors. By acting now, rare earths could be extracted in North America in as little as four years, perhaps in time to avoid this looming worldwide material shortage.

If invested in fully, North American rare earth deposits could produce up to 40,000 metric tons of rare earths annually, more than twice the amount currently used by U.S. industries and enough to allow American self-sufficiency in the rare earth market even as demand continues to grow.

Sen. Bayh and Rep. Mike Coffman, R-Colo., have both recognized this critical issue, and attached amendments to the fiscal 2010 National Defense Authorization Act calling for a report to be compiled this year on the uses and importance of rare earth elements in the defense supply chain. Both have recognized the need to avoid any interruptions in the supply chain and urged Congress to study the availability of these materials and any steps that can be taken to ensure that the U.S. does not remain dependent on foreign countries for supply.

“This [dependence] is strategically dangerous, and I hope this report will be the start of an effort to secure capacity,” said Coffman.

Former Chinese communist party leader Dieng Xiaoping said in 1993: “There is oil in the Middle East, there are rare earths in China.” If Congress were to take steps now to ensure that this study is carried out and to implement any resulting suggestions, this crisis could be avoided.

Jeffery A. Green is a former counsel to the House Armed Services Committee, president of J. A. Green and Company, LLC and a major in the U.S. Air Force Reserve. The views expressed are his own and not those of the U.S. Air Force. He represents clients in the defense and strategic materials industries as president of J. A. Green & Company, LLC.

Author’s Note:  According to Lynas Corporation, “Lynas has never been owned or under control of “the Chinese”. Whilst there was an application by a Chinese group to get permission to acquire majority control of Lynas  in May 2009, this was rejected by the Australian Government in September 2009 and this decision was immediately announced by Lynas and widely circulated.”