Not so long ago, the U.S. went into full panic mode. China had reached the point where it controlled 97% of the world's rare earth elements—minerals that play a crucial role in manufacturing high-tech products. Were they right to fear that Beijing has a stranglehold over the global economy?


Image of a rare Earth metal via the United Nations

Rare earth elements (REE) are a group of 17 chemically similar metallic elements in the periodic table, plus yttrium and scandium. Despite their name, REE are not rare. In fact, they're rather plentiful in the Earth's crust. But, tremendous effort and investment are required to extract, refine and process them.


Still, lots of people want them. They are the "vitamins of chemistry," says Daniel Cordier, a mineral commodities specialist for rare earths at the U.S. Geological Survey. "They help everything perform better, and they have their own unique characteristics," he says, "particularly in terms of magnetism, temperature resistance and resistance to corrosion."

As such, they are used in materials for multiple high-tech products (see table below). And, REE are widespread in U.S. defense systems, including: precision-guided munitions, lasers, communication systems, radar systems, avionics, night vision equipment and satellites. For example, fin actuators used in precision-guided munitions are specifically designed around the capabilities of neodymium iron boron rare earth magnets.

Until the late 1990s, most RRE were produced by the U.S. But mining companies, confronted with rising costs, began to scale-back and shut down operations:

The first step in extracting rare-earth oxides from the surrounding rock is to crush the rocks and grind them into a fine powder. This is passed through a series of tanks, where the rare-earth elements float to the top. Unwanted minerals sink to the bottom, and this hazardous waste material, called tailings, is sent to ponds for storage. Meanwhile, the resulting concentrate of rare-earth metals is roasted in kilns and then dissolved in acid. The fraction of the resulting slush that contains rare earths, in the form of mixed metal oxides, is removed. Finally, the solvent is neutralized. The reaction generates a lot of salt: when the Mountain Pass mine [in California] was running at full capacity in the 1990s, it produced as much as 850 gallons of salty wastewater every minute, every day of the year. This waste also contained radioactive thorium and uranium, which collected as scale inside the pipe that delivered the wastewater to evaporation ponds 11 miles away. Several times in the 1990s, cleaning operations intended to remove the built-up scale caused the pipeline to burst, spilling hundreds of thousands of gallons of hazardous waste into the desert. The state of California ordered Molycorp, which was then a unit of the oil company Unocal, to clean up the waste. In 2002, the company, already struggling to make a profit, ran out of space to store its tailings and failed to secure a permit to build a new storage facility. The mine shut down.


China began a dedicated effort to fill the void left by the decline in U.S. production. And, due to lax environmental regulations and cheap labor, Beijing was able to scale-up its operations in a relatively short period of time. By 2009, U.S. policymakers had begun to worry about whether this would have larger implications for the economy and national security.

Then, an event occurred in 2010 that confirmed their worst fears.

An Economic Superweapon

During a maritime border dispute in September 2010, Japan detained the captain of a Chinese fishing trawler, which had collided with two Japanese coast guard vessels. China responded by announcing that it would halt all shipments of rare earth elements to Japan, which used the imported metals in several high-tech industries—notably, magnets that Japan sold abroad or used for making consumer products, such as the Toyota Prius.


Japan immediately released the Chinese fishing captain. The New York Times declared that it was a "humiliating retreat" for Tokyo.


To the U.S., it appeared that had China had successfully demonstrated the power that came with near-total control of an important resource—the 21st century version of the "Oil Weapon" that Arab countries had deployed during the 1973 OPEC embargo.

Economist Paul Krugman wrote in the New York Times:

You really have to wonder why nobody raised an alarm while this was happening, if only on national security grounds. But policy makers simply stood by as the U.S. rare earth industry shut down….The result was a monopoly position exceeding the wildest dreams of Middle Eastern oil-fueled tyrants. Couple the rare earth story with China's behavior on other fronts — the state subsidies that help firms gain key contracts, the pressure on foreign companies to move production to China and, above all, that exchange-rate policy — and what you have is a portrait of a rogue economic superpower, unwilling to play by the rules. And the question is what the rest of us are going to do about it.


Congress convened a special hearing—"China's monopoly on rare earths: Implications for U.S. foreign and security policy"—where Rep. Donald Manzullo (R-IL) declared:

"China's actions against Japan fundamentally transformed the rare earths market for the worse. As a result, manufacturers can no longer expect a steady supply of these elements, and the pricing uncertainty created by this action threatens tens of thousands of American jobs."


And, according to Rep. Brad Sherman (D-CA), "Chinese control over rare earth elements gives them one more argument as to why we should kowtow to China."

Meanwhile, a report published by the Government Accountability Office warned that "rebuilding a U.S. rare earth supply chain may take up to 15 years."


Four years later, China's rare earth weapon has turned out to be a dud.

The Market Strikes Back


So, what happened? How did China suddenly lose its status as the Master of the Earth's Crust, poised to blackmail the U.S. economy?

Well, for starters, there might not have been a crisis to begin with.

Eugene Gholz, a professor of public affairs at UT-Austin who advises the Department of Defense on rare earth elements, has recently published a study outlining the various reasons for the rapid turn of events. His paper is worth reading in full, but here are the highlights:

The embargo that wasn't: What the Chinese government says and what Chinese companies do are often two different things. Chinese producers found various loopholes to evade the embargo on Japan. For instance, they were able to export REE that were combined with small amounts of other alloys. And smuggling in China is rampant, with small mining companies, sometimes assisted by crime networks, illegally exporting as much as 20,000 to 30,000 tons of REE per year. The central government in Beijing, beset with other pressing issues, has not made a concerted effort to crack down on this problem.


Compare that with the fact that only a small amount of REE are required for consumer products—roughly a kilogram of neodymium for each Toyota Prius and a few grams in each cell phone. It would take a long time for an embargo to have an effect, especially when a hefty amount of rare earths are still being exported.

Japan wasn't facing an imminent REE crisis when China announced its embargo. It's still not clear why Tokyo gave into Beijing's demands so quickly and released the captain of the fishing trawler. But, despite this so-called "humiliating retreat," Japan made no concessions about its territorial claims and continues to patrol the disputed waters. In the larger sense, China's threat accomplished nothing.


Demand Destruction: Concerns over the reliability of REE supplies has prodded private sector innovations that are reducing demand:

Companies such as Hitachi Metals [and its subsidiary in North Carolina] that make rare earth magnets found ways to make equivalent magnets using smaller amounts of rare earths in the alloys….Molycorp's Magnequench division also produces a dysprosium-free magnet that works at relatively high temperatures. Meanwhile, some users remembered that they did not need the high performance of specialized rare earth magnets; they were merely using them because, at least until the 2010 episode, they were relatively inexpensive and convenient.


New Suppliers: The rare earths market managed to attract plenty of interest outside of China prior to the 2010 incident. Motivated by expected increases in demand, investors in the United States, Japan and Australia were already opening rare earth mines and building new processing capabilities, and other investors were moving ahead on mines around the world in places like Canada, South Africa and Kazakhstan. Major investments made by the Lynas Corporation in Australia and Malaysia started delivering non-Chinese rare earths to markets last year.

When rare earth prices surged in 2010, hundreds of companies around the world started raising money for new mining projects. The Rhodia Company, long established as a leading rare earths processor in Europe, ramped up its use of its existing plant capacity and accelerated plans to recycle rare earths, effectively creating a new source of supply for the global market. Although Chinese producers will still contribute a substantial majority of rare earth elements, competition from the rest of the world will moderate Chinese pricing power.


Feeling secure: It turns out that the volumes of rare earth elements used in defense production are relatively small:

The percentage of total American consumption used in defense products differs from element to element, but for most rare earths, estimates put the number at well under 10 percent of U.S. demand—again, an amount that can probably be acquired through various methods of circumventing an embargo. And perhaps more important, the defense market can probably accept some delays in delivery of rare earth components….most manufacturers and some brokers keep enough inventory on hand that can act as a partial shock absorber.


As of now, China still produces at least 70% of the world's rare earth elements. But its market share seems likely to diminish further and, more importantly, Beijing's attempt to use its supply of REE as a political or economic weapon has proven to be ineffective.


As Gholz reminds us, the 2010 panic was just the latest in a series of exaggerated crises over natural resources. Before rare earth elements dominated the headlines, the U.S. was fretting over titanium imports from Russia.

The REE panic was an instructive test case, he argues. The broad lesson is that policymakers should not succumb to pressure to act too quickly or too expansively in the face of raw materials threats. Not all such threats are like that posed by the historical precedent that is typically invoked: the 1973 oil crisis. The OPEC embargo led to sustained higher prices because new sources of supply did not emerge to undercut OPEC's dominance for nearly forty years. "But oil has for years been the exception," Gholz says. "When people briefly feared that rare earths would make the oil experience more like the 'new rule,' their fears turned out to be largely misplaced."