China's Leg Up in the Rare Earths Market

Basically, rare earths are exotic elements that are critical to the future of high tech, clean energy, Big Science and – oh by the way – national defense. The list includes 17 elements like terbium, ytterbium, and yttrium.

Back in chemistry class you may have heard of the “Lanthanide Series” of elements, which includes 15 of the 17 elements. Also back in chemistry class, somebody doubtless raised their hand and asked the teacher what you needed to know about the Lanthanides. If your chemistry class was like most chemistry classes, the teacher probably said, “Don’t worry, they’re not on the test.”

Well, these elements are on the test now. Why? Because the Chinese control 97% of world output of rare earths, and have tight control over much else as well in the realm of technology metals. Recently the news is that the Chinese have been restricting exports of rare earths, and apparently some other metals. That’s a problem.

All of the rare earth elements have one or more excellent atomic properties. These include incomparable chemical, electrical, magnetic and/or optical properties. For example, neodymium (Nd) makes strong magnets even stronger. Europium (Eu) is necessary for television screens to show color images. Lanthanum (La) is useful in high energy-density batteries, as well as being critical in petroleum refining.

Now think about all the rhetoric you’ve heard about how “we” are going to transition to a high tech/clean tech future of solar panels, windmills, electric cars, smart grid, wired-world. Oh yeah? Problem is, most of these technologies simply WILL NOT WORK without large amounts of rare earths.

That is, the electric cars, wind turbines, solar panels, miniature electronics, smart grid, etc. will not get built in the US (or Canada, Japan, Europe, Australia, etc., for that matter) if industries cannot secure long-term supplies of rare earth minerals. And, oh by the way, that goes double for advanced defense technologies. For example, EVERY missile in the US arsenal uses some quantity of rare earths – every single one!

What’s the problem? In the past 15 years or so, the West closed down essentially all of its rare earths refining capability. The entire market (well, 97% of it) was conceded to the Chinese, for a lot of reasons – economic, wages, resource-base, environmental and much more. Now that the West wants to build out a different energy and technology future, the Chinese control critical substances from ore bodies through to final oxides and metals.

It’s as if somebody (the West) wants to set up a fancy, Napa Valley-style winery (new, clean, high tech), but doesn’t have any grapes (rare earths). This vintner-wannabe will have to buy the grapes from a producer in China. Do you really think that the Chinese will sell the guy the best grapes, and help him create a world-class brand of wine?

What do the Chinese say? They say that they’re just acting rationally. They’re closing down unsafe mines and controlling past environmental pollution. They’re consolidating the industry, as most other industries consolidate over time.

The Chinese say that they’re just encountering natural issues of depletion, from mining their ore bodies over the years. They say that they just don’t have “more” rare earths to export, because of natural economic and market forces.

Of course, the Chinese also say that if you move your factory to China, they’ll put you on an allocation for rare earths. You’ll have enough to operate. That is, you’ll have enough raw materials as long as you set up a joint venture with a Chinese firm and share all your technology. Of course.

Byron King

for The Daily Reckoning