China’s 'Rare Earths': A Threat To America's Strategic Standing

Minerals have always been one foundation of American greatness. The iron and coal mines of Pennsylvania, oil wells of Texas, and copper, silver, and gold mines of the west allowed us to create the industries that made America the most powerful country in the 20th century. But America’s strategic future now hangs in the balance.

The great innovators (and job creators) of the early 1900s, such as Edison and Ford, stood on the shoulders of the great miners of the late 1800s, such as Carnegie and Rockefeller. Victories in two world wars would not have been possible without access to the elements -- iron, copper, nickel, etc. -- from which our military might was built.

After WWII, we reached beyond our shores to establish alliances with mineral-rich nations in the Middle East and elsewhere to guarantee our strength and continued growth. Twentieth century military might was due to both our innovations and our control over the raw materials essential to them

Over the last 40 years America seems to have forgotten this. As a result, today the nation winning the battle for global control of the elements that will determine which nation will be the greatest in the 21st century is China.

The inventions of Edison, Ford, and Bell were in fact discoveries in the properties of the various elements on the periodic table. The table is populated with approximately 65 metals, each with its own unique alchemistic capabilities. The great inventions of the last century were possible because of copper’s ability to conduct electricity and iron and carbon’s ability to form structural steel.

The great innovations of the 21st century are no different, but they rely on very different metals, ones most Americans are unfamiliar with. For example, Bell’s national telephone system was possible because copper can transmit information electrically. Today’s fiber optic cables are possible because another metal at the very bottom of the periodic table, erbium, can transit information optically. Similarly, future generations of Ford’s automobile may not require either iron or oil, but they will most certainly require neodymium (electric motors) and lanthanum (batteries). Erbium, neodymium, and lanthanum are 3 of 14 elements collectively called the rare earths. The rare earths are essential to everything from modern automobiles, cell phones, televisions, and jets to countless military applications. Every Prius has 15 pounds of rare earths in it.

While the U.S. was the dominant producer of raw materials in the last century, China today controls nearly 100% of global production of rare earth metals. That’s right, nearly 100%.

Besides developing its domestic sources, China has built deep financial and political ties --- as we once did -- with nations around the world holding significant strategic metal reserves. It has invested billions in mineral-rich Africa alone. It is the underpinning of their foreign policy. While the U.S. continues to treat Africa as a post-colonial charity case, China’s much more forward thinking view of the continent is as a partner and important depository of strategic metals.

Our political leaders tell us the way out of our current financial crisis is through American innovation. But what if we are unable to participate in the next great American discovery simply because this time we don’t control the necessary raw materials? The millions of jobs flowing from these inventions would blossom where the materials are available. Today that place is China.

Even more threatening in the short term, China can at any moment easily challenge our military might by simply refusing to ship rare earths to America. U.S. high tech manufacturing would grind to a halt within months. This includes production of bulletproof vests (yttrium), night vision goggles (gadolinium), and the guidance systems on rockets, drones, and tanks (erbium, neodymium).

Would China actually use the threat of discontinuing U.S. rare earth shipments as a political weapon? It already has.

China did so to Japan 13 months ago. In October 2010, Japan arrested a fishing boat captain who wandered near islands in the East China Sea that both nations claim sovereignty over. In response, China instructed its customs offices to stop shipping rare earths to Japan. Within hours Japan released the captain. Japan knew it was out of business without rare earths.

In order to retain our place as the most successful nation, it will not be enough to invent the next great technology. We must also control the metals essential to that technology.

Today China links its good deeds in places like Africa to mining opportunities. American policymakers need to consider this in the context of our own foreign aid, and to bring our foreign policy into the 21st century. For example, one of the world’s largest untapped rare earth reserves is in Afghanistan, where China is already operating a major new copper mine. Why shouldn’t the terms of our continued involvement in that region include access to this deposit?

An American company that sells rare earth metals is Colorado-based Molycorp. They have a mine in California. Currently, Molycorp sells rare earths on the world market, yet  their prices are essentially determined by China, which given the size of its reserves will always act as the OPEC of rare earths by dictating global prices. China can at anytime drop prices to pre-2009 levels, effectively putting Molycorp out of business. This is evidenced by a drop in the company’s stock and a high level of short selling over the last several weeks due to nothing more than lower prices out of China.

The U.S. environmental movement supports restrictions on mining. They need to realize this is a Catch-22 that threatens the very future of our country -- as they themselves envision it! They cannot both demand a green technology future and simultaneously stand in the way of mining the raw materials essential to manufacture these products. Simply not blocking approvals will not be enough; they must actively demand a fresh approach to critical mineral mining.

We need to establish a Strategic Metals Reserve similar to the Strategic Petroleum Reserve created by Congress during the oil embargo. Such a reserve would have little impact on prices during times of peace, however an embargo such as China imposed on Japan would prevent us from maintaining our defensive readiness.

Wall Street needs to be permitted to facilitate “bottom up” manufacturing consolidation. China plans to make electric cars cheaper than we can by making rare earths available to its automakers below world prices. In order to encourage our mining companies to keep their costs in line with Chinese domestic costs in spite of higher world prices, we are not going to simply nationalize them as China did to its rare earth industry last year.

The only alternative is for U.S. mining corporations to move further down the supply chain through joint ventures and acquisitions so they realize their profits in the added value products, such as wind turbines, electric cars, and fluorescent lighting. Thus, corporate profitability becomes dependent on low internal rare earth costs rather than high world metal prices artificially sustained by China. These more vertically integrated U.S. companies can then generate the many jobs that will flow from American innovations built with strategic metals. Securities laws that stifle such vertical integration should be rescinded in favor of rules that encourage this behavior.

We need to encourage our young to pursue careers in exploration, geology, and high-tech metallurgy. The current leader of China, Premier Wen Jiabao, received his college degree in geology. His first job was in rare earth mining. The Chinese clearly get it.

There are two proposals in Congress that are important starts for addressing this crisis. One is the Critical Minerals Policy Act, which calls for an assessment of our critical mineral needs and current supplies and the development of a plan to assure access to strategic materials. Congressman Mike Coffman has proposed RESTART (the Rare Earth Supply-chain Technology and Resources Technology Act). It calls for expediting permits for rare earth mines, a Defense Logistics Agency to coordinate military rare earth needs, and loans to assist in developing rare earth mines.

If China is allowed to dominate production of rare earth metals, strategic dominance will shift toward the east, with potentially catastrophic results.

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