China Maintains Dominance in Rare Earth Production
In 1987, then-Chinese President Deng Xiaoping famously said, “The Middle East has oil. China has rare earths.”
“I don’t think people at the time understood it. But China understood that rare earths were going to be the backbone of manufacturing,” said Pini Althaus, CEO of USA Rare Earth, a startup with aspirations to mine and refine the 17 elements categorized as strategic minerals.
While what the former Chinese president said was true — China has vast deposits of rare earth elements to mine — so do many other nations, including the United States, Canada, Australia and Japan.
After Deng’s declaration, China legitimately partnered with foreign companies that were doing the complex work of separating rare earths from the surrounding rock and refining them, then moved the production to mainland China, Althaus said.
Meanwhile, the U.S. government widely thought that rare earth mining and refinement was a difficult and dirty business, so it let China do it all on the cheap so it can supply U.S. manufacturers with inexpensive rare earths, he said.
There are two pitfalls, Althaus said. One is if China economically weaponizes rare earths and stops sending the refined products to the United States so they can’t be used in weapon systems or commercial applications.
Or the nation may create shortages by prioritizing its own industries such as the burgeoning electric vehicle market, which uses some of the key elements to make high-performance magnets used in engines.
“We’re seeing shortages already and those shortages are projected to increase in the coming years,” he said.
In 2010, China pulled the “rare earth card” in response to a territorial dispute with Japan, which led to an undeclared Chinese embargo, according to the Biden administration’s 100-day review, “Building Resilient Supply Chains, Revitalizing American Manufacturing and Fostering Broad-Based Growth.”
That served as a wakeup call to U.S. policymakers, the Pentagon and its contractors, which rely on several of the elements to make weapon subsystems. The United States, European Union and Japan protested China’s actions at the World Trade Organization and prevailed, yet little coordinated action to counter China in the rare earths market has taken place in the past decade.
China has over the past 30 years established two rare earth R&D hubs in Changchun, Jilin Province, and Baotou in Inner Mongolia. It has legions of students studying material sciences. Researchers devoted to finding and patenting new applications for rare earths work at Peking University’s rare earth materials chemistry and applications laboratory.
Concurrently, the U.S. agency that carried out similar industrial policies to bolster U.S. competitiveness, the Bureau of Mines, was defunded in 1996 and only exists on paper.
As the 100-day review spelled out, there has been a dramatic decline in American human capital in the field as “only a handful of mining and mineral-related degree-granting university programs are left in the United States. … By way of comparison, China has 39 universities granting mineral processing and metallurgy degrees, thousands of undergraduate and graduate students.”
Meanwhile, a handful of U.S. startups have opened or are planning on opening rare earth mines, and some are planning on doing their own refinement. (See part 1 here)
To James Kennedy, president of Caldera Holding LLC, owner of an iron ore mine in Missouri that can produce rare earth elements, these startups are going against a mighty Chinese monopoly that does not play by the market rules that Americans are obsessed with.
“This is not an economic fight. This is a geopolitical strategy,” he said.
The 100-day review agreed, stating “China does not operate on market principles of cost or pricing structure.”
China’s strategy extends to other strategic minerals such as cobalt, of which it has established a monopoly, and lithium, needed to make lithium-ion batteries also found in electric vehicles, the review stated.
Kennedy said the largest profits are made when the refined elements are made into useful metals, alloys, or magnets. China will be happy to offshore the mining — and even the refinement of rare earths — as long as it can maintain a monopoly on the finished products, he added.
Althaus and other executives interviewed said they are well aware of Beijing’s underhanded means of manipulating the market and declared that they are well positioned to withstand dumping and heavy subsidies.
“China can’t manipulate prices the way they did a decade ago because then they were a net exporter. Now they are net importers, so they don’t have excess amounts of materials,” Althaus said.
James Litinsky, chairman and CEO of MP Materials, a publicly traded company that operates a rare earth mine in California, said,
“The drive to electrify and decarbonize is giving rise to a durable, demand-driven cycle that has only begun to materialize. In this new era, our operating results and balance sheet demonstrate the potential for U.S. companies to compete.”
Meanwhile, the 100-day review stated, “This central planning and active management [in China] of the rare earth industrial base continues, with new draft management regulations under review and even more expansion projects underway.”
