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  • Rare Earths: Cause for Worry, not Panic

    There are legitimate concerns over Chinese dominance in rare earth minerals but the near-frenzied nature of some of some assessments is unjustified. The long-term problems stemming from Chinese control will be resolved by the market; only the short-term problems are potentially threatening, and those remain vague.

    Rare earths have achieved a lofty status. They are recognized as important in military, environmental, and other high tech equipment. In the past few weeks, foreign policy joined that list, on speculation China’s interference with rare earth exports to Japan caused Tokyo to back down in their recent spat.

    Different roles for rare earths yield different concerns. Environmentalists worry higher prices for rare earths mean higher prices for green energy and more use of fossil fuels. The Department of Defense worries about a supply cut-off hampering production of advanced weapons. The Japanese government worries many of Japan’s biggest companies will lose key product lines without sufficient supplies of rare earths.

    These different worries have something in common: China. Through rare earths, the PRC is often portrayed as having a stranglehold on the American military, the Japanese economy, and the global environment. The reasons are commercial: China dominates rare earth production. The usual figures range from 95–97 percent, though this falsely implies all rare earths are equally valuable.

    Beijing has recently discovered environmental costs in rare earth mining—while steadfastly ignoring them in coal, iron ore, and elsewhere—and slapped export quotas on rare earths. These quotas have served to drive up prices. Prophecies of rare-earth doom also benefit from the decade or so it could take to move from starting a mine to bringing refined metals to market.

    Nonetheless, the panic is unnecessary. Molycorp, an American company, is not starting from scratch—it has already taken multiple steps to reopen its mine in California. Next year, production will begin at one of several planned Australian mines and Australia is rich in rare earths.

    While China will still control most of the global supply for a few years to come, many products made using rare earths have a long shelf-life. The magnets in the U.S. Navy’s SPY-1 radar, for example, have a lifespan measure measured in decades.

    What is needed on the security side is less speculation and more facts. What military supply, exactly, would be imperiled if China slashed or eliminated rare earth exports? DOD, with congressional urging, is belatedly studying the problem but the results of the study must be specific, and avoid general calls for more attention to an ill-defined problem.

    On the business side, China drove out competitors with low prices, and some users of rare earths have become accustomed to lower costs. Higher demand for environmental equipment, for example, will push prices up whether or not it’s convenient. However, the market has a built-in correction mechanism.

    As Chinese quotas push prices up, they not only encourage new suppliers to come online more quickly than otherwise feasible; they also encourage development of alternative products that don’t rely on rare earths. This is already occurring. It is also possible that, in anticipation of losing market share in 2012 and beyond, China will cut prices again.

    In the long-term development of rare-earth products, the next few years will just be a blip. As for short-term security concerns, we should hear in depth from DOD before running screaming into the night.

    Posted in International [slideshow_deploy]

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