The price of China's tech metal monopoly

U.S. got out the rare metals business, and helped create a Chinese monopoly that's incenting companies to open plants in China

WASHINGTON - China is producing 97% of the world's supply of rare earth elements , and is using its monopoly power against the U.S. by cutting exports, raising prices, and fashioning its power as an incentive for electronics makers to increase or shift production to China.

China announced in 2000 that it was setting export quotas. At the time, it exported 75% of the rare earth ore for processing outside of China, but today its exports are at about 15%, said Jack Lifton, an analyst at Technology Metals Research in Carpentersville, Ill.

[ See also: U.S. in rare earth quandry ]

Export declines are expected next year and prices for some elements are skyrocketing, he added.

But companies that manufacturer in China and then export finished goods that use rare earth elements are not affected by the export reductions and price spikes. This creates an incentive for manufacturers to keep their production in China and move new production there as well, said Lifton. "From the Chinese point of view, that's perfect -- they want jobs created in China," he said.

"We knew this was coming, and as usual in America, we never bother with anything until it's a crisis," said Lifton. "We sent the mining of ours to China because it was cheaper there. Now, it's payback time for our shortsightedness."

China's rare earth elements monopoly may be seen as part of an indigenous innovation policy, a program where China-originated technology is owned by Chinese companies. The geopolitical implications of China's monopoly were illustrated last month when it blocked rare earth exports to Japan following Japan's detaining of Chinese fishing boat captain over a disputed island area.

Yaron Vorona, executive director of the Institute for the Analysis of Global Security's Technology and Rare Earth Metals Center, says that China is using its monopoly to gain strategic advantage. "Whether they intend for it to be a strategic threat or not is a very good question," he said, at the Critical and Rare Metals Summit here Wednesday.

Congress is beginning to take action. Last month the U.S. House passed the Rare Earths and Critical Metals Act of 2010 that offers some loan guarantees and funds some research efforts. However, that the legislation was criticized Wednesday at a rare metals summit here as not going far enough to provide the funding.

"China has no incentive to support supply chains outside of its own country," said Keith Delaney, executive director of the Rare Earth Industry and Technology Association, and recreating rare earth production, which includes separating, refining, alloying and component making, can take a decade or longer.

Rare earth elements, such as neodymium, are used to make hard drive magnets. They are used in cell phones, monitors, many defense applications, because of unique capabilities, such as the ability to withstand demagnetization at very high temperatures, according to a recent U.S. Government Accountability Office report.

By shifting production to China, the U.S. also set itself on the path of also losing technical capability in rare earth elements as the workers who were once in this industry get older.

Peter Dent, vice president of business development at Electron Energy Corp., makes rare earth magnets, and because his customers include the U.S. Defense Dept., the company has to hire U.S. workers for defense projects.

But Dent said that finding U.S. workers with the right education, and some experience with magnets, is becoming difficult. But "China has research centers with thousands of qualified people," he said.

There's discussion about creating substitutes to rare earth materials that could reduce some of the demand, but Gareth Hatch who also at Technology Metals Research, says substitution is difficult and not quickly accomplished. He said the focus should be on producing rare earth materials.

In the U.S., Molycorp Inc. is working on resuming production in Mountain Pass, Calif., the site on the long standing rare earth mine.

The Congressional Research Service, in a report last month, warned of potential shortfall of rare earth elements as demand rises. By 2014, global demand may exceed 200,000 tons per year, but production may only reach 160,000 tons. But, "in the long run, however, the USGS (U.S. Geological Survey) expects that reserves and undiscovered resources are large enough to meet demand," said the report.

Long term, "I really don't think there will be an issue," said Hatch, in meeting supply needs, "it's just getting through the next one to two years," he said.

Patrick Thibodeau covers SaaS and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at @DCgov , or subscribe to Patrick's RSS feed . His e-mail address is .

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Copyright © 2010 IDG Communications, Inc.

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