America’s Unhealthy Dependence on China for Rare-Earth Metals
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Lanthanum. Neodymium. Yttrium. Not household names, especially compared to their precious metal cousins like gold or silver.
But don’t mistake their obscurity for lack of importance. They belong to the 17-member ”rare-earth elements” family. Among those elements, 16 of 17 are on the U.S. Geological Survey’s list of critical minerals – those deemed essential to economic and national security.
What makes these metals so important? They are necessary components in hundreds of products that are vital to our way of life – from smartphones to smart bombs, and plenty in between.
Rare-earth metals are critical to America’s renewable energy transition. A single wind turbine requires about a ton of four of them: neodymium, praseodymium, dysprosium, and terbium. And rare-earth magnets are widely seen as the best way to power the motors of electric vehicles.
Given their indispensable nature, having a reliable supply is, as the USGS’s list puts it, critical. That should be cause for concern. Roughly 97% of available rare earths are within the borders of one country: China.
Losing the long game
“The Middle East has oil. China has rare earth.”
So observed Deng Xiaoping in a speech made during his historic southern tour in 1992. China has surpassed the United States in rare-earth metals production every year since. Today, China is responsible for about 60% of global mine production and 90% of the refining of rare-earth elements. It is undoubtedly the dominant force when it comes to supplying the world with these critical minerals.
But it wasn’t always this way.
The United States has a deep history of mining for rare-earth elements. During the first two decades of the twentieth century, monazite, a mineral containing several rare-earth elements, was readily mined in North Carolina. That was until mining interests in India and Brazil began offering monazite at a much lower price, shuttering North Carolina’s mines in just a few years.
It would not be the last time that cheap foreign competition would decimate America’s rare-earths industry.
In the mid-1960s, the United States rose to dominate global production, thanks to its crown jewel of rare-earth metal mining known as the Mountain Pass. The mine was owned and operated by Molycorp, which began production there in 1952. The site, located deep in California’s Mojave Desert, was the key source of rare-earth metals for the United States well into the late 1990s. But the party was coming to an end.
Concurrent with Deng’s observation, several successful Chinese mining operations began flooding the market with rare-earth metals at a price that rendered Mountain Pass and others unable to compete.
China was embarking on the long game. By selling massive quantities at very low prices, it quickly became the world’s source for rare-earth metals. This decimated the rare-earth mining industry in other parts of the world. By the turn of the millennium, China accounted for more than 95% of the world’s rare-earth metals production. China’s mines were effectively the only ones left standing.
A Department of Defense report to then-President Donald Trump concluded that “China has strategically flooded the global market with rare earths at subsidized prices, driven out competitors, and deterred new market entrants.”
The result of this economic aggression has fundamentally altered the rare-earth metals industry. Molycorp, once a darling of Wall Street, ultimately declared bankruptcy. And the United States, once the leading global producer, has become heavily reliant on imports to meet its rare-earth needs.
About 80% of those imports come from China.
In the short term, it has been easier and more economically feasible to rely on export streams from China. In the long term, it is hard to imagine that ceding such monopolistic control won’t come without negative repercussions. In fact, we’ve already had glimpses of the vulnerabilities this arrangement has produced.
In 2010, China showed its inclination to weaponize rare-earth metals after a Chinese fishing boat rammed two Japanese coast guard vessels in the contested waters of the East China Sea. The Japanese government intended to put the fishing boat’s captain on trial. The Chinese government responded with several measures including an embargo on rare-earth sales to Japan, a move that could have devastated the Japanese auto industry.
The Japanese auto industry escaped relatively unscathed. They had the foresight to stockpile reserves. They also scrambled to source the metals elsewhere. Today, Japan obtains 30% of its rare-earth metals from Australian miner Lynas. But it was clear that China would not hesitate to use its monopolistic control to punish other countries.
And just last year, news broke that China was exploring its ability to weaken U.S. defense contractors by limiting rare-earth exports. For some context on how this is possible, consider that an F-35 fighter jet requires 920 pounds of rare-earths. Every Virginia-class submarine needs 10 times that amount.
Alarming as these examples are, it won’t take a nefarious plot by China to critically wound countries that rely on their rare-earth metals exports. The Chinese domestic market already consumes 70% of global rare-earth production. As the quality of life for the average Chinese citizen improves and access to high-end electronics grows, China’s voracious appetite for rare-earths could lead to consuming all its production within its borders.
Reasons for hope
The situation is bleak. Yet, recent developments may be pointing towards a gradual reversal. One of the lessons of the COVID pandemic was the vulnerability of the global supply chain. It is fitting that now we see signs of strength for the rare-earth mining industry outside of China.
Following the bankruptcy of Molycorp, the Mountain Pass Mine sat dormant for over five years. During that time, rights to the mine were auctioned off. The new owner of Mountain Pass, MP Materials, has resumed operations. It began trading publicly on the New York Stock Exchange in November 2020. That same year, its rare-earth production represented more than 15% of global output.
The reopening of Mountain Pass has been viewed as an important step towards breaking our dependence on China for these critical metals. In another move that will strengthen America’s domestic capabilities, the U.S. Department of Defense awarded Lynas over $30 million to build a rare-earth metals processing plant in Texas.
The United States is certainly not alone in recognizing the strategic importance of rare-earth metals. The Australian government recently invested A$140 million ($100 million) in a rare-earths mine in Western Australia in its quest to build a supply chain that will rival that of China.
It will continue to be an uphill battle. In a move expected to boost China’s already significant influence over pricing, three of China’s “big six” rare-earths companies recently merged into a mining giant that will be the world’s second-largest producer.
China does not feel confined to its own shores, either. In 2009, the Australian government blocked the attempt of a Chinese state-owned company to buy a majority stake in Lynas, the rare-earths miner that Japan would turn to just one year later when China curbed exports. More recently, it has sought to develop a massive rare-earth mine in Greenland.
Even the emergence of MP Materials is not quite the American turnaround story it may seem to be. The company is nearly one-tenth owned by Shenghe Resources, a partially state-owned Chinese company. According to MP’s latest annual report, Shenghe accounted for more than 90% of MP’s product sales. As MP states in the report, “Shenghe has entered into an arrangement to purchase substantially all of the Company’s production of rare earth concentrate.” The rare-earths MP mines may be domestic, but they ultimately belong to China.
Certain danger, uncertain timeframe
To be fair, concern about America’s reliance on foreign powers for critical rare earths is not a new phenomenon. It dates at least as far back as the Reagan administration, and probably further. Anyone bringing up America’s rare-earth predicament is immediately at risk of “crying wolf” accusations.
China has a powerful weapon in its rare-earth dominance. It has shown an inclination to use this weapon when it needs to. But predicting exactly when and how it will be used will not be a rewarding endeavor.
The most likely scenario is that China will continue to export enough rare earths to prevent a global panic. Artificially low prices will discourage new market entrants and mining exploration while China continues to expand and consolidate the industry.
But at some point, whether through tariffs, embargoes, or simply scarcity, the ramifications of our dependency will be felt. Manufacturers outside of China will be placed in a difficult position. Pay soaring rare-earth prices and pass the costs onto their customers, or switch to inferior inputs to create inferior products. Either way, a loss in market share will be a given, and the bankruptcy of iconic American companies is a certainty.
It is hard not to draw comparison to another time in history when our dependence on foreign powers for a critical commodity (oil) was weaponized against us (during the 1973 oil crisis). The oil embargo imposed by Arab members of OPEC quickly resulted in gasoline shortages and rampant inflation. Yet, at its peak, OPEC barely controlled 50% of the world’s crude oil production.
China’s grip on the rare-earths market is much tighter. We know what is said about those who fail to learn from history.
Michael Joseph, CFA is a vice president and deputy chief investment officer at Stansberry Asset Management. He is a member of the CFA Institute’s Practice Analysis Working Body and sits on the board of the i.d.e.a. Museum Foundation and the advisory board of the Arizona Council on Economic Education. He can be contacted at [email protected].