Over the last two decades China has managed to develop what can only be described as a stranglehold on the supply of rare earths critical to the US defence industry.

Rare earth elements (REE) play a vital role in a wide range of electronics and environmental technologies. They are also critical for military applications. The US military uses REE in precision-guided munitions, lasers, communication systems, radar systems, avionics, night vision equipment and satellites. Other off-the-shelf products used in defence systems also require REE, such as computer hard drives. They are not something the military can do without.

The REE are a group of 17 chemically similar metallic elements, comprising the 15 lanthanides and the non-lanthanides scandium and yttrium. The term 'rare' is actually a misnomer, as the REE are quite abundant in the Earth's crust (with the exception of promethium), but they are typically widely dispersed and not often found in concentrated and economically exploitable deposits. REE can be divided into three groups according to their atomic weight and their position in the periodic table of elements: the non-lanthanides, scandium and yttrium; the light REE (LREE) such as neodymium, lanthanum and cerium; and the heavy REE (HREE) such as dysprosium and terbium.

Current supply
For most of the 20th century REE were sourced from India, Brazil and South Africa, and later the USA. But as demand for different REE has fluctuated, and environmental concerns caused various mines to close, China became the major supplier. China has 37% of the worlds proven recoverable deposits, but now produces approximately 96% of the supply, including 100% of the HREE (exact supply percentages are difficult to determine due to the prevalence of smuggling). Total reported world production of rare earth oxide (REO) in 2008 was 126,000 tonnes, a four per cent increase compared to 2007 (121,000 tonnes). World production has more than doubled in the last 15 years, but with consumption of rare earth oxides forecast to reach 190,000-210,000 tonnes by 2015 it is predicted that demand will outstrip supply for certain elements by 40,000 tonnes per year, particularly for neodymium, dysprosium and terbium.

The REE market is more complicated than for many others metals because of the large number of elements, and their broad range of applications for which demand fluctuates over time, largely as a result of technological developments. While prices of other industrial elements have soared in recent years, REE prices have remained low due to the lack of interest in developing mines outside China. But recently there has been growing awareness that precisely because there are only a small number of mines outside China there is a threat to the supply. This threat has become realised as China has begun severely restricting the production and export of REO, and has increased export taxes on all REE to within a range of 15%-25%. Chinese export quotas have been dropping for several years, but the quota slash in 2010, from 50,100 tonnes down to 30,300 tonnes, caused consternation for investors and manufacturers around the world. The final quotas for 2011 are not yet clear.

Chinese export quota of REO (by thousand tonnes)
2004: 65.6
2005: 65.6
2006: 61.8
2007: 59.6
2008: 56.9
2009: 50.1
2010: 30.3
2011: ?

Aggressive policy
Publicly, China has said that its policy of slashing quotas is driven by the need to improve resource management and conservation, improve the efficiency of resource exploitation, and to protect the environment. But China's actions demonstrate an intention to increase its monopoly and to dominate the rare-earths market for decades. This would also give China control of much of the development and manufacture of vital technology for the rest of this century at least.

The strategy appears to be threefold. The first stage is to limit exports. This year's export quota is likely to be the smallest yet, and there is no indication they are going to increase in the future.

The second phase is to force manufacturers that use rare earths to move to China. Beijing is no longer content to dominate the market as an exporter of raw materials. China already accounts for about 60% of the REE consumed each year, and the plan is to increase that percentage. China wants to retain as much of the REE as possible, and force the world to buy Chinese manufactured components, thus boosting the economy not only in terms of GDP, but also by increasing education and training to support a manufacturing industry that requires more skilled labour.

Thirdly, China seems determined to control the markets by gaining influence over deposits in other countries. Two Australian companies, Lynas Corp and Arafura Resources, planned to open mines that would have a combined production equal to a quarter of the annual global output of REE. When the credit markets collapsed in 2008 both companies lost their financing. China seized the opportunity and stepped in with the funds and resources required to finish the construction of the mines and ore-processing factories, provided by Chinese state-owned companies. In return the Chinese companies received 51.7% of Lynas and 25% of Arafura.

The response
Rare earth materials have to go through five distinct processing stages. These are mining, separating, refining, forming and manufacturing. The US used to perform all stages in the REE supply chain, but now most REE processing occurs in China. Industry experts estimate that it will take about 15 years to rebuild a complete US based REE supply chain from mining through to manufacturing. This would require securing capital investment in infrastructure, developing new technologies, and acquiring patents currently held by non-US companies. The US' Department of Defense (DOD) is in the process of assessing the current reliance on REE, and will soon be ready to start taking steps to reduce future dependency, but the need for REE cannot be diminished quickly. Even though a 2010 United States Geological Survey (USGS) study found that the United States had 13m metric tons of REE, the US still lacks deposits of vital HREE. Also environmental concerns have prevented these reserves been tapped, as much of lies beneath various National Parks.

The way forward may be an international approach. Until it closed in 2002, for both environmental and economic reasons, the Mountain Pass mine in California was America's chief domestic source of REE. Mountain Pass is the largest non-Chinese REE deposit in the world, but it lacks the infrastructure to process the ore, and re-developing a complete US supply chain may turn out to be prohibitively expensive. The new owners of Mountain Pass, Molycorp, now plan to fully reopen the mine and ship the ore to Europe for processing. At the beginning of April this year Molycorp acquired over 90% of AS Silmet in Estonia, one of only two REE processing facilities in Europe. The move will provide Molycorp with its first European base of operations, and double its current rare earth production capacity to 6,000 tonnes per year. AS Silmet (now to be known as AS Molycorp Silmet) will immediately begin sourcing rare earth feed stock from Mountain Pass.

The Estonian facility, the first of its kind not to rely on rare earth materials from China, will primarily be focused on producing rare earth oxides like didymium metal, a critical component in the manufacture of rare earth magnets. The supply of niobium and tantalum will also be vastly increased.

Problem solved?
The answer is probably not. Firstly it is wrong to think of the rare earth marketplace as binary (China/not China). Every country in the world needs REE, so every country, especially those with domestic REE deposits or processing infrastructure must, first and foremost, serve their own interests. For some of them this will mean dealing with Chinese companies rather than US companies, so China's grip on the global market will not slip completely. Also, even if every other REE deposit were to be exploited China still possess more than a third of the world's recoverable supply, and so will retain a dominant market position.

Recycling has been hailed as a possibility, and big steps are being taken in this regard, especially in Japan. But recycling REE from, for example, discarded computer motherboards, is an expensive and laborious process. It is unlikely to have a significant long-term effect, and as techniques for recycling improve may even give China another advantage. Chinese domestic usage of REE is skyrocketing, so many of the components available for recycling in the future will be in China.

The only way to escape China's stranglehold on the REE market is to dramatically reduce demand. This will be difficult, as China is likely to do everything in its power to support and develop an industry that provides it with such levers over other countries and other economies.