Released 4 April 2022.
This article delivers a novel economic analysis of US dependence on China for rare-earth elements and sheds light on how Western nations may exploit the limitations of limit pricing to break China’s global monopoly in rare-earth element production and refinement. This analytical framework, supported by a comprehensive literature review, the application of microeconomic and industrial organization concepts, and two case-study scenarios, provides several policy recommendations to address the most important foreign policy challenge the United States has faced since the end of the Cold War.
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Stephanie Crider (Host)
Welcome to Decisive Point, a US Army War College Press production featuring distinguished authors and contributors who get to the heart of the matter in national security affairs.
The guests in speaking order on this episode are:
(Guest 1 Gustavo Ferreira)
(Guest 2 Jamie Critelli)
Decisive Point welcomes Captain Gustavo Ferreira and Major Jamie Critelli, authors of “China’s Global Monopoly on Rare Earth Elements,” featured in the Parameters Spring 2022 issue.
Ferreira holds a PhD in agricultural economics from Louisiana State University. He’s a senior agricultural economist with the US Department of Agriculture and serves as an agricultural officer at the 353rd Civil Affairs Command, US Army Reserves. Critelli is a civil affairs officer serving in the 353rd Civil Affairs Command, US Army Reserves. He’s an independent farm business owner and has worked globally in agriculture supply-chain rules on five continents. He holds a master of business administration and supply chain management from ETH Zurich. The views and opinions expressed in this podcast are those of the authors and are not necessarily those of the Department of the Army, the US Army War College, or any other agency of the US government.
Gustavo [and] Jamie, thanks for joining me. Let’s jump right in. Your article sheds light on how Western nations may exploit the limitations of limit pricing to break China’s global monopoly on rare-earth element production and refinement. What’s the working definition of “rare earth elements” here?
Good morning, Stephanie. Thank you for having us. So rare-earth elements are a set of 17 different metallic elements that fall into two different categories. You have the heavy and the light based on the separation process (once they get mined and get processed), which tends to be rather complex. And contrary to what the title suggests, rare-earth elements are abundant in the Earth crust. They have their rarity status coming from being typically highly scattered and mixed together with other minerals, and they’re rarely found in concentrations that make it profitable to extract. Oftentimes, they are a byproduct of other mining activities.
It’s important to understand rare-earth element reserves tend to be geographically more concentrated than other natural resources, such as oil and gas, but they’re also in line with other key mineral resources, such as copper, where they’re concentrated in one or two countries at the global scale.
Also, looking forward, as the global economy continues to transition to lower-carbon, renewable energies, analysts estimate that the demand for these minerals will continue to grow at a very rapid pace. That is because cleaner energy technologies such as electrical vehicles, electrical batteries, generators, and wind turbines will consume close to half of all the rare-earth element production. They are going to be a major driver for these resources.
And lastly, one thing that must be emphasized is the heavy environmental cost that goes along with producing these minerals. They produce an enormous environmental footprint, and that’s the reason why it’s concentrated in certain countries, such as China. They generate waste gas, acid-containing sewage water, radioactive wastes, and so on. It’s a pretty high environmental cost.
Thanks, Gustavo. How did we get here, and what is the state of rare-earth elements?
To truly understand how this industry has evolved to what we see today, we must understand the paths that China and the United States have followed for the past three or four decades regarding rare-earth elements. In the case of the United States, this country was once self-reliant and the world’s leading producer. From the 1960s to the 1980s there was a mine, the Mountain Pass mine, located in California. It was the world’s primary source of rare-earth elements. However, following decades of neglect, underinvestment by the US government, and a lack of interest by the academic community in this field, we had a gradual loss of know-how and the skilled labor force that’s required for this industry. Altogether, this led to a slow decline of this industry in the United States. This trend culminated in the shutdown of that Mountain Pass mine in 2002, following some regulatory issues and an environmental incident that involved a pipeline spill carrying contaminated water. So, there was kind of the nail in the coffin for that particular operation. It confirmed the decline of this industry in the United States.
Because of that, we lost nearly all our rare-earth production capacity, and we became gradually a net importer of these minerals—with, now, China becoming the main supplier, accounting for 80 percent of our imports.
Which is a good segue to how China was able to fill that gap. This didn’t happen overnight. This was a long-term effort by the Chinese government. It was a concerted effort that involved high-profile investments in national programs, the development of teams, and labs that will exclusively focus on studying production of rare-earth elements. And this long-term focus definitely yielded significant results and set the conditions for China to expand its production from the 1970s and 1980s. As the US started to decline, China picked up that slack. Then, China also made the decision to declare these minerals a strategic resource. So, they kind of set the political tone. They recognized the importance of this going forward, and they even were able to endure and accept the environmental degradation that would entail. They were willing to take that cost, given the national strategic importance of this resource. As a consequence, they started producing and exporting more and more throughout the 1990s and 2000s. That expansion of production had an impact on global markets in the sense that they flooded the market with large amounts of rare-earth minerals. They plunged the global prices, which resulted in many Western producers no longer being able to compete at those low costs and filing for bankruptcy, further reducing production in the West.
Another key shift in China was once they secured production and became the global powerhouse, they started shifting towards developing a more integrated supply chain. What I mean by this is they no longer were just simple raw-material producers, but they started investing in processing. And so, they could control the entire supply-chain process from mining all the way to the final products, such as magnets or oxides that are used by the final end users in the West. So, they created a whole supply chain, to include all value-added products, and now they control about 80–90 percent of that value-added refinement capacity. Even the United States or other Western countries that still mine rare-earth minerals—they have to export them to China in order to be refined there and processed to the way it could be used by the final end users.
That leads right into my next question. China dominates the rare-earth element global market. How can we overcome that? Or maybe I should be asking you: Can we overcome that?
Well, the short answer is “yes.” Thank you again for having us, Stephanie.
China did not arrive at a point of rare-earth element market leadership overnight. Once they realized how valuable these materials were, they set a decades-long course to arrive at the position they’re at today. Unfortunately, we can’t rely on market forces alone to correct this. In the short term, we only have two levers. We either become better at recycling or repurposing existing rare-earth elements or we stockpile these items, regardless of price, so we’re not supply-constrained by a foreign power.
So, in terms of recycling or repurposing, this of course is hampered by the limit-pricing efforts done by the Chinese and by the complete lack of a domestic rare-earth element recycling stream. We just don’t have it. We would have to build it up. And as Gustavo mentioned, there’s quite a bit of waste involved with this that we would need to address as well. As far as stockpiling, those efforts are a good strategy, but they would also be hampered by limit pricing. A lengthy discussion on the stockpile framework is also needed. What portion is for military use versus domestic use? How large of a stockpile? What mechanism would there be to extract an item from the stockpile? Because it can’t just be cost alone. And this would be to prevent inequities and to promote the national defense.
But if we were looking at a longer time horizon, say five to 10 years, then we do have many more options. First and foremost, we can build out the rare-earth element smelting, refining, and processing industry. Basically, build it back. This would be to process domestic and foreign sources of (rare-earth element or) REE concentrates. Most likely, it would have to be vertically integrated though to attract the capital investment needed to build and sustain it. And it quite possibly would have to be carved out as a legal monopoly.
Another option is to have continued Department of Defense collaboration with our allies and their businesses by employing mechanisms such as reciprocal defense procurement for the security of supply arrangements.
More (research and development or) R&D is an option you hear all the time, but here there’s a couple of different avenues. One is more R&D investment to improve the processing yield on turning those concentrates into final products or to minimize the waste stream. And this is akin to how fracking revolutionized the gas-drilling industry. If you could figure out a way to get a better yield with less input, it’s cheaper.
Continued focus on recycling: As I mentioned earlier, I believe we could leverage American ingenuity to recycle the world’s REEs. Problem solved.
And then, finally, there should be a change in procurement strategies domestically—and this would be to cement the fix—focusing less on costs and focusing more on balancing cost with supply disruptions. Perhaps there could be local content rules considered for key items such as REEs, much like Brazil has put into place.
You know, I’m left thinking that we bail out many other industries, but one that is at the heart of so many other critical industries hasn’t seen the investment required by government to address the issue. This is an industry that is marginally profitable and requires substantial capital investment. And, therefore, America needs to front the investment to help realize our national security and assist with the collective global security as well.
Gentlemen, if you could pull it all together for us, what are your conclusions on this topic?
As we sit with you today, Stephanie, the world is pulling itself out of (coronavirus disease 2019 or) COVID. And it is watching itself, in dismay, become involved with the unfolding situation in Ukraine. These are not dissimilar issues, though. Both events stood or stand to impact our supply chains on an unprecedented scale. Both COVID and the Russian invasion disrupt the availability of key products and commodities. Both continue to have second- and third-order impacts we didn’t plan for—and, unfortunately, these impacts could have been averted to a degree with more preparedness.
I’m encouraged in our post-COVID world. People now talk about decoupling Chinese and American supply chains for the first time in a generation. I wonder what conclusions people will come to when they contemplate ongoing scarcity events, well in the future, involving tiny amounts of key elements that the mighty US military-industrial complex can no longer obtain—or the reality that it will now take several decades to get ourselves back onto a sound footing. The question will be whether we have the political will now to address this challenge head on, much as China has done over the past few decades.
Sun Tzu is attributed the following statement: “take advantage of the enemy’s unpreparedness; travel by unprepared routes and strike him where he has taken no precautions.” Thank you for letting us speak with you today.
And I would like to add, just as a concluding remark, that, perhaps, we have a window of opportunity to overcome this dependency. It’s all because while in the past China was capable of flooding the market with cheap supplies and flushing out all competitors, they got to the point that, now, they are such large consumers themselves of those resources that they no longer can afford to apply those same tactics. They’re constrained on their end, which presents an opportunity for us to reinforce our industry and support the development of our domestic processing industry.
And the political will is there. There has been a series of executive orders that have been recently approved, which signal the political support going forward, which is key. These are 10- to 20-year-long investments, and we’re going to need that to continue in the political arena so this project can materialize and we can soften our dependency.
Because at the end of the day, the Chinese do think this is a critical issue. So, our political class should think the same as well as our military. So again, thank you for having us here. It was great having this conversation with you.
I’m delighted to have you.
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