Digging in on rare earth, the next front in the US supply chain war with China
- US scrambling to close the gap with China, which dominates the mining and refining of these essential materials for hi-tech military and consumer products
- The drive to develop in US taps Donald Trump’s themes of reviving extractive industries and ‘reshoring’ American jobs
China hawk Ted Cruz, a Republican senator from Texas, recently introduced a bill to spur US production of critical minerals, among the latest of several before Congress amid rising concern that China could leverage its dominance in economic and political negotiations.
“It’s making people in Washington wake up and say this is not sustainable,” said Martijn Rasser, a fellow at the Centre for a New American Security. “If China really is willing to restrict exports, we’re in for a rough ride over the next few years.”
But China’s strategic-metals grip is so strong and the challenges in competing against its state-led model so great that some estimate it could take over a decade to create a relatively secure US supply chain. The US has also made some significant missteps that haven’t helped, critics say.
Amid US-China trade war, China aims to elevate its domestic rare earth industry
Strategic concerns over rare earths mirror larger calls to reduce US dependence on China – spurred on by critical Covid-19 shortages of personal protective equipment – as President Donald Trump threatens to “completely decouple” the two massive economies.
“The rare metals issue is a microcosm of the broader trend,” said Paul Haenle, chair at the Carnegie – Tsinghua Centre and a former China affairs director at the National Security Council. “The issue of rare earth exports is particularly important because it also represents national security concerns.”
While many in Washington agree on the importance of reducing reliance on China, debate rages over how to get there.
Legislation, reports and proposals – including those laid out in a Senate Energy and Natural Resources Committee hearing late last month on critical minerals – range from subsidising production, strengthening alliances and increasing research to forging industry co-operatives, boosting recycling and mining in national parks, the Arctic and even outer space.
Most legislation faces a tough near-term slog as Congress grapples with Covid-19, economic meltdown and protests over police shootings of African Americans in an election year.
But rare earth provisions are included in both the House and Senate versions of the massive annual defence budget bill, a crucial law all but assured to pass, amid heightened suspicion of Beijing’s objectives and Trump’s “America first” policies.
“We have to find an economic message to counter the Chinese state,” said a Republican senate staffer who was not authorised to speak publicly. “And rare earth is a big part of that.”
The Pentagon, wary of its dependence on Chinese supplies for its weapons systems, has outlined a four-phase plan to bolster US mineral supply chains, even as powerful senators push the military for “US sources and at US facilities”.
The issue also taps into two of Trump’s pet themes – reviving extractive industries in the US and “reshoring” American jobs. Analysts believe that Trump’s bizarre proposal last year to buy Greenland was tied to its large rare earth reserves.
“The fact that he can show up with a hard hat and a bulldozer, it’s a great photo op,” said Rasser.
Rare earths – 17 elements with nearly unpronounceable names like gadolinium and praseodymium – are not particularly rare nor universally valuable, but they are difficult and expensive to refine.
And critics say that the US has badly misplayed its hand.
Among the largest and most promising US mining operations is California’s Mountain Pass, the global leader until China started dominating in the late 1980s. After its 2015 bankruptcy, Washington rather inexplicably opened the door to Chinese investors.
In 2017, the US government committee that reviews national security deals approved a US$20.5 million sale to MP Materials, an investment consortium including the co-chairman James Litinsky, a financier; some New York investors; and the Chinese state-controlled Shenghe Rare Earth Shareholding Company, which holds a 9.9 per cent stake.
“All alarm bells should have been ringing in Washington,” said Thomas Kruemmer, director of Singapore-based Ginger International Trade & Investment, which specialises in strategic metals. “The Trump administration messed up.”
In an interview, Litinsky said that attention on MP’s Chinese shareholders is misguided. “It's impossible to lift a US$1.7 billion chemical plant and mine and send it over to Beijing,” he noted.
“Our mission as a company is to return the full rare earth supply chain to the United States of America.”
The MP Materials website touts a contract the Pentagon awarded it in April, although that award faces resistance after several senators strongly objected to the company’s ties with China.
Even without the Chinese stake in MP Materials, the US relies on China for some 78 per cent of the rare earth elements it uses. The Asian giant is also the global leader in processing – including Mountain Top’s output, which is currently sold to China for refining.
“[Chinese] ownership is maybe 9.9 per cent. But in terms of MP’s revenue, 100 per cent of their revenues are coming from the Chinese side,” said Daniel McGroarty, an advisory board member with USA Rare Earth, which controls the Round Top Mountain mine in far west Texas.
Kruemmer put it more colourfully: “If China doesn’t buy Litinsky’s stuff, he can stir it into his morning coffee.”
China’s dominance in processing – which tends to create cancer-causing material and often radioactive waste as by-products – is bolstered by a reported 23,000 US patents pending or realised.
“People were more than happy to have China do all the dirty work,” Rasser said. “But now China has control of the market.”
The global market for rare earth elements – including their use in permanent magnets found in MRI scanners, batteries and missile wings – is expected to grow rapidly as demand increases for renewable energy products like electric vehicles.
Driving US policy and subsidies is concern that, if pushed, Beijing could block rare earth exports. Politicians and military strategists tend to see a greater risk of that happening, industry executives somewhat less so.
But Beijing has flexed its rare earth muscle before. A decade ago, China halted exports to Japan for several weeks after a territorial dispute. Beijing subsequently claimed that those rare earth exports were restricted to help market stability and the environment.
Last year, as the trade war accelerated, Chinese state media blared “Don’t say we didn’t warn you,” amid threats to cut off rare earth exports, adding “United States, don’t underestimate China’s ability to strike back.” About the same time, President Xi Jinping visited a rare earth processing factory in Jiangxi province.
“China tends to play this game far better than the United States does, but I think that was a misstep,” said Pini Althaus, chief executive at USA Rare Earth. “All that was achieved by that visit by President Xi was to light a fire under the United States to say we have to do something … It backfired.”
Even if Beijing doesn’t play hardball, foreign customers face shortages as demand for rare earth expands in China, which already uses more than half the global annual output. And the nation’s ambitious “Made in China 2025” blueprint is built on industries using rare earths and permanent magnets.
Washington’s sudden, belated response over an industry it once dominated underscores a US bias toward short-term profits and reactive fixes, analysts said, while China can take a more strategic approach befitting a state-directed economy overseen by a potential president for life.
“The Middle East has its oil, China has rare earths,” paramount leader Deng Xiaoping noted in 1987 when visiting production facilities in Inner Mongolia.
After China’s 2010 strong-arm tactics against Japan, some in the West raised warnings but were soon drowned out by economics, a supply glut engineered by China and limited political will. “The Pentagon has built its entire advanced weapons on Chinese quicksand,” military consultant James Kennedy wrote in a Defence One commentary in 2016.
Mining groups, attracted by growing political tailwinds and the lure of Pentagon largesse, are struggling to build more “secure” rare earth supply chains, even as they acknowledge that US autonomy is a long way off. Althaus, of USA Rare Earth, said it will take the US “decades to get even close to where China is today”.
USA Rare Earth announced last month that it had secured permit approval for a pilot processing plant in Colorado. Meanwhile, Mountain Pass plans to restart processing facilities that had been shuttered for financial reasons years ago.
A US-Australia venture with ties to Malaysia has proposed a processing plant in Texas. And mining interests in Alaska and Wyoming are plugging their potential.
But the sums in direct and indirect government subsidies required to build a full and viable US supply chain from ore to oxide are daunting, analysts say.
Legislation backed by the Pentagon, which only consumes a small percentage of US rare earth elements, could see US$1.75 billion allocated for strategic minerals that are needed for munitions and missiles; US$350 million for microelectronics; and no ceiling for hypersonic weapons.
“No sane private investor will get into this, unless there are all kinds of government guarantees,” Kruemmer, of Ginger International, added. “There is no market economy-based solution to this.”
Analysts also underscore the commercial challenges, which include the need for massive amounts of private capital and years without cash flow.
Other obstacles include the economics of separating and refining rare earths, which tend to throw off massive amounts of low value by-products, some of which are toxic. Moreover, output in some US mines is of low concentration and many “proprietary” processing technologies face resistance from community groups and hi-tech customers.
“Western large-scale end users diligently nod their heads if some US senator condemns China’s stranglehold on rare earths,” although in truth they prefer to buy Chinese rare earths given its quality and competitive price, Kruemmer said. “They don’t want to be forced to use untested domestic stuff.”
Even the idea of securing more rare earth material underscores the weak US hand. “What’s the point of having a stockpile … if you know you’re going to have to send it to China?” the senate staffer asked. “China is the game.”