Wednesday, December 15, 2010

Rare Earth Creationism

On Tuesday, China announced that it will raise export taxes on several of the rare earth metals that it produces. Taxes on the all-important elements already range from 15-35% but China claims that it wants to begin regulating its exports to protect its resources and environment (better extraction processes might help). If China didn’t produce roughly 97% of the rare earths on the market then this wouldn’t be news, but unfortunately China does and it is news.

Rare earths are a very elastic commodity, irreplaceable in hundreds of modern technological innovations from simple light bulbs to magnets made of samarium cobalt in the Aegis Spy-1 radar to fin actuators used in precision-guided munitions. A drastic short-fall in supplies would be catastrophic not just to production of everyday household items but also to technology vital to U.S. national security.

Investors and purchasers might be initially alarmed at the increasing taxes and lower production levels, but China has been steadily decreasing availability over the last year providing many importers the opportunity to start shopping elsewhere. China might currently produce most rare earths but it is only home to 30% of global reserves (still a mighty amount) meaning China’s extraction companies may have the jump but that there’s still room for other countries to begin investing in themselves.

Michael Lind’s “The American Way of Trade” proposes a defense oriented economic statecraft where the United States continues to engage in globalization on all fronts but national security. Lind is concerned that globalization and attendant outsourcing opens the U.S. defense industrial complex to market shocks and, worse, vulnerability to intelligence and resource capture by a foreign entity. Should Lind have his way the United States will be self sufficient in producing necessary components for defense materials.

Is the U.S. capable of producing its own rare earths? According to the U.S. Geological Survey the United States contains just under 30% of the global supply—only less than China and the Commonwealth of Independent Nations. But China’s supply is considerably closer to the surface than the U.S.’—the current cost of producing in the America is too high to break a profit. Further, the GAO released a study in April stating that rebuilding an independent supply chain of rare earths could take seven to fifteen years—an eternity if China continues raising prices and cutting down production.

Rising prices aren’t all bad though. It might soon become profitable for domestic companies to begin extracting and producing rare earths stateside. That could lower U.S. foreign dependency and with government subsidies and competition drive innovation to more effectively and efficiently extract the elements. Currently, Molycorp, an American company, is planning on re-opening a large mine in California in 2012 and in 2011 Lynas Corp. of Australia plans on opening a giant of a mine in the Down Under. U.S. options even now aren’t limited and it would be foolish of the government not to begin diversifying.

China’s recent rare earth provocations and tax hikes should be cause for worry but only if the market doesn’t move to pick up the slack. However, the market appears to be doing just that albeit slowly. In the meantime the DoD should be researching replacement elements to reduce rare earth elasticity and unnecessary panic.

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