Defense, Energy Markets Should Brace for Shortages of Key Materials

Article excerpt

The United States is on the verge of trading its dependence on foreign oil for dependence on another key natural resource.

Industry analysts predict that between 2013 and 2015, China, the world's leading (and virtually only) producer of "rare earth" metals, will no longer have the surplus capacity to export raw materials. That may not seem particularly significant until one considers that rare earth materials such as neodymium, samarium and lanthanum are key elements needed to fuel the "green revolution" and are found in components in countless defense systems.

Multiple scientific organizations including the National Minerals Advisory Board and National Academy of Science have classified rare earths as critical to U.S. national security. Neodymium iron boron magnets (neo magnets), for example, are the world's strongest permanent magnets and are found in many devices, from the guidance systems of smart bombs down to everyday computer hard drives. Other rare earths such as lanthanum, samarium and praseodymium are critical to hybrid-electric battery production and nuclear submarine technology. Anti-missile systems, jet engines and satellite communications systems represent some of the other technologies that rely on rare earths.

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The U.S. Geological Survey says that in 2008 Chinese mines produced 120,000 metric tons of rare earths from an estimated worldwide total production of 124,000 metric tons. More than 95 percent of world rare earth supplies are, thus, produced in China.

In 2003, despite the loud but ignored protests of Sen. Evan Bayh, D-Ind., the last U.S. manufacturer of neo magnets was sold to a Canadian company that moved production from Indiana to China. The U.S. government allowed the sale of this company with little thought to the gaping hole this left in the defense supply-chain, as the factory had until then produced 80 percent of the magnets used in U.S. smart bombs.

Now the Obama administration is touting a revolution in green energy that may be tougher to achieve given this production shift. Massive amounts of neo magnets are necessary to construct the permanent magnet windmill turbines that have become a prominent component of this push for green energy. The magnets are also essential components in the batteries of hybrid cars championed by the administration. Today, U.S. companies are able to purchase neo because China is a net exporter of rare earths. Experts such as Dudley Kingsnorth of the Industrial Minerals Company of Australia project said that in as little as four years, China, which is undergoing its own green revolution, may consume all its production internally and thus create a worldwide shortage of rare earths.

This is worrisome considering that the global rare earth market could at least double in the next 10 years.

Despite these projections, the U.S. government has been relatively silent on the issue. But options exist to prevent the crisis. Multiple deposits of rare earths exist outside of China, with at least three in North America. Thorium Energy has extensive rare earth reserves in its holdings in Idaho and Montana, and Great Western Minerals in Saskatchewan, Canada, has a known deposit of rare earths. Molycorp, formerly a subsidiary of Chevron, has a deposit at its Mountain Pass, Calif., facility, where mining ceased in 2002.

Opening these mines would avoid a total dependence on China and create a new competitive market in North America. With demand for these materials skyrocketing, a rare opportunity exists to reintroduce a manufacturing supply-chain in the United States that has largely migrated offshore.

Simple economics should dictate that this increased demand would drive new investment in production. But the dominant position of the Chinese, including an aggressive strategy of pricing on exports, could easily drive new market entrants from the business. The Chinese use of export quotas and pricing manipulation to keep foreign competitors locked out of the market is well documented. …