Home / Articles / China’s Monopoly on Rare Earth Elements—and Why We Should Care
A U.S. rare earth mineral strategy should . . . consist of national stockpiles of certain rare earth elements, reestablishing rare earth mineral processing in the U.S. by implementing new incentives and removing disincentives, and [research and development] around new forms of clean rare earth mineral processing and substitutes. We will need your help.
– Ellen Lord, Undersecretary of Defense for Acquisition and Sustainment, Testimony to Senate Armed Services Subcommittee on Readiness and Management Support, October 1, 2020.
One day before Ms. Lord’s testimony, President Donald Trump had signed an executive order “declaring a national emergency in the mining industry,” aimed at “incentivizing the domestic production of rare earth minerals critical for military technologies while reducing American dependence on China.” The sudden sense of urgency in a heretofore little discussed topic must have come as a surprise to many.
According to geologists, rare earths are not rare, but they are precious. The answer to what appears to be a riddle lies in accessibility. Comprising 17 elements that are used extensively in both consumer electronics and national defense equipment, rare earth elements (REEs) were first discovered and put into use in the United States. However, production gradually shifted to China, where lower labor costs, less concern for environmental impacts, and generous state subsidies enabled the People’s Republic of China (PRC) to account for 97 percent of global production. In 1997, Magniquench, then-America’s leading rare earths company, was sold to an investment consortium headed by Archibald Cox, Jr., son of the same-named Watergate prosecutor, with two Chinese state-owned metals firms, San Huan New Materials and China National Nonferrous Metals Import and Export Company. The chairman of San Huan, son-in-law of paramount leader Deng Xiaoping, became chairman of the company. Magniquench was shut down in the United States, moved to China, and reopened in 2003, where it fit in well with Deng’s Super 863 Program to acquire cutting-edge technologies for military applications, including “exotic materials.” This left Molycorp as the last remaining major rare earths producer in the United States until its collapse in 2015.
While as far back as the Reagan administration some metallurgists raised concerns about America becoming reliant on not necessarily friendly external sources—at that time, mainly the Soviet Union—for critical parts of its weapons system, the issue did not really come to public consciousness until 2010. In September of that year, a Chinese fishing boat rammed two Japanese coast guard vessels in the contested waters of the East China Sea. The Japanese government announced its intention to put the fishing boat’s captain on trial, whereupon the Chinese government retaliated with several measures that included an embargo on rare earth sales to Japan. This could potentially have had a devastating effect on Japan’s auto industry, which was already feeling threatened by a sharp increase in less-expensive Chinese-made cars. Among other uses, REEs are an integral part of the catalytic converters of engines.
China’s threat was taken seriously enough that the United States, the European Union, Japan, and several other nations filed suit in the World Trade Organization, which ruled that China could not put limits on REE exports. But the wheels of the WTO’s resolution machinery turn slowly: the ruling did not occur until four years later. The Chinese Foreign Ministry later denied it had imposed an embargo, saying that China needed more REEs for its own developing industries. This may have been true: already, by 2005, China had been restricting exports, causing concern in the Pentagon about shortages of four REEs—lanthanum, cerium, europium, and gadolinium—that were causing delays in producing certain weapons.
On the other hand, China’s virtual monopoly on REE production could also have been motivated by profit maximizing factors, and indeed prices did rise rapidly in that period. The demise of Molycorp also shows shrewd management by the Chinese government. Anticipating a sharp rise in REE prices after the Chinese fishing boat-Japanese coast guard incident in 2010, Molycorp raised a large sum to build a state-of-the-art processing facility. However, when the Chinese government relaxed its export quotas in 2015, Molycorp was left with a $1.7 billion debt and a half-finished processing facility. It emerged from bankruptcy proceedings two years later, sold for $20.5 million—an exceedingly modest sum when compared to the $1.7 billion debt. The corporation was rescued by a consortium in which China’s Leshan Shenghe Rare Earth Company holds a 30 percent non-voting interest. Since having a non-voting share technically means that Leshan Shenghe is entitled to no more than a share of the profits, and moreover those profits might be modest in total, one might question the company’s motives. Still, considering the size of Leshan Shenghe relative to the sum needed to obtain a 30 percent share, the company could well afford to take a chance. Influence may, however, be exerted in ways other than voting. According to a Chinese-language document produced by the Wall Street Journal, Leshan Shenghe would have exclusive sales rights for Mountain Pass minerals. In any case, Molycorp sends its REEs to China for processing.
Japanese industry was not actually badly affected by the 2010 dispute, since it was able to rely on a reserve. But the possibility of China weaponizing REEs was now recognized. Within weeks, Japanese experts were visiting countries with other significant rare earth resources, such as Mongolia, Vietnam, and Australia, to make inquiries. By November 2010, Japan had reached a tentative long-term supply agreement with Australia’s Lynas Group. Confirmed early the next year and since expanded, Japan now obtains 30 percent of its rare earths from Lynas. Interestingly, state-owned China Nonferrous Metal Mining had tried to purchase a majority stake in Lynas only the year before. Given the PRC’s own large deposits of rare earths, one might speculate that China had plans to corner the world market for supply as well as production. The Australian government blocked the sale.
For the United States, REEs arose again in the context of the U.S.-China trade war. In May 2019, PRC General Secretary Xi Jinping paid a well-publicized and highly symbolic visit to a rare earths mine in Jiangxi that was interpreted as highlighting the leverage his government has over Washington. Lest the implication be missed, Renmin Ribao, the official newspaper of the Chinese Communist Party’s Central Committee, wrote, “We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you.” Observers noted that the expression “don’t say we didn’t warn you” is typically used by official media only for very serious situations such as in 1978 prior to the PRC’s invasion of Vietnam and in a 2017 border dispute with India. To add to American concerns, as more advanced weapons are developed, more REEs are needed. To cite just two examples, every F-35 fighter jet requires 920 pounds of rare earth, and each Virginia-class submarine needs ten times that amount.
Extraction is Only Part of the Problem
Warnings notwithstanding, efforts to establish an REE supply chain that does not include China continue. However, the process is more difficult than simple extraction. In situ, REEs are mixed with many other minerals in different concentrations. The raw ores must then go through a first round of processing to produce concentrates, and from there to another facility that isolates the REEs into high-purity elements. In a procedure called solvent extraction, “the dissolved materials go through hundreds of liquid-containing chambers that separate individual elements or compounds—steps that may be repeated hundreds or even thousands of times. Once purified, they can be processed into oxides, phosphors, metals, alloys, and magnets that take advantage of these elements’ unique magnetic, luminescent or electrochemical properties,” according to Scientific American. In many cases, the process is complicated by the presence of radioactive elements.
There was brief euphoria in Japan when in 2012, and confirmed in detail in 2018, a rich deposit of high-grade REEs, estimated to supply its needs for several centuries, was discovered near Minami Torishima in its exclusive economic zone. However, as of 2020, Asahi, the country’s second-largest circulation daily, described the dream of self-sufficiency as quite literally “stuck in the mud.” Finding a commercially feasible method of extraction continues to be a problem, even for the technologically astute Japanese. A device called a piston corer collects mud from the stratum under the 6,000 meter deep seafloor. The process is agonizingly slow since the corer takes over 200 minutes to reach the sea floor. Reaching and then extracting the mud is just the beginning of the refining process, and other concerns impinge as well. There are potential dangers to the environment, with scientists concerned that “the seabed stratum could collapse due to the force of the circulating water, spilling the drilled rare earths and mud into the ocean.” Commercial factors must also be considered: 3,500 tons need to be collected daily to make the business profitable. At present, only 350 tons can be collected in a ten-hour day.
In other words, readying REEs for use, whether from the land or the sea, is time consuming and expensive. China controls nearly all of the world’s processing facilities, with even REEs taken from the ground in other countries being sent there for refining. Lynas, the exception, sends its ores to Malaysia for processing. Valuable though Lynas’ contribution to the rare earth problem be, it is a less than perfect solution. The corporation’s mines have a lower rare earth content than those of China, meaning that Lynas must mine more materials to extract and isolate heavy rare earth metals such as dysprosium, a crucial component in data storage applications, thereby raising costs. Mining the heavy rare earth metals has been compared to buying an entire cow just for the sirloin: as of August 2020, the price of a kilogram of dysprosium was $344.40, as compared to $55.20 for a kilogram of the light rare earth neodymium.
In 2019, Texas-based Blue Line Corporation announced that it would establish a joint venture with Lynas to build an REE separation plant exclusive of Chinese involvement. However, the project is expected to take two to three years to come on line, leaving potential U.S. buyers vulnerable to retaliatory measures by Beijing. While the Australian government blocked a Chinese attempt to buy into Lynas, Beijing continues to seek other foreign acquisitions. It already owns a facility in Vietnam, and had been importing large amounts from Myanmar—25,000 tons of rare earth concentrate in 2018 and 9,217 tons from January 1-May 15, 2019 before the Yangon government imposed a ban due to environmental damage and conflicts caused by the Chinese miners’ unregulated operations. The ban may have been informally lifted in 2020, with illegal mining continuing to exist on both sides of the border. Some experts believe that REEs continue to be illegally mined in south China, then sent into Myanmar in various roundabout ways such as through Yunnan province, and then re-imported back into China to evade the welter of regulations.
Chinese buyers have also been seeking to acquire mining sites in Greenland, causing unease in both the United States, which maintains an air base in Thule, and Denmark, of which Greenland is a semi-autonomous part. Shenghe Resources Holding Company has become the largest shareholder in Greenland Minerals Ltd. In 2019, it formed a joint venture with subsidiaries of China National Nuclear Corporation (CNNC) for the trading and processing of rare earth minerals. What does and does not constitute a security issue can be a contentious issue between the two parties to the Denmark-Greenland Home Rule Act.
How Concerned Should We Be?
Some argue that the concern over rare earth supplies is exaggerated. Stockpiles have surely been added to since 2010, providing at least a short-term hedge against a sudden Chinese embargo. Rare earths can also be recycled, and processes may be devised that will raise the efficiency of existing supplies. The Japanese government’s efforts to find a commercially feasible way to mine the rich deposits in its EEZ may succeed, and research on creating substitutes for rare earths is ongoing.
Nor will China’s rare earths necessarily be available in abundance forever. Enhanced environmental concerns in China are also impacting production. While selling REEs at low prices may have driven foreign competition out of business, there have been severe impacts in the areas where production and refining take place. The wastewater is highly toxic. Containing wastewater in surface tailing ponds can mitigate the pollution from areas where rare earth leaching takes place, but these can leak or break, leading to serious downstream contamination. Although contaminants from a rare earth mine caused by the once-in-a-century Yangtze River floods of 2020 have not been publicly mentioned, concerns about them surely exist. The floods had a disastrous effect on both Leshan Shenghe’s plant and its inventory, with the company estimating its losses at $35-$48 million, far exceeding the amount for which it is insured. Given that floods, presumably resulting from climate change, have become more frequent, the possibility of future flood damage and contamination become more likely as well.
An official at Ganzhou, the area visited by Xi Jinping, lamented, “Ironically, because the prices of rare earths have been so low for a long period of time, the profits from selling these resources are nothing compared to the amount needed to repair the damage.”
Even so, China continues to provide 70 to 77 percent of the world’s REEs, depending on the reporting source. The United States cannot continue to pay attention only when, as in 2010 and 2019, a crisis looms. In both the Magniquench and Molycorp situations, the respective consortia were able to convince the Committee on Foreign Investments in the United States (CFIUS) that the sales would not adversely impact U.S. security. CFIUS should broaden its mandate to include economic security—and be more vigilant as well. Sustained attention from future administrations, as opposed to the episodic and short-lived responses of the past, is imperative. Recalling the words of Renmin Ribao in 2019, we can’t say we weren’t warned.
The views expressed in this article are those of the authors alone and do not necessarily reflect the position of the Foreign Policy Research Institute, a non-partisan organization that seeks to publish well-argued, policy-oriented articles on American foreign policy and national security priorities.