A Sign of Things to Come: Rare Minerals & Made in China

China's prominence as the world's second largest economy now poses a substantial threat to the continued growth and development of Western economies.  Over the past two years, the Chinese government has been developing policies that "prohibit or restrict exports of rare earth metals that are produced only in China and play a vital role in cutting edge technology, from hybrid cars and catalytic converters, to superconductors, and precision-guided weapons," according to news reports.

Nearly 95% of the world's rare earth minerals are extracted and processed in China.  A year ago, China’s Ministry of Industry and Information Technology called for a complete ban on trade to foreign nations of terbium, dysprosium, yttrium, thulium, and lutetium.  A subset of other metals, such as neodymium, europium, cerium, and lanthanum, would be limited to a combined export quota of 35,000 tonnes a year; a value substantially below current global needs.  An article published last week in Chemical and Engineering News elaborates:

China has maneuvered effectively since the mid-1980s to establish a worldwide monopoly on rare-earth resources. Aiding its effort to corner the market is China’s tremendous rare-earth mineral wealth. U.S. Geological Survey reports indicate that China possesses roughly 52% of the world’s known rare-earth reserves. By comparison, the U.S. is believed to have the second-largest share, at about 13%. Russia and Australia each have 5–6% of the known reserves. India, Canada, Greenland, and a few other countries also have appreciable quantities of rare-earth minerals.

A summary of current uses of rare earth metals is listed below:

Each Toyota Prius uses 25 pounds of rare earth elements. Cerium and lanthanum are used in catalytic converters for diesel engines. Europium is used in lasers... Blackberries, iPods, mobile phones, palms TVs, navigation systems, and air defence missiles all use a sprinkling of rare earth metals. They are used to filter viruses and bacteria from water, and cleaning up Sarin gas and VX nerve agents.

A couple of months ago, the Chinese People's Daily reported that the Chinese government had created an internal cartel to prevent the undervaluing of minerals.  Peng Bo, an analyst at Guosen Securities, states, "The pricing mechanism, if put into practice, will effectively buoy rare earths' undervalued prices and give Chinese producers more say on the global market."  The Chinese newspaper bluntly states that prices in rare earth minerals, such as neodymium, have skyrocketed and that Japanese and American markets are completely dependant on China for their needs.

Recently, America's Government Accountability Office (GAO) prepared a report on rare-earth materials as it pertains to America's military preparedness.  The report found:

that rare-earth materials play important roles in numerous defense technologies, including radar, missile-guidance systems, lasers, and night vision equipment. The Department of Defense is now conducting an internal assessment and is expected to devise strategies to protect against rare-earth supply interruptions.

It's not just the minerals per se that China will now limit, but also the development, production, and distribution of the attendant technologies that are dependant on these minerals. The indolent and short-term thinking of America's leaders in government and business, have created a untenable situation, in which a foreign government now has the ability to limit and control the development of not only the West's existing technologies, but future technologies, such as "green-tech," that were supposed to transform America's depressed manufacturing landscape.  If innovation is the source of future prosperity, then that wealth will be exclusively controlled by the communists in Beijing.  Coupled with America's need for the Chinese to continuously purchase Treasury bills and flood their markets with cheap disposable consumables, the future has become substantially more complicated for those in Washington D.C.