Thursday, November 4, 2010

Moving Heaven and (Rare) Earth

The Pentagon’s Office of Industrial Policy is preparing to release the results of a year-long study that concluded that China’s monopoly on rare earth minerals does not pose a threat to U.S. national security. China produces 97 percent of the world’s rare earths, a group of 17 metals used in the production of military equipment such as radar, night-vision goggles, and precision-guided bombs. However, worldwide uncertainty about China’s intention to reduce exports of the materials has prompted several countries to move toward ending their dependence on Chinese production. Japan is planning to mine rare earth minerals in Vietnam, and India is accelerating geological surveys and mapping of its own possible reserves. The Pentagon study reportedly suggests that loans and incentives might be offered to U.S. providers of rare earth minerals to bolster domestic supply.

In “China’s Ace in the Hole: Rare Earth Elements” (Joint Force Quarterly 59, 4th Quarter 2010), LCDR Cindy Hurst urged the U.S. military to consider the possibility that China could capitalize on its decades of experience and work with rare earth metals to pull ahead of the United States in the military technology race. But Dr. Amory B. Lovins, cofounder, chairman, and chief scientist at the Rocky Mountain Institute and also a contributor to Joint Force Quarterly (Issue 57, 2d Quarter 2010), is more optimistic about the prospects that alternative technologies offer the United States. He explains in this letter to the editor of Joint Force Quarterly, as well as offering the following two suggestions for additional readings about the rare earths situation:

Dr. Jon Hykawy, Arun Thomas, and Gabriela Casasnovas, "Rare Earth Elements: Pick Your Spots, Carefully," Byron Capital Markets report, March 25, 2010 and Walt Benecki, "What Rare Earth Crisis?" Magnetics & Technology Magazine (Winter 2009).

—L.M. Yambrick
Click here to read the letter to the editor by Dr. Amory B. Lovins.

Comment from Dr. Jon Hykawy
November 8, 2010
Dr. Lovins,

At the risk of stepping into a discussion that our work was not meant to address, I wanted to elaborate on a few of the concepts you have discussed below.

We agree that a bubble in rare earth stocks has developed.  Adhering as closely as possible to the scientific method, my definition of a stock-market bubble is a situation in which all stocks associated with a particular sector or concept rise or fall, regardless of the value of their underlying assets.  Byron Capital Markets maintains a rare earths index, not with the intent of feeding the hype, but to help us determine whether or not there is too much exuberance manifesting in the market.  It would appear the rare earths space is currently experiencing such a bubble and level of exuberance.  But bubbles can persist for an extended period of time, and as long as capital continues to flow to the sector, we would agree with the conclusion in the DoD study that rare earths do not present a critical strategic challenge for the US military.

We also agree that there are substitutes available.  Indeed, we would suggest that the options available for extending the available supply of rare earths should include both substitution and mitigation.  For example, the major uses of dysprosium and terbium are likely to be as alloying agents in NdFeB alloy magnets, to raise the effective operating temperature of these parts, as outlined in LCDR Hurst’s JFQ article.  And yes, we can substitute ferrite magnets or other motor designs to remove the need for rare earth magnets, likely at a penalty of volume, weight and power/efficiency.  There is good research being done in Japan and Korea (and likely elsewhere, but these are the programs of which I am aware) to effectively decrease the use of dysprosium and terbium in magnets with little to no penalty in physical characteristics by processing of the magnet alloys, a form of mitigation; we want the magnet to work at elevated temperatures, we do not care if this can be done with or without Dy and Tb.  But we can also mitigate the base issue; in the case of rare earth magnets operating at elevated temperature, we can also work to more effectively cool the magnets, an engineering issue rather than a materials issue, and yet a direction that could provide a significant decrease in material use.  Combined, we believe all these options may well result in being able to do much more in industry with the rare earths we can lay our hands on.

However, we do not agree there is no cause for alarm.  Substitution and mitigation take time, and China currently owns the only available supply.  While the capital markets are willing to finance rare earths mines at present, this market bubble is not likely to persist forever.  There is little understanding in the capital markets regarding the rare earths value chain, and the need for separation/purification facilities outside of China, the need for metallization and alloying capability globally, and the amount of profit that each one of these operations can generate.  Without separation, metallization and alloying, magnet makers outside China will simply not receive product they can use, regardless of whether the raw rare earths are being extracted from the ground or not.  Rare earths within and without China are rising in cost, and while many have not yet reached historical highs, this may well be achieved with the next round of quotas from the Chinese.

I am not any sort of conspiracy theorist, and would not bill myself as a China expert.  I have done a fair bit of work with Chinese companies, government people and businessmen.  I would point out that one must parse official statements from Chinese officials very carefully before beginning to celebrate.  The Chinese have recently made statements to the effect that rare earths will not become a bargaining chip; that can be read two ways.  They have stated that, contrary to an earlier indication of a further 30% reduction in export quotas in the coming year, the quotas will not be reduced further; but it was not clear in anything I read whether this stable quota is based on a 2010 annualized level or on the run-rate quotas established in the latter half of 2010, which were significantly lower than 2010 average rates.  And I would add that our belief is that we will see a modified quota system from the Chinese in the near term, one designed to alleviate the very high prices of lanthanum and cerium outside China.  If a new system is designed that, at minimum, establishes separate quota levels for La and Ce and all other rare earths, it is trivial to set values for each segment that maintains export quotas in tonnes but severely curtails the shipment of magnet materials and heavy rare earth elements from China.  Given that we believe China’s main goal in limiting export of rare earths, whether by methods against WTO guidelines such as export quotas or within WTO guidelines (albeit perhaps not within the bounds of what China is allowed to do as a relatively new member of the WTO) as punitive export tariffs and taxes, is the importation of higher-value jobs to China, their goal should be to keep raw magnet materials and raw heavy rare earths within their borders.  There is more than one way to skin that cat.

Our original report suggested that while most light rare earths would be in relatively good supply in future, some heavy elements were likely to become scarce.  We stand by that opinion.  We continue to believe that the US should make the electrification of transportation a national strategic imperative, and not solely due to environmental concerns but largely because your nation spends some $300 billion per year buying foreign oil, weakening your currency and indirectly supporting regimes that, quite simply, do not have your best interests at heart.  Rare earths are a currently necessary part of the electrification of transportation, and at present price points are likely to continue to be a desirable part of that change, as well as many other industries.  While we do not believe these materials present a major crisis to your military, that does not necessarily make them an afterthought in many other sectors of your economy.


Dr. Jon Hykawy


  1. With the high percentage of Rare Earth Elements (REEs) the Chinese maintain, they may eventually have economic leverage over the U.S. ability to produce and procure technologies enabled by the REEs. China has the strategic advantage of geography that is difficult for any country to overcome. The US may not be able to directly counter this advantage, as it will find it financially challenging to mine the smaller amounts of REEs available in diluted quantities within the US.

    As long as the US depends on these metals to enable new and existing military and civilian technologies, it may have to realize the risks involved as the Chinese may have increasing economic control of this market.

    MAJ Jon Bushman, US Army, ILE Student

  2. I would agree with pretty much everything Dr. Hykawy has said above.

    @ MAJ Bushman: in addition to the production of rare-earth oxides, China already dominates the production of many of the downstream alloys, components and devices that utilize REEs, and on which the USA and many other countries depend.

    This is primarily a result of the "lowest-cost provider", free-market approach used by most industries in the West over the past 20 years, to increase or to at least maintain profit margins, without a thought given to the strategic implications for such offshoring...

    Gareth P Hatch
    Technology Metals Research, LLC


  4. it is trivial to set values for each segment that maintains export quotas in tonnes but severely curtails the shipment of magnet materials and heavy rare earth elements from China. Given that we believe China’s main goal in limiting export of rare earths, whether by methods against