Source: forbes.com
Perhaps it’s worth thinking why blame others for one’s own problems.
--The New Legalist editor
Last night 60 Minutes ran a segment on how American industry, and more importantly, the American defense industry, is prostrate before a Chinese monopoly of rare earths production. This is of course very worrying for all sorts of Very Serious People and something no doubt should be done. There is a slight problem with the analysis 60 Minutes presented though: that problem being that their analysis was wrong. And I say this as someone who works in that rare earth industry, someone who has, at times, been a near monopoly supplier of one of the rare earths and, even, a supplier to the US defense industry of non-Chinese rare earths.
Here are the most important lines in the 60 Minutes report:
But trouble is once again looming for the U.S. rare earth industry. Since restarting operations two years ago, Molycorp’s mountain pass mine has yet to turn a profit, and so deeply in debt that just last week, its own auditor warned it may not be able to stay in business.
That part is, as far as anyone in the industry knows, true. Molycorp, which runs the only producing US domestic rare earths mine, is deep in the financial doo doo and may well go bust without a recapitalisation. As was true of the major Australian rare earths miner, Lynas Corporation, until a recapitalisation a few months back (Sept 2014). You do not have to be excessively cynical to note that shareholders might prefer to have some government support rather than having to put more of their own money into such companies. That call for support, unless there truly is some important defense interest, should be rejected of course. For making losses as these firms are doing is the universe’s way of telling you to stop doing what you are doing.
However, on to the detail of what 60 Minutes tries to tell us about rare earths.
What do cars, precision-guided missiles and the television you’re watching right now have in common? They all depend on something called rare earth elements, unusual metals that are sprinkled inside almost every piece of high-tech you can think of. Most people have never heard of them. But we have become so reliant on rare earths that a few years ago, an intense global power struggle broke out over their free flow. The reason is that one country has a virtual monopoly – roughly 90 percent — of the mining, refining and processing of rare earths — China. And in 2010, it used that power to disrupt the world’s supply. It’s especially troubling, because it was the United States that started the rare earth revolution in the first place.
Well, that’s not particularly true. It most certainly was true, some years back, but it isn’t now. And I’m able to point back to something I wrote for Foreign Policy back in 2010 to explain why it used to be true but is no longer.
If rare earths are so precious, why isn’t the United States working harder to collect them? The main reason is that, for these last 25 years, China has been supplying all we could eat at prices we were more than happy to pay. If Beijing wants to raise its prices and start using supplies as geopolitical bargaining chips, so what? The rest of the world will simply roll up its sleeves and ramp up production, and the monopoly will be broken.
And what did happen? China did try to exercise its monopoly, the world did roll up its sleeves and both Molycorp and Lynas went into production. Between the two of them they produce very much more than 10% of global consumption of rare earths (in fact, reasonable estimates are that they produce more than total non-China consumption of them) meaning that China simply doesn’t have that monopoly being talked of. As I said would happen and as a result Alex Tabarrok over at Marginal Revolution has said of my 2010 analysis:
Bonus points to Tim Worstall, economist blogger and rare earth dealer, who in 2010 at the height of the crisis pointed out that rare earths were neither rare nor earths and China’s monopoly had been won only by low prices that accrued to our benefit. …(…)… Nailed it.
I don’t, by the way, claim great prescience over this. It was obvious to anyone at all with even the most limited knowledge of the industry and of mining economics. The problem that 60 Minutes is talking about, the Chinese rare earth monopoly isn’t a problem because the monopoly has been broken.
The U.S. and China rarely see eye to eye. The U.S. wants China to invest more in the American economy, but to do so it demands China reform its markets and respect intellectual property. On July 9 and 10, Treasury Secretary Jacob Lew and Secretary of State John Kerry traveled to Beijing to discuss a bilateral investment treaty. A treaty, praised by U.S. corporations, is still around three years away, according to Lew. That hasn’t stopped China from investing in the American economy. Here are the top 10 states where Chinese corporations are spending their money on acquisitions and greenfield projects. All data from The Rhodium Group.
60 Minutes has a couple more errors in their report:
Lesley Stahl: What I’m getting from you is that modern life depends on these elements.
Constantine Karayannopoulos: Absolutely.
Despite their name – rare earths are not rare. Small amounts can be found in your backyard. They’re trapped in what looks like ordinary rock.
But there are only a few places on earth with concentrations high enough to mine.
Constantine Karayannopoulos: Rare earths normally are found in very, very low concentrations. This is probably running something in the 25 percent grade.
Lesley Stahl: That’s good?
Constantine Karayannopoulos: Which is remarkable. To anyone who has ever worked with rare earths, this is a thing of beauty.
It is true that there’re not that many places around the world where you would dig a big hole in order to extract rare earths from said hole. But that’s a function of the economics of rare earths, not their geology. What we call “hard rock” mining is an expensive business. And so is the processing that has to be done to separate the lanthanides (the majority of the rare earths) one from each other. But that does not mean that that is the only manner in which we can get the rare earths we desire. There’re rare earths in all sorts of other minerals: other minerals that we already process for other reasons. It would be entirely possible to extract what we desire from the materials we throw away at other already producing factories. For example, I spent a few tens of thousands of my own money on checking a process to extract them from the wastes of aluminium (more strictly, alumina) production. It works, no doubt about it. And the reason that I’m not currently running such a factory is because it would be stupid to do so. It would lose money: as Molycorp is. There an English process that could make iron, titanium, alumina and the rare earths from that same waste: there’s even a possibility that that process could be economic. There’re rare earths (that we know how to extract, even if not profitably) in the wastes of zirconium production, other mineral sands, tin, there’s some vast amount in the fly ash (the soot from coal burning) that we currently dump in vast ponds by the tens of millions of tonnes each year.
The point here being that if you were actually starting with a clean sheet you wouldn’t go and dig a hole in the ground in order to get rare earths. You’d first change the system by which we separate them (yes, there are alternatives, we could use something akin to the method we currently use to process titanium dioxide for example) and then we’d look for streams of rare earths in minerals that we already process.
As Jack Lifton (a journalist very wise in the ways of this industry) has pointed out:
I got involved with the DoD’s concerns in the late noughties of this century. The matter was addressed at a meeting of the Office of Net Threat Assessment in the Pentagon in 2009 to which I was invited as a rare earths “expert.” I was asked how I would address the problem. I answered then that I would first set up a private company to recycle military scrap containing rare earths and then we could address the downstream needs for separation, metals/alloys making and magnet making after a supply of raw materials had been established. “How much would that cost?” I was asked. My reply was a few million dollars. I recall that some of the people present snickered and the group leader, the then 86 year old, Mr Andy Marshall, said that “millions’ are what we spend to “study” the problem. It was then pointed out to me that this might well be a billion dollar venture that will require study and political involvement. I said to the group that they were “nuts” an that even the Four-star general present sounded like problem makers rather than solvers. I was not invited back but even so I still maintain a cordial relationship with some individuals, not directly in government, who I first met at that meeting.
I don’t share Lifton’s enthusiasm for recycling but that’s a matter of simple opinion. He’s absolutely correct though that the people seeking to “solve” this “problem” seem not to be interested in small, incremental and low cost solutions to it. Lifton, or I, a number of other people, could knock together a development program to provide the US, or any other industrial country in fact, with their own source of rare earths for trivial, by government standards, sums. A number of lab research programs at under $100,000 each, two or four pilot programs (ie, in the jargon, taking the lab work that works and building a real machine to do it) at a couple of million each and end up with a rare earths supply system that doesn’t depend upon billion dollar separation plants nor on expensive holes in the ground but sources from the wastes of other industrial processes. We know, absolutely, that the supply is there and that the chemistry (physics as well, very important in a separation plant) works. The reason we’re not already doing it is because it would lose money.
Which brings us to that defense argument. Is there an over-riding defense related reason as to why we might want to do this? It’s most certainly true that the US military does not like to purchase anything made of Chinese materials, I’ve had that condition imposed upon me in a contract. That the rare earths contained do not come from China, were not processed there. How important is it?
A prime example of that is the new F-35 fighter jet, the most technologically advanced weapons system in history. Each one contains nearly half a ton of rare earths. Former White House Official Dan McGroarty says that’s just for starters.
Really not sure where that information is coming from but given that an F-35 unloaded (ie, without pilot, fuel or weapons) weighs some 14 tonnes or so it really is most unlikely that there’s half a tonne of rare earths in there. So unlikely as to be entirely untrue in fact. Rare earths are important to the project, yes. The most important being the coating for the blades in the jet engine which is made from yttrium, a rare earth. But while yttrium is a rare earth it’s not a lanthanide. So we don’t need one of those billion dollar lanthanide separation plants. And we also don’t need to get it from a rare earths mine as there’s plenty of other potential sources for it. So many potential sources in fact that even I, who does not normally deal with yttrium, have had vague discussions with people about supplying that program. And as I recall it the demand was for some 2 tonnes (yes, “two tonnes”, not two thousand or anything) of yttrium a year. Which doesn’t go all that far over a fleet of F-35s if each one needs 500 kg. And of course they don’t need 500 kg per plane, they’re using it to make a very thin film over those blades in those jet engines, just to protect the surfaces.
So, just to recap. China does not currently have a monopoly, nor 90%, of the supply of rare earths. 60 Minutes is also wrong on the geology and metallurgy of the rare earths. We do not need to have mines to produce them, we can extract from other minerals that we already process. They are used in various defense programs, I know that very well as I’ve supplied more than one of them. But they’re not important to the extent that 60 Minutes seems to think and even the one that is important to the F-35 doesn’t have to come from the traditional rare earths supply chain.
And finally, even if you do want to insist that the US must have its own supply chain, from hole in the ground to jet flying through the sky, this is a relatively cheap, almost trivial, problem to solve. It doesn’t require hundreds of millions, nor the bailing out of a failing mine, to achieve the goal. As an example, and as above, Lifton, I, a number of other people, could organise the supply of that essential yttrium for the F-35 for a couple of million dollars a year. And at that price we’d probably be getting ourselves a new Rolls Royce each year too (the car, not the jet engine). But why on Earth would anyone want to pay us to do that when you can go out into the market and buy the necessary material for perhaps $160,000 a year?
Which leaves me with just one prediction to make. Expect to see renewed interest in various pieces of legislation in Congress calling for subsidy of the US rare earths industry. With a certain emphasis upon how to “save” Molycorp perhaps. The company might well need the help but there are better ways to deal with the DoD desire for a domestic rare earths supply system: even if I don’t end up being one of the beneficiaries.
My latest book is “23 Things We Are Telling You About Capitalism” At Amazon or Amazon UK. A critical (highly critical) re-appraisal of Ha Joon Chang’s “23 Things They Don’t Tell You About Capitalism”.
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