97% of the world's rare earth elements come from China.
This has caused some consternation among the ranks of America's arm-chair geopoliticians for some time, but China's decision this summer to cut its rare earths exports quota by 72% and use of its monopoly to put economic pressure on Japan during their recent sprat over the Senkaku Islands has brought the issue into the broader public sphere. Every article and report on the subject is quick to throw out the 97% within the first few paragraphs. 97% of all rare earths sold on the market today were mined in China. 97%, 97%, 97%.
I believe we attached undue importance to this number.
If the geopolitics of rare earth elements came down to the amount of the stuff in the ground and the speed with which we could get it out, China's monopoly would not be a great problem. China currently mines 97% of the world's rare earths, but it only has 36% of the world's rare earth reserves. Mining in countries like America, Russia, and Australia did not stop because these countries' large reserves were depleted, but because China's loose environmental regulations and inexpensive labor made mining in China so cheap that the other mines were run out of business. In all likelihood, government subsidies (something the Pentagon has signaled it is willing to provide) would be enough to put domestic mines back into production.
Alas, things are more complicated than this. Mining is only the beginning of rare earth procurement: rare earths must also be refined and processed before they can be used. In this they are quite similar to oil and other fossil fuels, and the geopolitical realities of that trade shed some light on this one. The Islamic Republic of Iran has extensive oil reserves, but limited refining capacity. There is enough oil below Persian sands to meet all of the imaginable demands of the Iranian people, but Iran is forced to import petroleum. As Iran must export its oil and then import it at a higher price than for which it was originally sold, Iran is extremely vulnerable to international economic sanctions. A lesson may be gained from this: reserves do not automatically translate to power.
Ten years ago China was the Iran of rare earth elements. At that time it was the source of just more than 90% of the world's rare earths, but had to export more than 75% for processing. This is no longer true. China now exports only 15% of what it mines for refining or processing. Almost all of the world's rare earth refining and processing facilities are now to be found within China. America is the Iran of rare earth elements now.
Much like the mines themselves, America's rare earth processing facilities fell victim to China's cheap labor and low environmental standards. Unlike the mines, most of these factories no longer exist. And it is not just the physical infrastructure that suffered. The global supply chains used to process and transport rare earth elements has decayed into nothingness. A generation of U.S. workers were never trained to work with rare metals. Becoming self-sufficient is a much larger matter than opening a few old mines: it is building an entire supply chain and all of its infrastructural needs from scratch.
And that will take time.
We can only hope it does not take too much time. Less conservative projections predict that China's demand for rare earths will meet its supply by 2015. If current trends continue then China should have the refining capacity to handle all of this supply by this time. In such a scenario there will be little incentive to export at all - and it is this scenario Chinese leader's want to make reality.
Mark Humphries. Congressional Research Service. 30 September 2010.
Cindy Hurst. Institute for the Analysis of International Security. March 2010.