Rare Earth Elements Provide Opportunity to School China in Economics

periodic_table

One of the news stories rapidly gaining ground this week is the “Rare Earth Crisis.” The New York Times, Wall Street Journal and BBC are all reporting that the Chinese are flexing their economic muscle to force the West to do their bidding (or, at the very least, to overlooking Chinese violations of international accords on fishing, environmental protection, and the support of rogue states.) The Chinese are bullying the West by restricting, and most recently halting altogether, shipments of “rare earth” elements to the US and EU.

In case you were asleep that day in chemistry class, the so-called rare earth elements (light blue in this picture) include such household names as dysprosium (DY), terbium (TB) and yttrium (YT). There are actually 17 of them altogether. Why do you care? Because these extraterrestrial-sounding elements are at the heart of our most prized high-tech inventions. The unique configuration of their electron shells give them unusual and useful electromagnetic properties. Neodymium and dysprosium are critical to the high-performance magnets in electric electric vehicles and wind generators. Terbium and yttrium, europium and others are necessary phosphors which convert electricity into light for plasma screens and energy-efficient light bulbs. Without rare earth elements, the manufacture of everything from cell phones to hybrid cars grinds to a halt.

China produces 93 percent of the world’s rare earth minerals, and more than 99 percent of some of the most prized elements, which sell for several hundred dollars a pound. This gives them the power to decide who gets to play in the high-tech game and who doesn’t. Which may bring you to ask how the Chinese got so lucky as to wield such power.

The answer is actually quite simple and, surprisingly, has little to do with luck. In spite of their name, the rare earths are really not all that rare. They are found in relatively high concentrations in the earth’s crust. One of them, cerium is actually the 25th most abundant element. Unfortunately, those same electron properties which make them so valuable also keep them from concentrating into ore deposits. Still, significant deposits have been found in Australia, Brazil, Canada, China, South Africa and the United States. In fact, one of the larger mines is located right here in California. Unfortunately, it was closed, along with most of the other mines in the world, when China undercut world prices in the 1990s.

So, the short answer to the question of how the Chinese had this opportunity land in their lap is that we gave it to them. We traded control over the supply of this important raw material for short-term profits. Whether this lack of a strategic materials policy was good business or short-sightedness remains to be seen, but instead of accusing the Chinese of trying to start a trade war and holding our environmental interests hostage, maybe we should evaluate our own policies.

If an economist were to write this story, it would have a very different headline. Perhaps “Chinese drive up price of certain commodities to the point that exploiting alternate sources becomes economical.”

This isn’t news at all. It’s happened a bunch of times in the history of natural resources, perhaps most dramatically in 1980 when Texas billionaire Bunky Hunt attempted to corner the market on silver. His personal fortune rocketed to an estimated $4 billion in 1980. Just a few months later, he was bankrupt.

When you reduce the supply of a commodity, you drive the price up. As the price goes up, newer, formerly unprofitable sources become economically competitive. The price will re-stabilize at just above the marginal production cost of the alternate sources, often flooding the market when the demand caused by speculators collapses. (Work is already underway to restart the Mountain Pass mine in California, although it will take a year or two.)

The Chinese, who seem to see the world through the lens of control, are pitting their policy against a global system which does a very good job of ensuring that resources are made available at reasonable cost or substituted with more economical alternatives. Thanks to market economics, they can’t control the price any better than you or I can.

Good luck, China, and welcome to the world market.

Links:

“Magic Rocks,” IEEE Spectrum

“Trade Officials Ponder China’s Rare Earth Stance”, The New York Times

“Congress Holds Hearings on Unobtainium,” Wired

Update:

“The Upside and Downside to Rare Earth Metals Shortages”, IEEE Spectrum