China and Rare Earths: The Crux For Foreign Mining Companies

Last Updated Nov 12, 2010 7:02 PM EST

China's dominance of rare earths and its continued ban on exports to Japan has given rise to a mining renaissance as foreign companies scramble to find a new supply of the minerals, which are used in every kind of high-tech product from iPods to electric cars. Unfortunately, it will be difficult for new rare earth mines to get off the ground under a system controlled by China.

There's no question that fears of China have boosted the fortunes of some mining companies that own rare-earth properties. For example, Molycorp Minerals, the U.S.-based company that wants to restart the Mountain Pass mine in California, had a tepid IPO earlier this summer. That is, until China started reducing its rare earth exports. Shares, which were trading in the $12 territory in late July, rose to a high of $40.90 on Oct. 28. Rare Element Resources, one of 26 publicly traded companies in Canada that have rare earth projects in some phase of development, saw its share price skyrocket more than 380 percent between August and when it peaked Oct. 20.

The problems begin with the balance between supply and demand, which China has the most control over. As production outside the China comes online, supply will outstrip demand by around 20,000 metric tons in 2015, according to a presentation by two leading rare earth analysts reviewed by the WSJ. If China tightened up its supply, perhaps a balance would be maintained. But there's no guarantee.

More problematic is China's ability to stick to companies as they try to restart production and lock in supply contracts by suddenly changing its quota or lifting it altogether.

Right now, China doesn't have different quotas for each rare earth element, which are later processed into oxides. Instead, everything is lumped together under one total tonnage number. As a result, Chinese companies have exported a lot of expensive heavy rare earths, instead of the low-value light rare earths like cerium, the Montreal Gazette said in its recent article. That has inadvertently driven up the price of cerium oxide, which is used for polishing semiconductors. China would be able to more easily manipulate the system if it changed its quota system to place restrictions on individual rare earths, depressing prices if it suddenly flooded the marketplace with certain elements.

One possible solution, at least in Molycorp's case, would be for the U.S. government to approve the $280 million in federal loan guarantees it recently applied for. A recent Pentagon study, which has yet to be released publicly, reportedly determined that China's monopoly isn't a threat to national security. However, it does recommend at least looking at ways the Defense Department could help companies like Molycorp.

If this country has any hope of freeing itself from China's rare-earth stranglehold helping restart mines here is a good start.

Photo from U.S. Agricultural Research Service via Wikipedia, public domain