A Rare (Earth) Case of Wisdom

Four years ago we were being warned that China’s monopoly on rare earths was a threat to the United States. Since rare earths are key resources for both national defense and green technology, the crisis united right and left in fear and anger.

Paul Krugman titled his column Rare and Foolish and he was hardly alone when he wrote:

You really have to wonder why nobody raised an alarm while this was happening, if only on national security grounds. But policy makers simply stood by as the U.S. rare earth industry shut down….The result was a monopoly position exceeding the wildest dreams of Middle Eastern oil-fueled tyrants.

…, the affair highlights the fecklessness of U.S. policy makers, who did nothing while an unreliable regime acquired a stranglehold on key materials.

Yet you probably haven’t heard much about this crisis recently. Why not? Ans: The crisis was exaggerated and what wasn’t exaggerated the market alleviated. Eugene Gholz of CFR has a balanced examination of what happened. I summarize:

  • The Chinese government might or might not have wanted to take advantage of their temporary monopoly power (it’s still unclear what the fishing incident was all about) but Chinese producers did a lot to evade export bans both legally and illegally.
  • Firms that had been using rare earths when they were cheap decided they didn’t really need them when they were expensive.
  • New suppliers came on line as prices rose.
  • Innovations created substitutes and ways to get more from using less.

Even the government did some good by funding competitions to support basic and applied research in substitute products and processes. Gholz draws a simple lesson:

…policymakers should not succumb to pressure to act too quickly or too expansively in the face of raw materials threats.

I agree but would add that at the time it was almost surreal how quickly nominal free traders and internationalists merged into war hawks. We did surprisingly well to not overreact politically and instead let market forces solve the problem. A disruption in our trade partnership with China would have been far more dangerous to our national security than a dispute over rare earths. I’d say that’s a rare earth case of wisdom.

Addendum: 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. “If Beijing wants to raise its prices and start using supplies as geopolitical bargaining chips,” he wrote, “so what? The rest of the world will simply roll up its sleeves and ramp up production, and the monopoly will be broken.” Nailed it.


China's perhaps unintentional monopoloy on rare earths seemed like a non-problem to me here in Australia. We dig up rare earths, dump them in ships and sell them to China for processing. If somebody else wanted to pay for them they could have had them. While any major bottlenecks in the world's supply chains are a cause for reasonable concern, rather than reasonalbe concern there seemed to be a whole lot of hype far out of proportion to the likelyhood of a disruption in supply. The hype died down as people found other things to enjoy taking offence at, but the hype has done damage. I still see people in comments sections carrying on as if rare earths are actually rare rather than just the name of part of the periodic table.

What the rare earths really are is dirty to refine - and the world had no problem with the Chinese doing the dirty work. Again.

'The Chinese have also used sulfuric acid refining techniques that generate 9,600 to 12,000 cubic meters of gas "laden" with flue dust concentrate, hydrofluoric acid, sulfur dioxide, and sulfuric acid to produce one ton of rare earth elements. Chinese refining processes also produce large amounts of liquid and solid waste; they estimate that after refining one ton of rare earth elements, approximately 75 cubic meters of acidic waste water and about one ton of radioactive waste residue are produced. The Institute for the Analysis of Global Security (IAGS) has reported that China produced over 130,000 metric tons of rare earth elements in 2008. Combining this figure with the figure for waste generation estimates that production yields very large amounts of waste - 1.2 billion to 1.6 billion cubic meters of waste gases per year, and 9.8 million cubic meters of acidic waste water.


Rare earth element ores tend to contain a range of different metals in their structure, including aluminum, arsenic, barium, beryllium, cadmium, cobalt, copper, lead, manganese, and zinc. These are the most harmful metals that are found in rare earth mines, and are separated from the ores during the refining process, as well as allowed into the open air in mines. Metals can be found in the air, the water, and the soil, which makes them concerning contaminants, since they are able to exist in all three environmental mediums. Since metals can only react into different compounds in the environment, not be destroyed, they can stay for a very long time in an ecosystem, which can allow them to accumulate to dangerous levels.' http://web.mit.edu/12.000/www/m2016/finalwebsite/problems/refining.html

What you're really paying for when you buy rare earths is the chemical waste left behind in the producer country. No surprise that China underbids everybody else on that. Buy it while you can -- you're getting a bargain. Sooner or later, China is going to get serious about tackling pollution.

Australia is too short of labor to refine the rare earths?

Therefore Australia needs to sell its capital assets cheap to China, so China can turn those capital assets into high priced assets that are in part sold back to Australians?

Maybe Australia prefers to remain a colony economy, but today a colony of China instead of Britain?

The American colonies in the north wanted to employ labor manufacturing instead of selling capital assets (raw materials) to Britain and then paying very high prices to buy them back after British labor increased the value of the capital assets. Admittedly the US has in some sectors returned to colonial status, exporting wood, fish, metal ores, and then buying them back at higher prices, meanwhile complaining that too much labor is idle.

Comparative Advantage called, it says what you're describing is completely normal. No Australia is not short of labor, they're short of labor to refine rare earths at the prices China is doing it for.

That's a remarkably ill informed post.

"Australia is too short of labor to refine the rare earths?"

Population of Australia: 23 million
Population of China: 1,357 million

So yes Australia does legitimately have a shortage of labor. At least when compared to China.

"Therefore Australia needs to sell its capital assets cheap to China"

Raw ore is not a capital asset.

"Maybe Australia prefers to remain a colony economy, but today a colony of China instead of Britain?"

A colony is a political subdivision. Australia is neither a colony of China nor Britain, but an independent country. Maybe you were trying to stumble towards the phrase "resource economy", but Australia's mining sector is only around 10% of it's GDP. Which is substantially less than Canada's, for example.

"Admittedly the US has in some sectors returned to colonial status, exporting wood, fish, metal ores, and then buying them back at higher prices, meanwhile complaining that too much labor is idle."

So apparently you are creating long posts on a Economic's blog with no understanding of comparative advantage.

Not labor. Disregard to pollution and capital intensive refinery. That combination gave China a leg up on everyone.

Krugman is an idiot no surprise there, the only solution to these "problems" is unlimited immigration and open borders.

Id criticize you for trolling in the same old way, but this one has a classic feel that made me smile.

To be fair Krugman's solution is pretty much what the 'solution' to the problem turned out to be, find new supplies, find ways to substitute other materials where possible etc...pretty much your classical economics advice.

First, and most obviously, the world needs to develop non-Chinese sources of these materials. There are extensive rare earth deposits in the United States and elsewhere. However, developing these deposits and the facilities to process the raw materials will take both time and financial support. So will a prominent alternative: “urban mining,” a k a recycling of rare earths and other materials from used electronic devices.

Not addressed here was what Krugman was actually responding too. A minor dispute between Japan and China resulted in China attempting to 'punish' Japan by a sudden cutoff of rare earth sales. This is not actually the typical concern with a monopoly, that the monopoly will keep the price higher and collect monopoly rent. In that case if competition is possible it will arise as new suppliers enter the market to try to capture some of those profits. In the China case we had exceptionally low rare earth prices which both increased the use of rare earth materials and drove non-Chinese suppliers out of the market. This set up a possibility that China could use exports of rare earth materials as a diplomatic weapon by suddenly cutting off countries that have offended it. True if China plays that card too often it would increase prices which brings alternative supplies online but if it plays it rarely it could use that card to enhance its power. Again Krugman was pretty much in line with standard economic orthodoxy there in asserting major economic powers should play 'by the rules'. Imagine if the US would suddenly declare that entire countries would be shut off of Facebook or Twitter over minor diplomatic ruckuses.

No Facebook? No Twitter? No way!

Worstall is an acknowledged expert in rare minerals, so it's no surprise that he was proven right in the end. I wish his coverage of energy economics was better - last I checked he still doesn't grok the concept of EROI.

I remember at the height of the rare earths shortage craze I bought a strategic minerals ETF and then watched it halve in value over four years - one of my moments of truly poor judgment, especially considering I normally just dump everything into VTSAX.

EROEI makes about much sense as MROMI (substituting "mass for "energy"). If Worstall pays it no heed, he's merely exhibiting a bit of sense.

It makes sense in specific contexts in aggregated production of fuels. It's worth talking about as a simplistic model even if it doesn't encapsulate energy type, when talking about large energy flows through the economy, and about future projections of energy use. Outside of those contexts, it's useless. With all due respect to Mr. Worstall, the last time I saw him talk about it he tried to dismiss it as nonsense by pointing out that a premium, nonfuel commodity (that is, food) gets produced despite a negative energy return. If you take a tool and apply it to something that it isn't used for, you will get results that aren't useful.

I've never heard of MROMI.

You have never heard of MROMI because it is, clearly, patent nonsense. My point is that EROEI also is, yet far too many people who understand little about economics (or human response to incentives) but lots about vending doomsday porn can't seem to utter three words without trumpeting it.

All that matters is money return on money invested, or simply put, ROI. Not all energy is the same.

Saying that EROEI is declining is simply another way of saying that the easy oil gets produced first. But that has been know since the beginning of the oil age. Maybe much of the low-hanging fruit has been eaten, but that doesn't mean that the world is about to end.

Rare gold at lowest price in four years.

Peak oil at $79 a barrel.

Now, rare earth.

Some of the rare earth folks were also the same folks that told you to buy gold and were critical of those who thought it wasn't a problem: http://www.businessinsider.com/goldman-sachs-did-not-do-their-homework-on-the-rare-earth-shortage-2011-5

It's almost like market imbalances are corrected by an invisible hand or something. I guess I just don't know how this works, I'm not an economist.

It was nice to be right. My only regret really is that I never did get that check from Foreign Policy for writing that piece in which I was right.

You can tell us, did you play the commodities futures markets on your prediction?

There are no futures markets in rare earths. Thus there was no market to play.

so many media-darling blowhards that know something about everything! Or at least they claim to know something...I doubt it..

Given the proliferation of comment sections across the internet, this about describes the entire citizenry of the country/world. Deflationary markets in everything...Humility!. the rarest of earths elements.

I don't think we should blow this up into an all-out trade war or anything, but what's the point of having international trade arbiters if you don't use them? We entered into a treaty with China that governs fair trade practices. As far as I can tell, restricting your exports to gain a trade advantage might be illegal. Is there a problem in bringing that to an international court, which is a right afforded to us by this treaty?

No technical problem, perhaps, but as with Chinese currency manipulation by the time we had gotten around to justifying retaliatory tariffs to the proper treaty authorities the problem would have gone away. Certainly trade manipulation and subsidies are still around and highly persistent from China, but their economic policies backfire on them better than half the time. See, e.g., methanol, steel, fluorspar, low-quality solar panels, and a whole lot of others.

I'd be interested in learning more about these solar panels. My impression is that China is trying to leap-frog up the industrial value-chain, which I'm guessing is going to involve a lot of failure.

China has gained a significant market share in the lower efficiency solar panels. However, the price of lower efficiency solar panels will always be at the mercy of those producing higher efficiency solar panels.

Also, this command economy move seems vaguely similar to Japan's move in the 1980's to dominate computer RAM production. Japan succeeded in their goal. Unfortunately, they also managed to commoditize RAM and they ended up with a domineering market share in a product with high capital costs, high R&D costs, and a low profit margin.

Is this related to the desire to have a source for a rocket motor other than Russia?

"I don’t think we should blow this up into an all-out trade war or anything, but what’s the point of having international trade arbiters if you don’t use them? We entered into a treaty with China that governs fair trade practices. As far as I can tell, restricting your exports to gain a trade advantage might be illegal. Is there a problem in bringing that to an international court, which is a right afforded to us by this treaty? "

We did do this and China lost.

Courts do take time though.

That's good news, at least! Thanks for the details, Tim. Sorry you couldn't get rich off your predictions. :(

My real world work with rare earths is with scandium. That's the one that China, traditionally, hasn't provided in any quantity. Russia was the usual source. And whether I get rich or not, well that sorta depends upon how the new extraction plant works out in a couple of month's time.......

I like to think I know a lot about what materials are used for, but I had to go to Wikipedia for scandium. Nuclear reactor control rods and a minor constituent of certain aluminum alloys. The latter sounds like it might have some growth potential, but according to Wikipedia worldwide production is only about 2 tons, of which only about 400 kilograms is new production and the rest comes from stockpiles in Russia leftover from the Cold War. These aluminum alloys must not be very important, otherwise they'd be eating up more scandium.

Hafnium sounds interesting because of the recent development of a critical application in semiconductors, but I suspect the volume is rather low and will stay low, even if this application were to grow substantially.

There just aren't too many materials which are choke points for industry. I've heard that one may develop for lithium, if electric cars suddenly become much more popular. I'm not rushing to invest, though. I'm a bit skeptical there will be a lithium crisis.

That Wikipedia entry is well out of date (and I was the one who contributed the bit about Soviet stockpiles). Production/consumption is some 10-15 tonnes a year these day (global, annual). Major consumption points are those Al alloys and SOFC fuel cells (exactly as Bloom Energy makes them). The nuclear bit is entirely garbled: the Soviets launched two or three satellites with nuclear batteries and a small part of the structure was Sc. But that was a very, very minor use for a short period of time. The Russian stockpiles are now used up.

Hafnium, we're just not going to run short of it even with those new IBM chips. Current global usage is 500 tonnes a year or so. And the way we get Hf is to extract it from the zirconium ores we already mine. Normally we don't bother to do this but there's some 20,000 tonnes a year Hf in that Zr we already mine. Plenty to go around.

Lithium, depends really. There's a lot of lithium out there. Some friends have worked out how to get it from a mineral called zinwaldite and there's many other such minerals it can be got from. It's not quite economic at current prices but it rapidly would become so with only moderate price increases.

"Is there a problem in bringing that to an international court, which is a right afforded to us by this treaty? ”
We did do this and China lost."

China lost in court, but good luck trying to enforce the decision. Ask US Steel how that works.

"at the time it was almost surreal how quickly nominal free traders and internationalists merged into war hawks"
How is getting upset about a country restricting exports inconsistent with a free trade stance?
Being pro-trade doesn't mean being accepting of every country's trade restrictions other than your own.

There are gains from unilateral removal of restrictions, so apparently there are different types of free traders.

You could also argue gains from unilateral disavowal of military force, but in fact that may encourage other parties to move in the opposite direction. Threat of sanctions are an effective way to keep everyone compliant and on their "enlightened" best behavior.

So, the CCP isn't any better at cornering a market than the Hunt brothers? Color me shocked.

'and instead let market forces solve the problem'

Yep, that EU wide madatory recycling of electronic goods really paid off in providing rare earths without requiring additional mining at all. http://en.wikipedia.org/wiki/Waste_Electrical_and_Electronic_Equipment_Directive

Hunt Brothers' problem is that they're over leveraged to the hilt on buying out the future contract. When the central bankers around the world saw what's happening, they simply rewrote the rules on margin, can call their bluff, all the while flooding the market with substantial amount of silver that temporarily crash the market.

As Worstall had said, the stuff is just not economical to process on a large scale due to the technical and polluting problem. The pollution problem is one that China is happily ignoring for now.

If it paid off, there would be not need for the law.

I disagree with this strawman article by AlexT.

Two facts: Neodymium sells today for an average of 295k/kg (see: http://www.metal.com/metals/rare-earth/prices ) but in November 2011, only a year after the hysteria AlexT mentions (in 2010), it was at the same price (see: http://www.nytimes.com/2011/11/17/business/global/prices-of-rare-earth-metals-declining-sharply.html?_r=0) Note in 2010, neodymium was $50/kg. And the forces that AlexT mentions (alternate supply, using less of the material) are referred to in the Nov. 2011 NY Times article.

So, for neodymium, a proxy rare earth metal used in magnets like in small cars and wind turbines, we can draw the following conclusions: (1) prices *have not* fallen much since late 2011, where they had exploded to six times over the baseline price of 2010, and, (2) the forces AlexT mentions (alternate supply, using less of the material) were *old news* in late 2011, less than a year (and more like six months) after the hysteria (see the NY Times graphic).

So in short: nothing has changed much in the rare earths debate, except, as AlexT says, the market has adjusted. Move along, nothing to see or hear here. Here here!

@myself--and to emphasize the last sentence: "nothing has changed much in the rare earths debate, except, as AlexT says, the market has adjusted" - the market *had* adjusted in Nov. 2011, as short as six months after the peak for Nd in summer of 2011. That market is the same then for Nd as it is today. So where's the story?

295,000 RMB / mt (renmibi / metric ton) equivalent to approx 48.24 USD per kilogram. A drop from 500 (2011) to 48 USD (2014) per kilo looks interesting. Check your units, 2 points less ;)

Yes, rare earth metals are getting expensive (which they should be because extracting them is expensive). Yes, rare earth metals are forbidden by some automotive companies (like VW), because of their origin in China (mostly the result of CSR). But all this doesn't make a crisis. There are other ferrite magnets that can take up the gap. Also Ferrite and its mixed metals (La and Co) are world-wide available for a lower per tonne price.
However, there are some applications that can't use ferrites, for example small platic magnets. In these cases, however, the volume of neodymium used is so small, that the price is still ok. This is due to the fact that the magnetic remanence of neodymium is almost twice that of a ferrite magnet (even the latest iterations).
But in the end, the crisis did only one thing: It created a new equilibrium of neodymium to ferrites and thus a change in market shares amongst different enterprises.
For the final consumer not much changed, because all products are still available and only slightly more expensive, if it all.

Err, Ray?

You are comparing a US $ price (the NYT price) with an RMB price (the metal.com price). The exchange rate is around 1:6.........

300 RMB is actually about $50.

@TimW - thanks Tim, ah, it's $100/kg not $300...well the rest of my points still stand... the price was coming down in Nov. 2011 anyway.

I think you mean $50k/kg, but you are getting closer to the right number.

"well the rest of my points still stand… the price was coming down in Nov. 2011 anyway."

I fail to see how your point stands, but AlexT's blog is a "strawman". Did you actually read his post? In particular this comment:

"Yet you probably haven’t heard much about this crisis recently. Why not? Ans: The crisis was exaggerated and what wasn’t exaggerated the market alleviated."

He may be a bit sloppy with the facts, but he sure has a lot of confidence in his opinions.

They don't make 1%-ers like they used to...

Now this is funny

Whats the exchange rate of young Philippine hotties to Neodymium is the real question

Pics, please. I'll show you mine: http://periodictable.com/Samples/060.2/s7s.JPG

I stand here before you to propose an international agency to oversee the extraction, processing and sale of rare earth metals. We cannot afford the wildcat profiteering of Communist cadres to disrupt our national economic planning. We must not allow our children to die in foreign wars for profit. Stand with me to end the scandal of scandium!

(Happy Election Day, Americans.)

It's almost like demand generates supply or something. Uncanny. If only we could somehow harness this magical process. Until we do, I guess we'll just have to rely on rationing and subsidies.

In the same piece, Krugman also wrote: " So what are the lessons of the rare earth fracas?

First, and most obviously, the world needs to develop non-Chinese sources of these materials. There are extensive rare earth deposits in the United States and elsewhere. However, developing these deposits and the facilities to process the raw materials will take both time and financial support. So will a prominent alternative: “urban mining,” a k a recycling of rare earths and other materials from used electronic devices. "

In his piece, Tim Worstall wrote that China reached its monopoly position by old fashioned means -- industrial aggression, low labor costs and somewhat predatory pricing (the FP paywall is keeping me from pasting the exact passage) -- much like what Krugman said in his piece.

I don't think Krugman and Worstall are much at odds -- although they are emphasizing different things

Krugman and Worstall are at odds. Krugman's 'we must do something about this' vs Worstall's 'the market will take care of itself'

Krugman's point is interesting, the market will 'take care of itself' assuming the actors in the market have market incentives.

So a monopolist who tries to over exploit their monopoly will invite the market to respond by cultivating alternatives.

But China's case wasn't a market. You had a player achieving a near monopoly not for traditional market motivations (seeking profit) but political ones (getting the world to rely upon you so you can then turn supply on and off as a way to cultivate power).

What a triumphant clarion to obviousness!

China has most of the easily-extracted rare earth metals. No kidding that markets adapted. The question is: at what price? That is what is missing from the post.

Many of the so-called green technologies rely on RE. Rising cost of RE decreases their supply. In other words, green will cost us even more green.

Cost == labor wages.

You believe you will be better off with China labor doing your job because the stuff you consumed on welfare will be cheaper?

You believe you believe you will be better off on the dole filling up with cheap gasoline from mining Saudi capital assets and driving on decay bridges and highways not being replaced because they can't be imported cheap from China.

Yep, just have the Fed print money and helicopter drop it on Americans to buy cheap imports and get rid of expensive US labor.

You can import a bridge from China.


Pennywise may have been pound foolish.


At the peak of the rare earth scare I figured China was just more tolerant of the waste water and pollution involved in production than elsewhere. The world's largest mine (at least at one point), Mountain Pass in California, was in part closed due to environmental concerns, as California is a notoriously difficult place for mining projects. In hindsight perhaps not and price was a more important factor.

It was the cost of production in general, as well as, the cost of meeting tough CA environmental standards that made production at the mine unprofitable. However, when the price shot up, it was once again profitable to mine the ore.

"Full mining operations were planned to resume by the second half of 2011 as a result of increased demand for rare earth metals.[16] In December 2010, Molycorp announced that it had secured all the environmental permits needed to begin construction of a new ore processing plant at the mine; construction would begin in January 2011, and was expected to be completed by the end of 2012.[17] The company announced its resumption of operations on a start-up basis at the Mountain Pass mine on August 27, 2012."


China had some ability to interfer with the market since they always had the ability to cut/subsidize pricing.

No rational investor would invest into expensive mines if they knew that at any point china could flood the market and subsidize production and thus bankrupt anyone who started a mine.

Here is the timeline....

I read the NY Times article hours after it was put up and immediately thought it was b.s. in part because NY Times journalists know zip about economics. So I went to the WSJ and found they got it mostly correct. I immediately posted on the NBR Japan-US Forum that Tim Worstall reads that the NY Times story was garbage.

I'm a Worstatll fan (thanks for your articles on Fukushima!) but his article was a week later.

A journalist who nailed the story was Peter Lee, writing for Asian Week. He pointed out that all of the NY Times quotes were anonymous.

Anyway, a big "hats off" to Tim Worstall and Peter Lee for quickly seeing through the B.S.

(Just to add that I'm sure Worstall got the real story immediately but that it took a week to publish)

Nice job with summarizing blow by blow, but what you and AlexT probably don't realize, along with all the other commentators on this thread, is that according to game theory the best way to get free trade is through occasional threats of force by a hegemon, which is what Krugman et al were agitating for. Quick exposition: no trade is the worse for all countries, unilateral trade (where one country has an open border regardless of the other countries, which are closed) is better than no trade, but the best form of free trade is bilateral free trade, where all countries have open borders. What does game theory say about inducing bilateral trade? Short of cooperation, the best way to get bilateral trade is though credible threats of a trade war and sanctions, exactly what Krugman et al on this issue were advocating. And, perversely, it may have helped prevent China from acting out on its impulse to ration the rare earths. Again, game theory trumps the blind ideology of the free marketeer fundamentalists.

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