China no longer has a stranglehold on the world’s supply of rare earth metals

Back in 2010, China produced 97 percent of the world’s rare earth metals, which are used in everything from the magnets in our headphones and wind turbines to the catalysts in our gasoline refineries. That same year, China began restricting exports as part of a political dispute with Japan. The global price for rare earths skyrocketed, and there was a fair bit of alarm in the US about how China’s chokehold on rare earths threatened the economy and even national security.

But the panic turned out to be overblown. In a new working paper from the Council on Foreign Relations, former Pentagon advisor Eugene Gholz explains that the much-feared crisis never actually came to pass. Not long after China restricted exports, other countries quickly began producing their own rare earths — or finding ways to reduce their reliance on the metals. As a result, China’s control of the market is much diminished today.

The chart below, from Reuters’ Scott Barber, tells the story. It tracks the price of three key rare earth metals — neodymium, dysprosium, and cerium — over time. (Gold and silver are there for comparison, to show these aren’t just general commodity swings.)

When China began restricting exports in 2010, rare earth prices soared. But just two years later, prices were falling back down again. Doom had subsided.

So what happened? Three big things:

1) Other countries developed their own rare earth supplies: A key point here is that, despite their name, rare earth metals aren’t actually that rare. At various points in the twentieth century, Brazil, India, the United States and South Africa were all major producers. It’s just that, in the 1980s, China ramped up production massively, driving out competitors and cornering the market. (China could do this, in part, by going easy on environmental oversight of mining, which can be a horrifically dirty process.)

When China decided to restrict exports in 2010, that drove prices up and suddenly made it profitable for other countries to start boosting their own production again. In Mountain Pass, California, Molycorp reopened and expanded an old rare earth metals mine. The Australian mining company Lynas opened up new processing facilities in Malaysia. As a result, China’s market share declined from 97 percent to 70 percent today.

2) Companies reduced their dependence: Next, many Japanese companies rushed to reduce their heavy reliance on rare earths. Hitachi found a way to use less dysprosium in order to make a key magnet inside electric cars. Panasonic developed a technique to recycle neodymium from old electronic appliances. And so on.

3) The export controls didn’t work perfectly: Finally, Gholz notes, it turned out that China’s export curbs weren’t fully effective, particularly for heavy rare earths such as dysprosium and europium. Some smaller Chinese producers found a way around the ban. The end result? The rare earth shortage quickly resolved itself within a few years. Some non-Chinese producers were hurt by the subsequent price crash in 2012. But broadly speaking, the adjustment was pretty painless.

In the end, Gholz argues, China didn’t get that much benefit from restricting rare earths — save for the release of a fishing captain who had been detained by Japan. Japan has now adjusted and is less vulnerable to trade pressure over rare earths than once believed.

The United States, too, managed to wiggle out of China’s rare-earth grip in short order. A few years ago, military planners had worried that crucial weapons systems might be at risk if China disrupted the rare earths supply. But subsequent analyses have shown that this was unlikely.

So what’s the takeaway here? Back in 2010, many members of Congress were sounding the alarm and pushing to pass new measures to subsidize US rare-earth production. But this turned out to be unnecessary. The market adjusted relatively quickly. (Gholz does, however, praise the Department of Energy’s 2011 spending on R&D to reduce reliance on rare earths — the sort of long-term investment that makes more sense than short-term subsidies.)

“The broad lesson is that policymakers should not succumb to pressure to act too quickly or too expansively in the face of raw materials threats,” Gholz concludes. “The global economy constantly moves and adjusts, investing in supply diversification and innovation to alleviate potential bottlenecks. Governments should gratefully accept the help.”

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