Decisive Point Podcast – Ep 3-03 – CPT Gustavo Ferreira and MAJ Jamie Critelli – “China’s Global Monopoly on Rare-Earth Elements”

This article delivers a novel economic analysis of US dependence on China for rare-earth elements and sheds light on how Western nations may exploit the limitations of limit pricing to break China’s global monopoly in rare-earth element production and refinement. This analytical framework, supported by a comprehensive literature review, the application of microeconomic and industrial organization concepts, and two case-study scenarios, provides several policy recommendations to address the most important foreign policy challenge the United States has faced since the end of the Cold War.

Keywords: United States, China, foreign policy, rare-earth elements, microeconomic, industrial organization

Read the article: https://press.armywarcollege.edu/parameters/vol52/iss1/6/

Episode Transcript:

Stephanie Crider (Host)

Welcome to Decisive Point, a US Army War College Press production featuring distinguished authors and contributors who get to the heart of the matter in national security affairs.

The guests in speaking order on this episode are:

(Guest 1 Gustavo Ferreira)

(Guest 2 Jamie Critelli)

(Host)

Decisive Point welcomes Captain Gustavo Ferreira and Major Jamie Critelli, authors of “China’s Global Monopoly on Rare Earth Elements,” featured in the Parameters Spring 2022 issue.

Ferreira holds a PhD in agricultural economics from Louisiana State University. He’s a senior agricultural economist with the US Department of Agriculture and serves as an agricultural officer at the 353rd Civil Affairs Command, US Army Reserves. Critelli is a civil affairs officer serving in the 353rd Civil Affairs Command, US Army Reserves. He’s an independent farm business owner and has worked globally in agriculture supply-chain rules on five continents. He holds a master of business administration and supply chain management from ETH Zurich. The views and opinions expressed in this podcast are those of the authors and are not necessarily those of the Department of the Army, the US Army War College, or any other agency of the US government.

Gustavo [and] Jamie, thanks for joining me. Let’s jump right in. Your article sheds light on how Western nations may exploit the limitations of limit pricing to break China’s global monopoly on rare-earth element production and refinement. What’s the working definition of “rare earth elements” here?

(Ferreira)

Good morning, Stephanie. Thank you for having us. So rare-earth elements are a set of 17 different metallic elements that fall into two different categories. You have the heavy and the light based on the separation process (once they get mined and get processed), which tends to be rather complex. And contrary to what the title suggests, rare-earth elements are abundant in the Earth crust. They have their rarity status coming from being typically highly scattered and mixed together with other minerals, and they’re rarely found in concentrations that make it profitable to extract. Oftentimes, they are a byproduct of other mining activities.

It’s important to understand rare-earth element reserves tend to be geographically more concentrated than other natural resources, such as oil and gas, but they’re also in line with other key mineral resources, such as copper, where they’re concentrated in one or two countries at the global scale.

In terms of uses, it’s important to highlight they’re desired because they have unique characteristics, such as magnetic strength, and, consequently, they’re used in a wide range of ubiquitous consumer goods, such as flat-screen TVs and cell phones. Other important industrial applications include wind turbines and electrical vehicles. And one that’s typically a very visible application of this resource is in the military space. These minerals are key inputs for many weapons systems, such as jet fighter engines, missile guidance systems, satellites, ammunition, and so on. It’s always good to put a number on it to emphasize the current demand for these inputs. An F135 fighter jet (engine) requires about 920 pounds of rare-earth minerals—just to put it into perspective.

Also, looking forward, as the global economy continues to transition to lower-carbon, renewable energies, analysts estimate that the demand for these minerals will continue to grow at a very rapid pace. That is because cleaner energy technologies such as electrical vehicles, electrical batteries, generators, and wind turbines will consume close to half of all the rare-earth element production. They are going to be a major driver for these resources.

And lastly, one thing that must be emphasized is the heavy environmental cost that goes along with producing these minerals. They produce an enormous environmental footprint, and that’s the reason why it’s concentrated in certain countries, such as China. They generate waste gas, acid-containing sewage water, radioactive wastes, and so on. It’s a pretty high environmental cost.

(Host)

Thanks, Gustavo. How did we get here, and what is the state of rare-earth elements?

(Ferreira)

To truly understand how this industry has evolved to what we see today, we must understand the paths that China and the United States have followed for the past three or four decades regarding rare-earth elements. In the case of the United States, this country was once self-reliant and the world’s leading producer. From the 1960s to the 1980s there was a mine, the Mountain Pass mine, located in California. It was the world’s primary source of rare-earth elements. However, following decades of neglect, underinvestment by the US government, and a lack of interest by the academic community in this field, we had a gradual loss of know-how and the skilled labor force that’s required for this industry. Altogether, this led to a slow decline of this industry in the United States. This trend culminated in the shutdown of that Mountain Pass mine in 2002, following some regulatory issues and an environmental incident that involved a pipeline spill carrying contaminated water. So, there was kind of the nail in the coffin for that particular operation. It confirmed the decline of this industry in the United States.

Because of that, we lost nearly all our rare-earth production capacity, and we became gradually a net importer of these minerals—with, now, China becoming the main supplier, accounting for 80 percent of our imports.

Which is a good segue to how China was able to fill that gap. This didn’t happen overnight. This was a long-term effort by the Chinese government. It was a concerted effort that involved high-profile investments in national programs, the development of teams, and labs that will exclusively focus on studying production of rare-earth elements. And this long-term focus definitely yielded significant results and set the conditions for China to expand its production from the 1970s and 1980s. As the US started to decline, China picked up that slack. Then, China also made the decision to declare these minerals a strategic resource. So, they kind of set the political tone. They recognized the importance of this going forward, and they even were able to endure and accept the environmental degradation that would entail. They were willing to take that cost, given the national strategic importance of this resource. As a consequence, they started producing and exporting more and more throughout the 1990s and 2000s. That expansion of production had an impact on global markets in the sense that they flooded the market with large amounts of rare-earth minerals. They plunged the global prices, which resulted in many Western producers no longer being able to compete at those low costs and filing for bankruptcy, further reducing production in the West.

Another key shift in China was once they secured production and became the global powerhouse, they started shifting towards developing a more integrated supply chain. What I mean by this is they no longer were just simple raw-material producers, but they started investing in processing. And so, they could control the entire supply-chain process from mining all the way to the final products, such as magnets or oxides that are used by the final end users in the West. So, they created a whole supply chain, to include all value-added products, and now they control about 80–90 percent of that value-added refinement capacity. Even the United States or other Western countries that still mine rare-earth minerals—they have to export them to China in order to be refined there and processed to the way it could be used by the final end users.

(Host)

That leads right into my next question. China dominates the rare-earth element global market. How can we overcome that? Or maybe I should be asking you: Can we overcome that?

(Critelli)

Well, the short answer is “yes.” Thank you again for having us, Stephanie.

China did not arrive at a point of rare-earth element market leadership overnight. Once they realized how valuable these materials were, they set a decades-long course to arrive at the position they’re at today. Unfortunately, we can’t rely on market forces alone to correct this. In the short term, we only have two levers. We either become better at recycling or repurposing existing rare-earth elements or we stockpile these items, regardless of price, so we’re not supply-constrained by a foreign power.

So, in terms of recycling or repurposing, this of course is hampered by the limit-pricing efforts done by the Chinese and by the complete lack of a domestic rare-earth element recycling stream. We just don’t have it. We would have to build it up. And as Gustavo mentioned, there’s quite a bit of ...