Tariffs lay bare Washington's rare earths dilemma
LONDON, July 19 (Reuters) – The United States Defense Logistics Agency (DLA) is aiming to buy 10 tonnes of Yttrium oxide this year.
Yttrium is one of the rare earth metals that have become increasingly critical to a wide spectrum of modern-day products.
It is used in radars, lasers, camera lenses and super-conductors.
It is also about to become more expensive if the United States makes good on its threat to impose more tariffs on China because, to quote the U.S. Geological Survey (USGS), "nearly all imports of yttrium metal and compounds are derived from mineral concentrates produced in China."
The same applies to many of the other metals on the DLA's procurement plans for the year, particularly the 416 tonnes of other non-specific "rare earths".
Yttrium is just one a host of esoteric, critical minerals on the list of Chinese imports targeted for the next escalation of the simmering trade war between the two countries.
Across the metallic spectrum tariffs will ricochet back on U.S. consumers, not least the country's own military materials procurement arm.
The U.S. administration is of course aware of its Chinese dependency, which is why it is working on a plan to reduce its import reliance for "critical minerals". Rare earths are on the list.
Its short-term options are limited, however, unless it is prepared to countenance a very un-American solution.
USGS' estimates of global production in 2017:
USGS' estimates of long-term global production:
Made in China
The proposed U.S. tariffs on another $200 billion of Chinese goods include many inputs to Beijing's "Made in China 2025" plan to become a global leader in high-tech industry.
Unfortunately for the United States, and just about everyone else, China is itself the major supplier of those inputs.
Rare earths are a particularly striking example.
The USGS estimates that China accounted for around 80 percent of global rare earths production last year, or 105,000 tonnes out of 130,000 tonnes.
Hard figures are hard to come by. The USGS has taken China's official 2017 production quota of 105,000 tonnes as a best guess as to how much the country actually generated.
Rare earth pricing is going to be "made in China" for the foreseeable future.
The official quota excludes illegal production in China, which may be significant since Beijing has been waging a campaign for years to exert control over what has been a free-wheeling part of its mineral economy.
The next largest producer last year was Australia thanks to the Mt Weld mine operated by Lynas Corp The mine and integrated processing plant in Malaysia produced 8,839 tonnes of rare earth compounds in the half year to December.
Lynas has emerged as a major supplier to the non-Chinese market in Asia but China itself still dominates the global supply chain, exporting 51,200 tonnes last year.
It is also the dominant supplier to the United States to the tune of 78 percent of all rare earth imports last year, according to the USGS.
The balance of 2017 imports was largely split between Estonia, France and Japan, all of which sourced their raw materials from China.
The only U.S. domestic source of rare earths is the privately-owned Rare Earth Salts, which commissioned a plant in Nebraska in the middle of last year.
It is using as initial feedstock recycled fluorescent light bulbs to make a number of rare earth compounds, including yttrium. Targeted production is, however, just 18 tonnes per month.
There are other potential producers waiting in the wings but NioCorp, which is leading the race, is still only at the permitting and funding stage.
Its Elk Creek mine in Nebraska will produce scandium, niobium and titanium, but not yttrium.
If the United States is going to break its Chinese dependency for yttrium and most of the other rare earth elements, it needs the revival of the Mountain Pass mine in California, because Mountain Pass once dominated the global supply chain in the way that China does now.
Opened in 1952 it consistently accounted for over half the world's supply until the mid-1980s.
It was closed in 2002 due to a combination of low prices and environmental concerns resulting from a series of waste water leaks, some of them radioactive.
Mountain Pass briefly returned to life in 2012 under the ownership of Molycorp before being mothballed again in 2015 due to another collapse in price.
A new entity, MP Materials, bought the mine out of Molycorp's bankruptcy process for a reported $20.5 million and is working towards "reviving America's rare earth industry", to quote the company's website.
There are, however, a couple of potential problems with Mountain Pass from the U.S. administration's point of view.
Although MP Materials is headed up by two U.S. investment funds, JHL Capital Group and QVT Financial, there is a direct link with China in the form of Leshan Shenghe Rare Earth Co.
Leshan, again according to MP Materials' website, "holds a non-voting minority interest in the company". How sizeable an interest is not stated but fund managers are unlikely to be in the driving seat when it comes to operating the mine.
More fundamentally, though, the rare earths market will remain beholden to China simply because it accounts for so much of the world's production.
Mountain Pass was reopened on the back of the dramatic boom in rare earth prices at the start of the decade. The price explosion was triggered by China slashing its exports.
Beijing claimed environmental reasons but the move was widely seen as retaliation against Japan, its biggest-volume rare earths customer, over a maritime dispute.
And what forced Mountain Pass back onto care and maintenance was the price collapse occasioned by China lifting its export restrictions under pressure from the World Trade Organization.
China is unlikely to try the same tactic again whatever the provocation but rare earth pricing is going to be "made in China" for the foreseeable future.
The only way to break the linkage is for the U.S. government to take a direct interest in Mountain Pass.
Nationalisation would likely be anathema to any U.S. administration, particularly a Republican one and particularly this Republican one.
But left to free market forces, it's going to be a long time before the United States is going to produce enough yttrium or any other rare earth element to meet its needs.
(Editing by Edmund Blair)