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The Chinese procurement question Is it overblown?


Rare earths are a hot topic in Washington. Almost everyone agrees that the United States needs a dedicated supply of rare earths for high-tech national security and defense systems. But not everyone is in agreement on how to make it happen.

Whether the U.S. Defense Department should take a bottom-up approach of stockpiling raw materials by paying market rates in places like China, or look more downstream and invest in a domestic supply chain that can produce value-added products are two points of contention.

Jeff Green, president of J.A. Green & Co. LLC, Washington, and former counsel to the House Armed Services Committee, warned of impending shortages of rare earth materials, which are needed to support domestic manufacturing of "green" technologies as well as military applications. "There are clear projections that Chinese consumption is going to exceed their supply," said Green, who noted that China controls about 97 percent of global rare earths production.

China announced earlier this year it would cut rare earth export quotas by nearly 72 percent in the second half of the year. China's Ministry of Commerce said foreign shipments will be capped at 7,976 tonnes vs. 28,417 tons in the same period last year.

"This should serve as a huge red flag for U.S. government officials studying this issue," Ed Richardson, president of the U.S. Magnetic Materials Association (USMMA), said. "Immediate action must be taken to free the United States from its complete foreign dependence for these increasingly important natural resources. If the United States is to become a leader in clean-energy technology, it needs a reliable domestic rare earths supply chain."

Rep. Mike Coffman (R., Colo.) earlier this year introduced the Rare Earth Supply-Chain Technology and Resource Transformation (Restart) Act (H.R.4866), which aims to re-establish competitive domestic rare earths mineral production, processing, refining, purification and metals production industries to support the growth of green job technology and manufacturing, as well as the nation's defense industry.

The "whole-of-government" approach would involve the U.S. Departments of Commerce, Defense, Energy and State, the Office of the U.S. Trade Representative and the Office of Science and Technology Policy within the Executive Branch.

Based on industry estimates, rebuilding the U.S. rare earths supply chain could take up to 15 years and is dependent on several factors, including securing capital investment in processing infrastructure, developing new technologies and acquiring patents currently held by international companies.

Green, who also lobbies for the USMMA, said he supports this "manufacturing first" strategy for developing a domestic rare earths industry. "(China) said that they're not going limit access to these raw materials provided that you come to China for the manufacturing. It's a clear and blatant strategy to draw the entire value chain into China. That's why we need to create demand from the manufacturing side (in the United States)," he said, adding that government policy should support investment in the development of rare earth resources in the United States as well as in friendly countries like Australia.

There are a number of non-Chinese projects, such as Lynas Corp. Ltd.'s Mount Weld deposit in Western Australia, which is due to come online next year, and Molycorp Minerals LLC's Mountain Pass Mine in California, scheduled to start up in 2012.

A good model for the domestic rare earths industry could be the titanium sector, Green said. "The U.S. titanium industry is thriving, while the rare earths industry has been basically non-existent. In the titanium market, there's a good story to be told," he said.

The titanium market focuses primarily on the value-added end of the manufacturing supply chain, according to Green. "From sponge to ingot, that's where we have invested a lot of resources, so the basic raw material isn't as much of a concern. We turn raw material into things that the (Defense Department) needs and not just put boxes of critical materials in a warehouse," he said.

Noah Munro Lehrman, senior vice president of Hudson Metals Corp. and chairman of the North American Committee of the Minor Metals Trade Association, said that developing a domestic industry is important, but he also contends that China will have to play a role in the future. The specialty metals provider serves the North American, Asian and European markets.

The controversy over Chinese rare earth quotas is overblown, Lehrman said, adding that supply will be available—if you're willing to pay. "China is a major player in wind turbines and solar energy, so it's only natural that demand (for rare earths) is going to pull more and more toward China," he said. "You're not going to get a policy solution because what are really at play here are market forces and demographics. If you want to get material over here, you're going to have to buy at prices that are competitive with the market over there."

There have been similar concerns in the past over other minor metals or ferroalloys that came out of China, Lehrman said. "The thing is that metal still comes out; it's just going to be at higher prices than it would be otherwise. We're not the only game in town and we have to realize that." TOM JENNEMANN

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