China to Stockpile Rare Earth Metals, should the US do so too ?

A Wall Street Journal article (February 7,2011) describes plans by the Chinese Ministry of Land and Resources to build reserves of rare earth metals in order to protect their industries, impact pollution and manage the supply and demand relationship for these commodities.  In response, the article cites Rep Mike Coffman as the author of a bill mandating the US military to build stockpiles and thus ensure US supply chain competitiveness.  Such calls have also appeared in other reports published recently. But another school claims that such efforts will further impact prices in the short run and thus argues against it.  Other countries such as Japan and South  Korea have planned stockpiles.  Should the US government start building up rare earth stockpiles to assist US industry ? Can coordinated stockpiles across countries be counted in to solve the global supply problem ? Or will industrial innovation resolve the problem ?

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11 Responses to China to Stockpile Rare Earth Metals, should the US do so too ?

  1. Freddy Horn says:

    This is an interesting topic, but a difficult question to answer! Various factors play an important role. From a short-term economics point of view, it does not make sense for the US to build up a large stock of rare earth metals. Prices are already high. Increased demand from a big player like the US will increase prices for rare earth metals. Since most of the world’s rare earth metals are found in China (approximately 97.5% of the world production), China will be the country that would benefit most from such a price increase. The US would therefore strengthen one of its main economic “enemies.” Furthermore, rare earth metals are also heavily used in the production of consumer electronics, which again are mainly produced outside of the US. This results in higher prices for American consumers on imported electronics. Even though this might not concern the US, the exploitation of rare earth metals is still hazardous and damages the environment for people in proximity of the mines.

    From a long-term perspective, the US would only ensure supply chain competitiveness if it has enough processing capacities for crude rare earth metals in the country as well as industries or a military that depend on this raw material. Unfortunately, I have no information on whether or not that’s the case. Another long-term advantage of a large rare earth metals stock would be the ability to influence the world market price for these metals. This is similar to the story of crude oil production and fracking, which is giving the US the ability to ramp up production when oil prices are too expensive and reduce output when prices are too low. A high stock of rare earth metals would therefore increase power and influence of the US and give it leverage in geopolitical or trade negotiations – or worse trade wars.

    This is a difficult decision to make. Personally, I think the long-term advantages outweigh the short-term disadvantages. Especially, if the US economy or military depends on rare earth metals.

    • Sarah Rosnick says:

      Freddy – i think your comments were thoughtful and probably at the right level of analysis for this scenario. As I read through your comments, it reminded me of the scenario and tensions that stockpiling nuclear weapons created. While obviously there’s a different flavor to stockpiling a weapon of mass destruction vs. rare earth metals, it seems concerning that they’d use military forces to mine and gather these resources unless they thought it would bring significant strategic might somewhere down the road.

  2. Michael Minor says:

    Our rare-earth element (REE) mine in California can’t compete in quantity or price with those in China, Africa or Russia. We cannot export yttrium to other countries at a competitive price, so our mining should be for domestic use only. We must consider that mining in the US is highly regulated to protect the population and environment, unfortunately at the expense of the mining company. Also, REEs are found in small deposits meaning that mining these resources will cause a large amount of destruction of the environment to produce viable quantities. The United States can’t depend on China to provide the REEs needed to produce weapons, lasers and planes for its military. For that reason, I believe the US should develop a strategic commodity management program for REEs that controls reserve and stockpiles to be used strictly for domestic military needs and commercial innovation that benefits the overall population.
    In the case of REEs, yes stockpiling across countries will address the global supply issues but not the root of the problem. First, the stockpiling strategy is used to prevent production loss when there is a major supply disruption. A fact is that innovation is creating more demand for REEs and without a method to recover a larger percentage of electronic waste using these resources we’ll continue to have supply problems.

  3. Julia Eldridge says:

    Operations management teaches us that we should ideally be holding zero inventory. By stockpiling rare earth metals, we would intentionally be amassing a large inventory. Between the holding costs and liabilities, not to mention how it would impact operations, it is not surprising that some claim it will impact costs, especially in the short run.

    Considering the environmental impact and the scarce nature of rare metals, I would anticipate technological advances to come up with alternatives to needing the rare metals. Emphasis on technology is a more sustainable and potentially less expensive, in the long run, approach than stock piling the metals.

    • Sarah Rosnick says:

      Your comment is fascinating to me, Julia. I’d been considering this as an issue of strategic might, but you bring up an interesting perspective. If we treat this as a supply and demand issue in a market, i’d never recommend creating artificial demand or creating an artificially low supply level. But if we did run our government like we would run a business, then perhaps it’s the next logical step.

  4. bairdjb says:

    I think Freddy, Mike, and Julia have all discussed some very important factors.

    I agree with both Mike and Freddy that the US can not compete with China because of the highly regulated mining industry in the United States. However, I am not sure that if the US create stockpiles that there would be much change in the market prices if it were done incrementally over a long period of time.

    Additionally, I agree with Mike that we should not depend on China to provide the REEs for needed to produce our weapons. Thus, I would not be opposed to the stockpile as long as it was only done with the intent of benefiting the entire country and not used to control markets or favor specific players in the industry.

  5. Jordan McCroskey says:

    Great points so far all. The US already has a strategic reserve of oil and natural gas. I could understand the strategic benefit to a potential stockpile of REM, however I agree it wouldn’t be the most cost-efficient to build from the US, compared to acquiring materials from other nations with lower costs. From an operations perspective, tying up working capital in inventory doesn’t make a ton of sense, but when you print your own working capital – it could work. Perhaps the money could be spent on developing renewable alternatives, or reducing our reliance on REM.

    I think this is one of those conversations when it is tough to apply business logic to running a country. Sometimes political needs don’t always make the most business sense.

  6. Kim Coldiron says:

    My colleagues make some strong points on both sides of this debate. However, I couldn’t help but think back to our economic studies when I read this blog. While it may be a slightly different perspective on economic theory, stockpiling of any scale flies directly in the face of Adam Smith’s theory of the invisible hand or free market. Smith’s belief was that large-scale government intervention and regulation of the economy is neither necessary nor beneficial. Even when specifically intended to protect or benefit society, Smith argues that it is usually less effective and in some cases harmful to society as a whole. Creating such reserves would create short and long-term disruption in the global economy in the name of self-preservation. Do we not believe the “free market” philosophy can exist on a global scale? In reality, we fight the same self-interest behaviors between countries on multiple fronts. One could argue that it is critical to the global economy that the US support and even enforce, where possible, the idea of a global free market, I’m just not sure it is possible in practice.

    • D. Zekveld says:

      I was thinking along the same lines as Kim for this blog. China’s approach is consistent with their politics, whereas the US approach (embracing free market) should fundamentally let the market decide. Government intervention in supply chain is pretty prevalent in China and quite the opposite in USA.

      I work in the field of radioisotopes, which is nuclear material with typically strategic importance. Countries to ensure a security of supply for domestic use. The US and Russia are leaders in production. Many of these isotopes have strategic military applications, so I can understand the need to invest to ensure supply.

      In short, I think for the domestic supply chain and economy, free market should rule. For military purposes, I can see why a stockpile of REM could be maintained.

  7. Paul Aoun says:

    As the other bloggers said, the answer to this question depends on the perspective:
    • From an operations perspective, no, there is no value in building-up the REMs raw materials inventory, ahead of the demand and the manufacturing needs.
    • From a strategic perspective, if this akin to the establishment of the oil reserves, then it might be useful to stockpile a certain amount of REMs, to buffer against fluctuations in the market due to the relationship complexities with China.

    If the right agreements are in place, and there are trusted agency managing the global stockpiles, then yes, a coordinated effort across countries could be a way to solve the supply problem. Plus despite their name, REMs are not really rare (see https://en.wikipedia.org/wiki/Rare-earth_element)

    Finally, as far as the REMs displacement for other materials due to technological advancement, at this point, there is no indication of that happening, especially with the availability of the REMs, albeit monopolized by China.

  8. srinivas tadepalli says:

    I agree with what has been said above by my fellow colleagues. Julia makes a very good point as to the costs involved in handling and storing of the R.E.M. inventory. One difference though is that fact that these materials are not like consumer goods which are presihable and has an expiration data. As long as the holding costs are acceptable, there is no harm in storing these materials.
    From an economy standpoint of view, In fact, a country’s currency or paper money has a value directly linked to its gold reserves today ( I consider gold to be rare earth metal) . With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. Who knows what will happen in the future. Some other Rare earth metal like platinum or titanium might become the monetary standard. Other arguement is purely related to the user of these rare earth metals for manufacturing of products. Today, with the advances in additive manufacturing and custom manufacturing of metals with desired material properties, customers are able to manufacture materials to fit their needs as opposed to what was happening until now I.e. You have a product and you are looking or the best material available. Our company develops a softcare called material studio which enables materials scientists and research teams to develop new, better performing, and more cost effective materials faster and more efficiently than with test and experimentation alone.
    http://accelrys.com/products/collaborative-science/biovia-materials-studio/

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