The most important and wide-ranging historical analyses of the economic consequences of our activities have simple yet globally descriptive titles. In the eighteenth century, Adam Smith began the modern study of global economics, with his famously titled seminal treatise “An Inquiry into the Nature and Causes of the Wealth of Nations.”

In the first part of the twentieth century John Maynard Keynes described the economic consequences to both the victors and the vanquished of World War I (known as The Great War in the days when it was hoped that it would be the last of its type), in “The Economic Consequences of the Peace.”

Keynes next deeply studied global economics and titled his masterpiece, simply “The General Theory of Employment, Interest and Money.” Milton Friedman then wrote “A Monetary History of the United States,” and Frederich Hayek penned “The Road to Serfdom” as his analysis of the then-raging battle between the consequences of socialism and capitalism. All of these twentieth century studies were written before the middle of that century.

In Smith’s day the richest nation on earth, in terms of what we now call gross domestic product (GDP), was probably China. Between Adam Smith’s death and the publication of “The Road to Serfdom”, the Industrial Revolution led to the pre-eminence, economically and globally, first of Great Britain and then of its intellectual descendant, the United States of America.

The wheel of history seems now to be turning again, so that we will surely see by 2020 at the latest, the return of China to its former place as the nation with the highest GDP. This return to economic dominance by China could not have been, and was certainly not foreseen in 1947, when America owned half of the world’s gold reserves and was the richest nation in history both in GDP and in per-capita income.

The last half of the twentieth century has seen the transformation of China from a third-world socialist economy, to first an export powerhouse and now a nascent consumer economy, under a hybrid version of capitalism that sees state control of the banking system used to control the direction and growth of capitalist institutions. The Chinese refer to this as “Capitalism with Chinese Characteristics,” but it is really just a very sophisticated state-controlled capitalism.

Chinese capitalism has created the greatest commodity-consuming nation in human history. Just with regard to metals, which is the economic sector that I study, we now live in a world where the Chinese economy consumes nearly 70% of the total output of all metals of all kinds, produced in the world each year. China at the same time produces more than 60% of all of the metals produced in the world each year. Thus any analysis of the markets for, and the future of, any metal – any metal at all – must assume that China is and will continue to be the major consumer of that metal. As it also turns out, China is probably going to also be the major producer of that metal too.

Great Britain in 1850 and the United States in 1947 held the titles of the world’s largest producers of iron and steel. The first because it was the home of both the Industrial Revolution and the birthplace of modern capitalism, and the second because as the victor and armorer of the world in the Second World War, it had by far the largest remaining iron and steel industry. It also had the pent-up demand not only of its 13,000,000 returning soldiers and sailors to satisfy, but also that of its 120 million additional and now richest in the world consumers, who had been saving enormous sums for a decade.

Now, in 2013, it has been not war but industrialization, mainly in China, that has produced a nation of voracious savers whose centrally controlled economy is moving to create the greatest consumer-driven economy in the history of the world. More than one billion Chinese consumers are being readied to continue the growth of the Chinese economy and its starting point is already that of the world’s second largest economy. I have no doubt that another two billion Asians, Indians, Indonesians, Koreans, Malaysians, and Filipinos will join the Chinese consumer boom by 2050, to firmly center the global economy in Asia.

What will this mean for the markets for critical and strategic materials? First and foremost it will mean, and already does, that civilian not military demands for structural and technology metals will be the dominant and overwhelming driver for the growth in their supply. It also means that the natural resources of both the wealthy and of the poorer of the resource-rich nations, which do not have enough population or industry to build the capital they need to produce or consume their domestic resources, will be developed by Asian capital and purchased for use domestically in Asia.

The currently wealthiest nations of the world in North America, Western Europe, and Japan are mature consumers of material natural resources. Their economies are not growing. Therefore the only material natural resources they need are to replace those lost through waste or mismanagement.

The economic power and growth of Asia’s economies will, I believe, mean that the rare technology metals will ultimately only be available to non-Asian (but still rich) economies through conservation and recycling. This is not a military-capability problem; it is a deep problem of the civilian standard of living. Because it is not a military-security issue there is a zero probability that governments in the West or Japan are going to finance mining to produce new supplies of rare technology metals. In any case, only in the USA are there sufficient deposits of such materials to make it worthwhile. Mining is today in the USA too politically expensive for our short-sighted politicians to even consider such a solution.

The immense resources of rare technology metals contained in the existing American and European “inventories” of end-of life consumer and military scrap are already being mined by Asian entrepreneurs for their own benefit. I believe we are already at the stage in the USA where producing rare technology metals from scrap is the only remaining hope of obtaining a secure supply of the lowest possible cost materials, to feed a total domestic supply chain to satisfy our domestic (replacement) demand for such materials.

It is now sixty years since the great twentieth-century economists explained where the global economy came from and where it stood. We have been annotating these great works of economic analysis and theory for nearly three generations, as academics advise ever more poorly educated politicians on how to create wealth equitably. it seems to me that this instruction passes right over all of their heads, and it has become accepted as inevitable that the rapacious accumulation of wealth and power is the natural state of human endeavors.

It is obvious, however, that the avoiding of polarization into “haves” and “have nots”, by the waste of productive capital through its pointless accumulation, is the major purpose of government. Such accumulations reduce society to oligarchy and the protection of the oligarch’s wealth, the protection of which then supersedes a society’s economic growth and fair distribution as economic policy.

If we have to beg the oligarchs to follow a path that provides the most wealth for the many, we are already lost.

I note that the Sunday New York Times last weekend, had an article in its business section with the title, “Japan’s Economic Gloom Runs Deeper This Time.” Of particular interest to those of us following the rare-earth-supply issue is the following paragraph in the article (emphasis is mine):

“…since the collapse of the bubble economy of the 1980s …the Nikkei 225 stock index is still three-quarters off its peak. And the economy has been hit by blow after blow, from sagging property prices to mounting debts and intensifying competition from China.”

Nowhere is China’s current stranglehold on the supply of rare earths more deeply felt than in Japan, and nowhere else, I repeat, nowhere else, is obtaining an alternate supply more important than in Japan.

The reason for this is that Japan’s rare-earth permanent-magnet (REPM) industry is considered to be the best on earth. Its largest REPM maker, Hitachi Metals, in fact still holds more active patents in the technology than anyone else in the world.

Japan is very protective of its REPM industry. If a Japanese manufacturer uses a REPM made by Hitachi Metals or which is covered by a Hitachi Metals patent license, then that magnet must have been made in Japan, under the terms of the patent licenses that Hitachi Metals manages.

The Chinese REPM industry, now the world’s largest, and twice the size of Japan’s by volume, considers this system to be a form of Japanese protectionism, and it wants to break into the Japanese market, the world’s largest after China, itself.

I believe that this competition more than any other external factor, is what is driving the current Chinese agenda on limiting the exportation of the rare earths as raw materials. Chinese magnet makers would like to make the magnets for Japanese end users to incorporate into permanent-magnet motors and permanent-magnet generators as well as into speaker magnets. Japanese manufacturers know that if this were to happen, then it would only be a matter of time before China pressured Japanese manufacturers to move all of their subcomponent operations to China in the same manner as they did to American manufacturers and continue to do.

Japan cannot afford the luxury of lower domestic costs disguising the transfer of an industry, its jobs, and its future developments in technology to another country. The Japanese economy simply cannot afford to take such a gamble, and the Japanese look at what happened to the American rare-earth supply chain as an object lesson in sheer short-sighted greed.

I find it intriguing that American investors who know or should know the above facts, even so still believe that a company like Hitachi Metals which is way ahead of any American company in terms of the manufacturing technology for REPMs, would agree to compete with itself, by letting a raw-material supplier become a new Hitachi Metals licensee. I think it is as unlikely that Hitachi would do this with an American supplier, as that it would with a Chinese raw-material supplier. I do believe that Hitachi Metals would like to re-enter the US REPM market by manufacturing in the USA, with American raw materials. Structured carefully as to ownership and control, this would give Hitachi Metals a definite competitive advantage when dealing with the US Defense Department, which now has prohibitions against buying certain types of rare-earth-based magnets, which are made in Japan (and elsewhere).

Japan is a particularly resource-poor country. Its military ruling elite dominated the populace for centuries by, among other things, controlling the production and use of metals such as iron and copper (as bronze). A razor-sharp samurai sword wielded by a man in iron chain mail and bronze armor, was the most effective means of controlling the Japanese peasants until Western “traders” brought firearms, and large quantities of both fabricated and fabricated metals to Japan in the mid-nineteenth century.

Japan’s attempt to create a self-sufficient natural-resource supply by force of arms, failed precisely because its principal enemy had an unlimited (from the Japanese perspective) supply of natural resources, especially of energy and metals. Japan will never again give up any advantage based on natural resources.

Japan won’t give up nuclear-generated electricity for dependence on imported coal and oil, nor will it give up independent technological prowess. Japanese private industry is actively seeking independence in natural resources, and this is evidenced by the activity not only of Hitachi Metals and Toyota, among many others, but also of the giant Japanese trading companies seeking to buy and operate sources of iron, copper, and the rare earths, as well as indium, gallium, and many other technology metals.

The rare earths are a critical component of Japan’s competitive stature in the world of technology.

China isn’t the only game on the planet, and, by the way, South Korea has begun its own quest for technology metals too.

It goes without saying that in the short term, the biggest challenge for Japan and its economy is to provide immediate humanitarian relief to the victims of the earthquake and tsunami. Cost will, of course, not be a factor in rescue and relief efforts.

However, in the long term the largest problem for the Japanese industrial economy will be the sudden onset of the need to redistribute (at best) and allocate and prioritize (at worst) the supply of electricity between civilian and industrial demand. I don’t know how much of Japan’s national electricity production capacity has been destroyed, but even if there is spare capacity, it remains to be seen when the grid in the affected area can be restored.

It also remains to be seen how much of Japan’s industrial capacity has been impaired and which particular industries may have been affected. As long as the emergency lasts, there will be no need and perhaps no easy way, logistically, to continue either just-in-time or long-term deliveries of non-fuel or non-food raw materials. Theoretically Japan will want to bring its export industries back up to speed as soon as possible, so as to resume full economic life. Practically, however, some industries will need to slow down, so as to allow others to get logistical priorities for humanitarian reasons.

Japan is China’s largest customer for rare-earth metals and alloys, but processing such materials is energy-intensive, such that this processing may be reduced or even eliminated this year, until the essential economy is restored. I am going to guess that deliveries of rare-earth metals and alloys to Japan will slow dramatically in the next quarter at least, if not longer. Although Japanese trading companies will continue to buy and now stockpile them, they will not simply accumulate them for an indefinite period.

This means a short-term increase in the supply of these materials, since the production of them is mostly in an unaffected China. If the law of supply and demand is still operating in the real world, this should mean a short-term decrease in the price of the critical rare-earth metals.

I note, finally, that last year China exported only 10% of its production of the critical rare-earth metal, dysprosium, as a metal for others to alloy and fabricate products. If I were a Japanese end user or trading company, or one of the same in Korea, I would try now to buy as much dysprosium as I could, and take delivery outside of China for future demand. The rare-earth production industry’s customers are overwhelmingly in China and Japan. Any impairment of industrial production in either country will have a major impact on global rare-earth prices.

Investors should focus on those rare-earth ventures that can produce outside of China, the most critical rare-earth metals such as dysprosium, terbium and europium. There are ample deposits of the lighter rare earths in development, and thus no further need to worry about the supply of the light rare earths.

By Jesse Emspak – International Business Times – Published: November 19, 2010

Representatives of the Japanese government are in the United States, meeting with their counterparts at the Department of Energy and the U.S. Geological Survey, to discuss new sources of rare earth minerals.

But while the U.S. has supplies of the strategically vital elements, it does not have any extant mining operations and won’t have them until 2012 at the earliest.

Rare earths are a group of 16 elements that have magnetic and chemical properties that make them ideal for high-tech applications. All were discovered in the 20th century, and are used in applications such as magnets for hard drives, lasers, and oil refining.

In September, the New York Times reported that China had cut off rare earth shipments to Japan, amid a diplomatic dispute. Chinese officials denied that they had ended shipments, but they did say they had reduced rare earth export quotas due to environmental concerns. China currently supplies 96 percent of the world’s rare earths.

As eager as Japanese companies and the government are to work with the U.S. on supplying rare earths, they may be disappointed.

A report from the United States Geological Survey says that there are supplies of rare earth elements in the United States, and enough to satisfy current demand. The report says that total proven reserves in the U.S. — those that could be expected to enter the market in the near future — are about 1.5 million metric tons. Adding the reserves in Canada, Australia, and South Africa, which are unlikely to stop shipping them to the U.S., gives 13.8 million metric tons.

But while the reserves that look promising in the U.S. are large, there are a number of caveats. One of those is how many companies are willing to shoulder the cost of mining them. Another is that many of the areas that look promising are just that — promising, but unexplored.

Extraction Is Difficult

While they are called “rare” some rare earths, such as Cerium, are more abundant in the Earth’s crust than copper. But the separating them from the minerals they are in is complex and costly. Many precious and base metals can be found in their pure state; rare earths never are. To get rare earth metals requires a multi-step process that involves separating the elements as oxides from the ore before purifying them. Gold, iron or copper are much simpler.

Most mines, the report says, produce rare earths as a byproduct. The Chinese mines are largely iron mining operations. Two areas in the U.S. that show large concentrations of rare earths are similar, as they are in abandoned iron mines in Missouri and upstate New York. In the latter case, the rare earths might be separated from the tailings – the waste left over after a mine is dug.

But no one has tried extracting rare earths that way, at least in the U.S. Sumitomo Corporation has embarked on a project in Kazakhstan to recover rare earths from the tailings of old uranium mines.

Rare earths often occur together in the ore, but since they all have different chemical properties separating them is time consuming and costly. Another issue is that rare earths often show up near deposits of thorium, a radioactive element. Mining anything with thorium requires costly waste management methods.

Dan Cordier, one of the authors of the USGS report, notes that despite the difficulty, there is a lot of activity now surrounding the known deposits, and many companies seeking funding. But that is no guarantee that the relevant elements will be worth mining. “Everybody who had a gold or uranium deposit is now saying it’s a rare earth mine,” he said. “But investors want a return.”

Risky Business

The USGS report lists 1.5 million metric tons of proven reserves in the U.S., with another 10 million tons that are unproven, though possible, spread between 15 different areas. Several companies are exploring them, however, but it isn’t clear whether they are economically feasible.

US Rare Earths, for example, is exploring the Lemhi Pass district in Idaho, and the company says the deposits there are some of the largest in the U.S. But no mining activity has begun yet. US Rare Earths has sampled another part of the state, near a place called Diamond Creek, but that area has never produced any rare earths at all, nor has there ever been mining there.

In some cases there has been extensive mining, as in Alaska at a place called Bokan Mountain. Uranium mining was done there until 1971, and Ucore Rare metals has been exploring the region for the last two years, and last week received a $10 million private placement on the strength of its reported findings of rare earths.

The Wet Mountains, in Colorado, is estimated to have some 59,000 metric tons of rare earth oxides, and the USGS report says it is promising with highly concentrated deposits. But there has never been any mining there except for some exploratory work in the 1950s.

Perhaps the closest mine to production is the Mountain Pass deposit and mine, owned by Molycorp. Molycorp produced rare earths there until 2002; it is set to re-open the mine in 2012. The reserve there is estimated to be nearly 2 million tons of rare earth metals. Molycorp went public in July at $12 per share; it now trades at $28, in no small part on the promise of that mine.

But most of these entail risks. Mining consultant Jack Lifton says that the USGS is often looking at the geology of a site – which has less to do with how economically viable it is. He says it’s unlikely that most U.S. producers can compete with the Chinese on a price basis. “If they can sell niobium for $2.50 per kilo, then the Chinese will be buying it from you,” he said. That said, the mining business has a long list of prospectors who came up empty.

By Ira Mellman – Voice of America – Published October 20, 2010

China says reports that it has reduced quotas of rare earth exports by 30 percent “false and groundless.” A Ministry of Commerce official told the official Xinhua news agency that “China will continue to supply rare earths to the world.” The original report of the quota reduction appeared in the Beijing based China Daily newspaper.

Rare earth materials are necessary for the production of evolving technologies, like wind turbines, batteries for electric cars, iPods, cell phones, computer hard drives and many high tech weapons used by the US military.

Jack Lifton is the co-founder and director of Technology Metals Research and an independent consultant and commentator focusing on the future end use trends of rare earth material. He says the problem for many nations, especially Japan, is that China is the only country in the world that mines these rare earth materials.

Is it true that the Chinese have made no secret of their intentions on exporting rare earths?

The Chinese have been telling us for the last two decades that they do not wish to be a rare earths exporter indefinitely. And since at least the beginning of the 21st century, ten years ago, the Chinese has been each year reducing their export of rare earths as raw materials which others can add value to and make finished goods. Because China’s stated goal – it has never been a secret – is to create as many jobs in China as possible and add as much value in China as possible to everything they are involved with. In the cases where they are the rare earths producers, they would like to add as much Chinese labor and technology as possible, so that these things wind up as components of finished goods where they make the most money possible, therefore they have employed as many people as possible in the transformation of these raw materials to finished goods. That is what this is all about.

The largest importer of these rare earth materials is Japan which has been basically battling with China over this value-added issue for a decade now. Japan does not wish to give its industrial technology of manufacturing high tech magnets or batteries to China.

What would Japan do?

Japan does not produce any rare earths. In fact, nobody today in the world does essentially except China. So the Japanese at the moment have six projects going around the world to develop rare earths mines, the outputs of which and the concentrates from which will be sent to Japan for processing. There is also a mine well under development in Australia by an Australia-owned company and there is one in California by an America-owned company. The problem of all of these is that we will have at least two years before any of these companies can produce a product that the Japanese can process into an end product they can use. So the Chinese have leverage now for two more years, and they dominate this area. The idea of having a law case or a discussion in the U.S. Congress is just foolishness. The Chinese have the upper hand here. And I think the Wall Street Journal the other day was absolutely right – the way to resolve this is to resolve with the Chinese, in the short term. In the long term, we will have other production around the world and this crisis will go away.

How do you theorize that it should be solved with the Chinese?

I actually do not know, but I don’t think the Chinese are going to give in on this. The problem we are going to have is that while those products are made in Japan using Chinese raw materials, we may have a problem because the Japanese have a problem. I don’t know what the outcome is going to be. This is something that we anticipated a decade ago, I have been talking about this for over 10 years about what we are going to do. “Oh, they (the Chinese) will never learn how to do this stuff, and they will always need us to process that stuff.” All of that is no longer true.

by Bill Gertz – The Washington Times – Published: October 13, 2010

The diplomatic dispute between China and Japan over the Senkaku Islands has died down, but the incident involving a detained fishing boat captain has raised new fears within the U.S. government over China’s use of economic warfare, namely, its control over exports of rare-earth minerals needed for high-technology manufacturing.

“It isn’t about scarcity but rather China’s virtual lock on production capacity,” said a U.S. official who monitors the issue. “Other countries have rare-earth mineral deposits but aren’t exploiting them to the same degree.”

Japanese diplomatic sources confirmed — contrary to denials from Beijing — that China shut off or slowed exports of rare earths last month after Tokyo detained a Chinese boat captain who rammed his vessel into two Japanese coast guard ships near the Senkakus, which are Japanese territory but claimed by China and Taiwan.

Japan’s Ministry for Economy, Industry and Trade conducted a survey recently of 31 Japanese companies dealing with China on rare earths and found that all were facing official and unofficial problems in getting shipments out of China since early September. The slowdown hit some companies that already had obtained Chinese licenses to export rare earths.

Rare earths include 17 elements that contain unique properties that are essential for high-technology goods. They are used in batteries, lasers, computer hard drives, magnets and other electronics.

Experts say China since the 1990s has taken steps to try to lock up the market for these difficult-to-extract metals. Starting in 2006, China began cutting exports by 5 percent to 10 percent annually, driving up prices amid growing demand.

Estimates are that China holds 35 percent of the world’s reserves of rare earths and it supplies between 93 percent and 95 percent of demand.

Gareth P. Hatch, a specialist on rare earths with Technology Metals Research, said the Chinese tightening of rare- earth exports should be a wake-up call.

“I’m not sure I believe that there is a high probability of the U.S. losing access to the raw materials, semifinished and finished rare-earth products that its defense contractors need, for the devices and weapons systems that are used by the Department of Defense,” he said. “On the other hand, should such a scenario occur, the effects would very likely be devastating, and I would argue that this is an unacceptable risk.”

Non-Chinese production reportedly will begin in the next several years in California, which produced some rare earths until 2002, and in Australia, India and Vietnam. According to the Economist magazine, the only rare-earth producer outside Asia that is not dependent on Chinese ore is the Estonian company Silmet, which is being sought by customers worried about Chinese controls.

by Joe McDonald, Yuri Kageyama, Sangwon Yoo & Mari Yamaguchi – Associated Press – Published: October 4, 2010

China’s recent halt of exotic metal shipments to Japan amid a diplomatic spat has reverberated throughout the world’s high-tech manufacturing hubs — now on heightened alert to the risks of relying on one country for materials that do everything from helping hybrid engines run to creating the color red in televisions.

Governments as far afield as Washington and Seoul are asking: What happens if China cuts off our supply too?

Like the rest of the world, Japan depends almost entirely on shipments from China, which produces 97 percent of the global supply of the metals known as rare earths.

As tensions over islands claimed by both Japan and China ran high last month, Japanese companies reported that China had halted shipments of rare earths — 17 exotic minerals critical for advanced manufacturing. Hybrid car engines, like those in Toyota’s Prius, need lanthanum. Europium creates the color red in televisions. The electric generators in wind turbines use neodynium.

“Some countries have started taking steps to seek various options,” Japan’s new Foreign Minister Seiji Maehara said Friday. “I think it is quite a healthy development for each country to start resource diplomacy after developing a sense of crisis because of the latest incident.”

China’s virtual monopoly is no accident. Former Chinese leader Deng Xiaoping once famously quipped that while the Middle East had oil, China had rare earths. The U.S. led the world in rare earth production until the late 1980s. Since then, however, China has grown to dominate the market by undercutting other producers with lower prices.

Annual global production of rare earth elements totals about 124,000 tons, according to a July report by the U.S. Congressional Research Service. World demand is expected to rise to 180,000 tons a year by 2012. By 2014, global demand could exceed 200,000 tons per year, according to the report.

Concern about rare earth supply had been brewing long before September’s restrictions to Japan, which Beijing still denies. To cope with growing demand at home, China has been reducing export quotas of rare earths over the past several years. In the second half of this year, the government has capped overseas shipments at 7,976 tons, down 49 percent from the first half, according to figures from China’s Ministry of Commerce.

Although shipments appear to have resumed, the issue has become a political priority in Japan, where the vital auto industry has invested heavily in hybrid and electric cars — among the biggest consumers of rare earths — to drive growth.

Jack Lifton, an independent consultant, speaker and author on rare earths, says Japan has the most to fear from Chinese import restrictions.

When it comes to high-tech goods, “anything that’s not made in China is made in Japan,” said the Michigan-based Lifton, who has advised the Japanese government on the issue.

On Friday, Tokyo released a set of “comprehensive rare earth measures” to ensure a stable supply for Japanese industry.

The Ministry of Economy, Trade and Industry outlined five main areas of focus, including speeding development of rare earth alternatives, turning Japan into a major global center for rare earth recycling and helping manufacturers install equipment to reduce rare earth consumption. The government will also support Japanese companies in acquiring concession rights to rare earth mines outside of China and study the possibility of stockpiling rare earth reserves.

Japan announced a new accord with Mongolia the following day. At a meeting between Prime Minister Naoto Kan and Mongolian Prime Minister Sukhbaatar Batbold, the two countries agreed to cooperate in developing rare earth mines in Mongolia.

The new partnership comes on top of ongoing projects launched recently by major Japanese companies seeking to diversify their rare earth sources.

Toyota Motor Corp. said last week it set up a rare earth task force. An affiliated trading company, Toyota Tsusho Corp., established a rare earth mining joint venture in Vietnam two years ago.

“There are many risks in depending on one nation,” company spokesman Morimasa Konishi said.

The company expects the Vietnam mine to begin supplying minerals to Japan in 2012, he said. Toyota Tsusho has also invested in a similar project in India, which should begin operating next year.

Toshiba Corp. and Sumitomo Corp. have each launched rare earth joint ventures in Kazakhstan over the past year. Australia’s Lynas Corp. said last week that it had signed a deal to supply a major Japanese company with rare earths from its Mount Weld project in western Australia. Lynas did not name the company and said it was in talks with other firms in the U.S., Japan and Europe.

South Korea — home of tech giants Samsung Electronics Co. and LG Electronics Inc. — has taken notice of its neighbors’ dispute.

It plans to spend 17 billion won ($15 million) by 2016 as part of a long-term plan that seeks to secure 1,200 metric tons in rare earths reserves, the Ministry of Knowledge Economy said in a statement.

Seoul expects prices to climb and supplies to become increasingly unstable, as its main supplier China consistently decreases exports, the statement said.

The policy plan, titled “Plans for Stable Procurement of Rare Metals,” will be finalized in mid-October, after further consultations, the ministry said. The plan will include strategies on developing domestic mines and investing into research for alternative materials and recycling technologies.

And in the U.S., legislation to jump start domestic rare earth production appears to be gaining momentum.

At a Senate subcommittee hearing last week, lawmakers expressed concern that the U.S. was so reliant on China. David Sandalow, assistant secretary of energy for policy and international affairs, told the hearing there were “potentially very serious implications” if the U.S. lost access to rare earths.

“It could interrupt the development of clean energy technologies,” Sandalow said. “It could interrupt commerce.”

Lifton, the consultant from Michigan, believes the rare earths issue represents “the tip of the iceberg” as China’s ambitions and economy grow rapidly. Similar supply worries could emerge about other high-tech metals that China sends to the world.

“The Chinese are pretty set on moving manufacturing to their country,” he said. “They don’t think that’s sinister. That’s just doing business.”

It’s all so utterly predictable.

Every man, woman and canine following the rare earths space will be aware of the ongoing saga of China’s alleged unofficial ban on rare earth exports to Japan. We’ve been told that China got uppity with Japan over its arrest of a fishing trawler captain, and the next thing you know China was apparently telling rare earth exporters, to quietly yank on Japan’s chain, through the temporary cessation of exports [because of course doing it quietly in this way, would mean that no-one would put two and two together, right?].

The wider story broke in the New York Times last week, following the earlier publication of a single anecdote on the subject, by the Industrial Minerals web site. This is a Web site not to be confused by the way [as it was by at least two so-called “reputable” mainstream news publications], with Dudley Kingsnorth’s Industrial Minerals Company of Australia Pty Ltd [IMCOA]. Dudley and his company had nothing to do with the story as it emerged.

Protagonists from all sides of the various stories and sub-stories came rushing forward, claiming this, that and the other. Then came the inevitable denial from China, followed by the inevitable “they denied it so they MUST be guilty” routine, and before we knew it, ladies and gentlemen, we had ourselves a good ol’-fashioned tale of conspiracy, dark dealings and yet more ABSOLUTE evidence, by gosh, of the perfidious nature of the Chinese. And so it goes.

I almost hate to break it to you, folks, but the truth of the matter is that outside of a few dingy offices, several thousands of miles away from where you and I are probably sitting right now, no-one really knows what ACTUALLY happened last week, or continues to go on – or not, as the case may be. Anecdotal “evidence” continues to flow but frankly, it’s all rather irrelevant.

Ultimately it doesn’t actually matter if the alleged ban was or is real or not: diversifying our supplies of any important materials, makes as much plain common business sense now, as it did before last week’s storm in a teacup. Right? Whether it’s alleged threats to cut off supply, or an unfortunate but catastrophic earthquake or other natural disaster, placing all of one’s procurement eggs in one geographical basket is just daft if it can be avoided, particularly in the case of the rare earths where there are deposits geographically located all over the globe.

Perhaps if North Americans and Europeans spent as much energy on actually implementing and coordinating sound procurement strategies, underpinned by sound national policies and objectives, as they did on the pissing and moaning that has taken place these past few days, we might have been just a little closer to the creation of a robust, decent supply chain than we are now. The reaction to last week’s story feels like being stuck on a boat with half a dozen rowers all paddling in different directions, taking us nowhere except towards the ominous waterfall ahead. All mouth and no trousers, as they say back in my old neighborhood.

The story does actually get a little better in Japan; that country has been looking to develop non-Chinese sources for their technology metals for years. They have also been developing alternatives to rare earth elements – again, for years. Not that certain Japanese ministers and politicians appear to know this [or those who would quote them]; apparently there is nothing unique to the Americas or Europe, in politicians having no clue regarding the scientific work being done right under their noses, in their respective countries.

As a resource-poor nation, Japan has had no choice on this matter, for years. As just one example, Japanese researchers have been working to reduce the amount of dysprosium needed in high-performance neodymium-based permanent magnets since at least 2004, if not earlier. Long before the present rare earths bubble, or the one before that…

And yet, despite being just about the world’s leading location [certainly outside of China] for science and innovation in the rare earths and their applications, Japan was excluded as a possible partner, in work to be conducted by a new US rare earths research & development center, which was proposed in legislation making its way through the US House of Representatives this week. There is mention of cooperation with directorates of the European Union, to avoid “duplication of efforts”, in the bill, so I suppose we should be thankful for small mercies. Not linking up with Japan, however, and its formidable scientific and engineering talents, is just plain myopic, and brings into question the motivations of the bill in the first place.

We’ll see how the China vs Japan story unfolds [or doesn’t] as time goes by. We’ll also see if the rare earths bill gets turned into legislation or if the upcoming campaign season and subsequent lame duck session in Congress will see the bill disappear into oblivion. In the meantime, let’s just hope that the powers that be, in the public and private sectors of the USA and Canada, can get their political and financial acts together in the face of potential supply chain disruption, from threats real or imagined.

PBS Nightly Business Report – Broadcast: September 23, 2010

by James Areddy, David Fickling & Norihiko Shirouzu – Wall Street Journal – Published: September 23, 2010

SHANGHAI—China said it hasn’t limited export of rare-earth elements to Japan, denying a report that it had halted exports of the materials to its neighbor as retaliation in a territorial dispute.

“China doesn’t block rare earth exports to Japan,” Chen Rongkai, a spokesman for China’s Ministry of Commerce, said Thursday.

The New York Times, citing industry officials, reported Thursday that Chinese customs officials had blocked shipments of the minerals to Japan in response to Japan’s detention on Sept. 7 of a Chinese fishing boat captain, whose trawler collided Japanese patrol vessels near islands both countries claim. China produces well over 90% of the world’s output of rare-earth elements, which are critical to making certain technology products like batteries for electric cars. The report followed a brief article in Industrial Minerals, a trade magazine, which cited a Japanese trader it didn’t name also claiming China had barred exports of the materials to Japan.

Most government and business offices were closed in both China and Japan for holidays on Thursday. Several industry executives and government officials in Japan and China said they had seen no evidence of such a ban in the rare-earth trade—although some said they had heard rumors or reports of such a move. Industry participants said there are broader concerns about global supply of rare-earth elements after Beijing earlier this year issued sharply reduced export quotas for the materials that are now nearly exhausted.

“The Japanese government hasn’t been informed” of any Chinese ban on rare-earth materials, a Japanese Foreign Ministry official said. An official in Tokyo at the Ministry of Economy, Trade and Industry also said the Japanese government hasn’t received any notice from the Chinese government on a ban and is “now trying to confirm” if there is anything to the reported embargo. Another Japanese economic official, who watches China closely, said his office would flash a “red alert” if evidence were found to support the reports, but that so far they hadn’t found any such evidence.

A fourth official said Japanese trade officials have received some reports from Japanese trading companies that it has become “more difficult” in recent days to arrange rare-earth shipments to Japan, and some have not taken place as scheduled.” He wasn’t sure when the difficulties began or what might have caused them, though he said they could have something to do with the diplomatic spat.

An executive at a Japanese importer of rare-earth elements said his company has seen no disruption in its imports from China. “So far, nothing has changed,” he said. “We’ve heard rumors this past one or two days” about a possible cut-off, but as of Thursday afternoon “we haven’t been able to confirm them.”

A government official in Baotou, a city in China’s Inner Mongolia region that is a major mining center and headquarters of Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech Co., said he hadn’t heard of any ban on exports to Japan. Blocking exports would violate World Trade Organization rules, the official said, and “I don’t think China [would] to do this.”

An executive at a major European buyer of rare earths said he has seen no supply disruption at all to its intake and hasn’t heard from any Japanese companies wanting to purchase supply.

Jeff Green, a U.S. industry consultant who runs J.A. Green & Co., said by email that over the past 24 hours “numerous sources in Japan” have told him they have experienced a halt in rare-earth shipments, possibly due to the overall yearly quota.

Any ban on rare-earth shipments to Japan would mark a startling escalation of the territorial dispute, one that would not only upset Japan but also risk angering the U.S. and other countries and aligning them against China for using its global commercial clout in a bilateral political dispute. Chinese officials, including Premier Wen Jiabao, have denounced the captain’s arrest and threatened unspecified actions in response if Tokyo doesn’t release him, but it has so far limited retaliatory efforts to suspending political and cultural exchanges trying to curtail tourism.

China’s decision over the past year to impose global export quotas on rare- earth elements has caused worry among foreign industry executives and government officials for months. China’s Commerce Ministry said total exports for the year would be capped at just under 30,300 metric tons, down 40% from last year. Only 7,976 tons of that were allocated for the second half of this year, and experts say much of that has already been shipped. As the near-monopoly producer of the 17 rare-earth elements, which share certain chemical properties and are critical to manufacturing high-tech magnets, night-vision goggles and wind turbines, China is at least temporarily in a powerful position to dictate trade in rare earths. High-tech Japan is the world’s biggest importer of rare-earth minerals.

Over the past year, as Beijing has tightened export quotas on rare-earth elements—quotas that apply globally rather than to particular nations-high level delegations from the U.S., Germany, and Japan have implored Beijing to recognize how critical they consider sustained supply.

Mr. Wen responded to such concerns expressed by a visiting Japanese delegation led by former Foreign Minister Katsuya Okada last month by pledging China would not halt exports.

Chinese officials have said the tighter export limits this year are motivated by environmental concerns. Chinese Commerce Minister Chen Deming said during the meeting with Mr. Okada that “mass-extraction of rare earth will cause great damage to the environment; that’s why China has tightened controls over rare-earth production, exploration and trade.”

By the end of August, China had exported some 28,500 metric tons of rare earth to customers around the world in 2010, the vast bulk of the 30,300 metric tons it set as the full-year quota, according to an executive at a foreign rare-earth producer who cited Chinese statistics but who asked not to be identified.

“The fact that we’re in mid-September, it would be reasonable to assume the remaining [about] 2,000 tons has been consumed,” according to the person.

Rare-earth elements include the relatively common cerium, used in pollution-control equipment, and terbium, used in energy efficient light bulbs, as well as the truly rare thulium, which has applications in x-ray devices.

Many of the elements are more abundant than the label suggests. The U.S. has around 13 million tons of reserves in rare earth oxides, according to the U.S. Government Accountability Office, against 36 million tons in China.

Yet, no one is currently producing most rare-earth minerals in the U.S., while Chinese output is around 120,000 tons annually. The U.S.’s best hope is a Mountain Pass, Calif., mine that closed in 2002 and is now being redeveloped by Colorado-based Molycorp Inc., one of several companies in the U.S., Canada, Australia and elsewhere racing to exploit concerns about the unbalanced global supply.

Global trade in the elements is nevertheless small: China’s annual production weighs less than a single Capesize vessel.

Some rare-earth industry officials said they believed it possible that China might temporarily cut off exports to Japan. But they said it would pose little immediate threat to global supplies, even though it might underpin already rising prices for rare earths as the world economy recovers and demand for products like iPods and electric cars grow.

Dudley Kingsnorth, a known Australia-based industry consultant who runs Industrial Minerals Company of Australia, said he had heard from a Japanese trading firm that he declined to name that China was “informally” halting trade in rare earths. If there were temporary disruption, he said the immediate fallout would be limited, noting many users are sitting on six months or more of stockpiles, which rose during the global recession.

Yet, even the hint of a politicized reduction in exports from China, said Mr. Kingsnorth, “raises real alarm bells about long term security of supply and will force companies to look at diversity of supply.”

That warning was echoed elsewhere in an industry that has struggled to make the economics of rare earth mineral production work in the short term, despite widespread agreement long term reasons dictate improved production.

“It is precisely this type of vulnerability in the overall rare earths supply chain [for geopolitical reasons and others], that makes it important for Japan and other countries to diversify their supply chains for rare earths,” Gareth Hatch, founding principal of Illinois-based Technology Metals Research LLC said by email.

—Atsuko Fukase and William Sposato in Tokyo, Yajun Zhang in Beijing and Bai Lin in Shanghai contributed to this article.