Have you ever heard of neodymium?  Neither had I, until I read an article in The Atlantic by Lisa Margonelli (“Clean Energy’s Dirty Little Secret“).  Neodymium is a “rare earth element” that is a critical component in making lightweight, affordable permanent magnets.  According to a U.S. Geological Survey Fact Sheet written by Gordon B. Haxel, James B. Hedrick, and Greta J. Orris, “Small, lightweight, high-strength REE [rare earth element] magnets have allowed miniaturization of numerous electrical and electronic components used in appliances, audio and video equipment, computers, automobiles, communications systems, and military gear.  Many recent technological innovations already taken for granted (for example, miniaturized multi-gigabyte portable disk drives and DVD drives) would not be possible without REE magnets.”  Neodymium magnets are also found in “green” products like electric/hybrid cars and wind turbines.

So, what’s the problem? 

“In 2006, nearly all of the world’s roughly 137,000-ton supply of rare earth oxides came from China…and over the past few years, China has cut exports to nurture its own permanent-magnet industry,” Margonelli writes in her article.  The chart below from the U.S. Geological Survey Fact Sheet shows global production of rare earth oxides from 1950-2000. 

(Source: "Rare Earth Elements--Critical Resources for High Technology," Gordon B. Haxel et al., U.S. Geological Survey, November 2002; Click image to enlarge)

The authors of the U.S. Geological Survey Fact Sheet, which was published almost seven years ago, write, “The surprisingly rapid progression from self-sufficiency prior to about 1990 to nearly complete dependence on imports from a single country today involves a number of causative factors. These include much lower labor and regulatory costs in China than in the United States; continued expansion of electronics and other manufacturing in Asia; the favorable number, size, and HREE content of Chinese deposits; and the ongoing environmental and regulatory problems at Mountain Pass.  China now dominates world REE markets, raising several important issues of REE supply for the United States,” which the authors outline in the document.

The Mountain Pass mine in California is the United States’ main source of rare-earth metals, and it provided most of the world’s supply of REEs until 1989.  Chemical processing at the mine was halted in 1998 due to environmental issues (radioactive waste water leaks).  The current owner of the mine, Molycorp, plans to restart production soon, but the company faces one constraint its competitors in China don’t: it has to spend $2.4 million a year on environmental monitoring and compliance (read Margonelli’s article for more details).

“The rare earth elements are essential for a diverse and expanding array of high-technology applications, which constitute an important part of the industrial economy of the United States,” state the authors of the Fact Sheet.  “Long-term shortage or unavailability of REE would force significant changes in many technological aspects of American society. Domestic REE sources, known and potential, may therefore become an increasingly important issue for scientists and policymakers in both the public and private sectors.”

Translation: REE supply is a supply chain risk management issue, with national security implications.

The bottom line: I think Irving Mintzer, a senior advisor to the Potomac Energy Fund said it best (as quoted in Margonelli’s article): “If we don’t think this through, we could be trading a troubling dependence on Middle Eastern oil for a troubling dependence on Chinese neodymium.”

The world is not flat; it is round.  And what goes around, comes around, so we better be careful what actions we set in motion towards China because those actions will eventually roll back around to us.

For example, we’re a step closer to passing cap-and-trade legislation.  Since China has no intention of implementing similar measures, some politicians and members of the Obama administration, including Energy Secretary Steven Chu, are floating the idea of instituting a “carbon tariff” on China and other countries that do not mandate greenhouse gas emission reductions.  This may sound like a brilliant idea to some folks, until you realize that China arguably has more leverage than we do (even if you don’t take into account the fact that China owns much of our debt).  In addition to potentially triggering a trade war, a carbon tariff could severely limit our ability to build a green economy by prompting China to curtail supplies (and significantly increase the price) of rare earth elements.

If President Obama and Congress are betting our future on building a green economy, I hope they understand that it’s most critical components are Made in China.