Rare Earth “Market Based” Solutions Untenable For National Security Needs

By the Strategic Materials Advisory Council

Nearly four years of turbulent markets for rare earth elements have exposed an inexplicable passivity within policy elements of the Department of Defense when it comes to securing supplies of strategic materials and the technologies associated with them. Despite unpredictable rare earth availability, the Department has failed to take action to support development of rare earth supplies, instead adopting a “market based” approach. With this approach, Department officials have ignored that the nation is sitting atop the same powder keg that ignited recent upheaval.

In April, Bloomberg interviewed the Pentagon’s most senior defense industrial policy official about the recent chaos in the rare earths market. Noting that DoD would intervene if it proved “unable to meet requirements,” the official also contended that the recent crisis did not result in shortages and that prices had actually dropped. The market, he argued, had fixed itself without any need for government action.

Unfortunately for strategic materials industries like rare earths, this laissez faire approach is fundamentally flawed, as revealed by a simple glance at the market’s evolution. In the 1980s, rare earth production moved from California to China as companies sought lower environmental restrictions and labor costs. American competitors were nearly driven out of business over the next two decades.

In 2010, China asserted its monopolistic position in the rare earth market against Japan by cutting off rare earth exports over a diplomatic dispute; a move that alerted the global business community to the risks of centralized production in China.  In response, on the demand side, companies began to stockpile rare earth materials in an expensive effort to secure supply. Companies who could, sought less than optimal substitute materials, attempted to reduce consumption, and shelved further development of rare earth-containing applications. On the supply side, hundreds of public companies arrived on the scene, claiming to be the panacea for the world’s rare earth shortages. Eventually, these measures reduced demand, causing prices to fall to near the pre-2010 crisis run-up levels, where they remain.

It is reasonable for the casual observer to assume this demonstrates the resilience of the market and the lack of necessity for any additional policies to safeguard strategic material supplies. This is the primary argument for the “market based” approach touted by DoD’s policy makers – and it misses the point.

The fundamental flaw in this argument is that it focuses on the symptoms of the rare earth supply chain problem rather than the drivers of supply chain risk. Despite the considerable activity in the sector from 2009, no U.S. company can produce a heavy rare earth oxide, reduce any oxide to a metal, or produce the most common magnet type, neodymium-iron-boron. Furthermore, for the few companies outside the U.S. who have these capabilities, they continue to rely on Chinese feedstock.

As requirements in the defense market are more demanding than commercial markets, the absence of reliable producers for these high-performance materials is especially acute for the DoD. New “market based” supply may already be destined for commercial customers, but it might be the wrong product mix, it might require additional processing and manufacturing in China, or it might simply be inadequate for the military specifications.

This blind reliance on the market is not sophisticated enough for the complexities of the strategic materials market and it has led to equally poor policy. That many U.S. military systems cannot fulfill their most basic functions or would suffer catastrophic failure without these materials only further compounds the supply chain problem.

Long-term solutions are only available if DoD proves willing to understand the extreme complexity of its own supply-chain and willing to commit to supporting production of its various materials needs.   It is time to replace the passivity of the past with proactive leadership, actually solving the problem rather than hoping an invisible hand will provide.

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