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3 weeks ago
2
China has just shot its rare earths industry stone dead. Yes, yes, I know, everyone is convinced of the opposite — they have us over the barrel and they are not preparing to use any lube this time. But my view is the correct one and not just because it’s mine. That intense rogering China is trying to give to the Western industrial world is precisely why that hold they have will be broken — why their rare earths industry is in for a whole world of pain.
The key concept here is one of contestable monopoly. Having a monopoly — say, 80 per cent of global rare earth production, 90 per cent of processing and 100 per cent of some business lines — is lovely and one can take great joy in observing that dominance. But the moment you use that position to try to pressure the customers, others will arise to contest that dominance. That is what “contestable monopoly” means. That by happenstance, hard work, deliberate design even, you are the dominant supplier and well done you. But the only reason that dominance continues is that it is not worth anyone’s while to contest it — give ‘em a reason and they will.
This is where China is with rare earths. They produce what the world wants to eat at prices everyone is willing to pay and have done so for many decades. Excellent — now they want to exert that power. At which point we’ll all contest that position and it’s we who will win.
One reason for certainty in this is that I said this back in 2010, the last time China tried this. By 2014 people were agreeing I had been correct. That non-China world opened a couple of rare earth mines and prices fell back below the starting point. Contestable monopolies will be contested if you try to exercise that market power. This is why we should not worry — at least not overmuch — about contestable monopolies.
Is it more complex this time? Sure it is — we now need to rebuild the entire production chain. But this can be done. Obviously it can be done. Rare earth magnets, the thing being squealed about most, were an American invention after all. Magnaquench was a GM subsidiary sold to Chinese interests, who then — quite literally — packaged up the factories and shipped ’em home. If the US could make them once then the US can make them again — yes, even though China now has a couple of decades more learning by doing under the belt. Easy-peasy might not be the correct description, but it is definitely possible.
Do not allow yourself to get confused by China having 40 per cent or whatever of rare earth reserves. Reserves are something made by humans — deposits are what God’s Friday afternoon engineer strew about the place. And rare earths are neither rare nor earths, and they are nearly everywhere. The biggest restriction on being able to process them is the light radioactivity the easiest ores (so easy they are a waste product of other industrial processes — monazite say) contain. If we had rational and sensible rules about light radioactivity — alas, we don’t — then that end of the process would already be done. Passing Marco Rubio’s Thorium Act would, for example, make Florida’s phosphate gypsum stacks available and they have more rare earths in them than several sticks could be shaken at.
There simply isn’t any shortage of the raw material
Some also point out that only China has the ores with dysprosium and terbium — needed for the newly vital high temperature magnets. This is also one of those things that is not true. A decade back, yes, we did collectively think that was true. The ores — “ionic clays” — were specific to South China and Burma. Collective knowledge has changed and now we know that they can exist anywhere granite has weathered in subtropical climes. I have a list somewhere of a dozen Australian claimed deposits and there is at least one company actively mining such in Chile and Brazil.
There simply isn’t any shortage of the raw material. This is also normal of course — there is no shortage of any element that we might want to use, simply because there are only 90 of them and the world’s a very big place — all of it made of only those 90 elements.
We face shortages of those currently being mined but there are hundreds — no, really, hundreds — of companies scrabbling around the lower end of global stock markets looking for the cash to do so. Some of them might even produce if they gained finance (no one is ever very confident in the claims of small mining companies). We’d like more plants that can separate those ores into the individual rare earths. Those are expensive but clearly they are things that can be built. We would even like a new idea about how to do that separation and if anyone is interested I have one. (With the added bonus that I know it works so send your sealed bid via the editor here.) We would like more people who know how to make the elements — the terbium, the neodymium — into the things we actually use too.
But the point about all of these ambitions is that they are things that can be achieved. Perhaps not by next week but given that they all are, observably, done elsewhere then we can do them here as well. We simply need to have a reason to do them.
We haven’t had a reason, in these recent decades — precisely because, as at the top, China did all of this at prices we were happy to pay. Now that’s not true — so we’ve got to start.
No, this is not an argument that we should have subsidised for 40 years to maintain production. It’s going to be vastly cheaper to build new now than it would have been to carry deadbeats for decades. Quite apart from anything else, we’re going to build our new stuff at the edge of the current technological envelope — not just shiny but modern.
As to why we’re going to have to, it’s what China is really suggesting here. They are demanding the entire routemap of Western industry (at least the rare earths using part of it) — the detailed design of who does what, for whom, in what volume, when, for what final use. It’s not just that there are national security implications to that, it’s that western industry simply isn’t going to allow itself to be reliant upon a licence, a permission, from China when it wants to change supplier, change usage, change end customer and so on. But that is the system China is trying to impose.
There is something called “dual-use” which itself comes in varied flavours. The idea — and it is a good one — is that some things can be used simply and also for nefariousness. So, when that nefariousness is something we worry about then we ask that people either declare it is to be used simply or, if or the other purpose, who by, where and when.
These varied flavours range from “Fill out this form, honey” up to men with three letters after their name investigating what your grandfather had for breakfast. If it was porridge you might get the licence — if kasha or congee possibly not to be culinarily nationalistic about it. I’ve had every version and flavour at times — of licence not breakfast.
What China is now demanding is the “military” dual use licence on most rare earths down to 0.1 per cent content. As opposed to the nuclear, or space versions of such licences. This means that every buyer has to reveal the entire production chain in which those rare earths are to be used — all the way to where the rare earths are less than 0.1 per cent of the product. So, say, the rare earth oxide buyer reveals who will make the metal. Who will reveal the magnet maker they are making for. Who will tell of the electric engine manufacturer they’re for. Who will reveal GM it’s making engines for. And GM — probably — won’t have to have a licence to sell to you or me.
That whole production chain can only — legally under Chinese law that is — change or alter what it’s doing, with whom, in what volume, upon receipt of a licence from MOFCOM, the Chinese foreign trade ministry. In theory the guys who make those desktop magnet displays need a licence — a specific licence — to sell you a $29.95 game. The rare earths are more than 0.1 per cent of that final desktop value, d’ya see?
China’s monopoly is done
That’s the thing that isn’t going to happen. It simply isn’t. Sure, sure, people will pay obeisance for a bit but we’re very quickly going to see a bifurcation in the market. Those materials not produced in China will gain a premium for not requiring these vast shoals of paperwork and permissions. At which point the job of contesting, and breaking, China’s monopoly is done. For everyone now has the incentive to do so.
This won’t happen overnight — it will not happen without effort. But the very thing that China is trying is what will make it happen. It also doesn’t need any guidance from other governments to make it happen. Nor financial support nor investments nor buying rare earth companies and the rest. The desire, demand, from end users to be free of MOFCOM is enough.
Well, my $1 million project will still be worth it, obviously. As everyone else in the industry will also be loudly declaring. Even if I am right and they are all not — for I’m suggesting vacuum distillation of halides which none of the rest of them are. So there.
Back to that very basic piece of economics. You can only maintain a contestable monopoly if you don’t exploit it. The moment the costs of your exploitation annoy people then the contesting will start. And precisely because it is contestable — for this is what the phrase means — then the monopoly will be broken. We did see this immediately post-2010 and we’re going to see it again. Yes, annoying amounts of effort will go into doing so but the very attempt to exploit is what is going to make it happen.
Policy makers, don’t just do something, stand there. Well, except for me of course.
