By John Pomfret
Washington Post Staff Writer
Thursday, September 23, 2010; 10:36 PM
China's recent move to limit exports of minerals critical in the manufacture of a vast array of products such as missiles, car batteries, cellphones, lasers and computers is stoking alarm that its domination of the industry could give it enhanced leverage over the United States.
On Thursday, some traders of "rare earths," 17 minerals that are used in small portions in almost every advanced industrial product, reported that China, which controls 97 percent of the industry, had halted the export of anything that contained traces of the minerals to Japan. The Chinese government denied the allegation.
The purported export ban was linked to a dispute between the two countries over an island chain called the Senakus in Japanese and Diaoyu islands in Chinese. Japan has detained the captain of a Chinese fishing vessel over a collision at sea with a Japanese coast guard ship. On Thursday, Chinese Premier Wen Jiabao demanded that Japan release the boat captain immediately. China also announced that it had arrested four Japanese near a Chinese military installation.
Analysts and manufacturers said regardless of whether China has indeed blocked these exports to Japan, the incident underscored China's increasing economic leverage and its seeming willingness to try to translate that into political power.
This summer, China's Commerce Ministry said that total exports of rare earths would be capped at about 30,300 metric tons - a 40 percent drop compared with last year. Most of that tonnage has already been shipped.
"The most important issue here is that China is able to wield power like this," said Ed Richardson, the vice president of Thomas & Skinner, a magnet maker in Indianapolis. "Just the reports that they might have done something like this has sent a chill through the industry. Here you have an incident over a fishing boat and this topic comes up. It's startling."
Only in the past year has the issue begun to receive significant attention in Washington. In April, the Government Accountability Office reported that it could take as long as 15 years to rebuild the U.S. rare earth industry. The GAO report also found components in U.S. defense systems that use Chinese sources for rare earth materials. And it determined that the Defense Department had "not yet identified national security risks or taken departmentwide action to address rare earth material dependency." The Defense Department, however, is studying this issue, and a report is slated to be delivered this month.
On Thursday, the House Committee on Science and Technology approved legislation that would provide funds for research and development of rare earths technologies as a first legislative step to break China's monopoly.
"Rare earth materials are essential for our country's technological competitiveness and our national security, yet China is cornering the market and we are falling behind," said Rep. Kathy Dahlkemper (D-Pa.), who wrote the legislation.
For years, China has worked to dominate the rare earths industry. Starting in the late 1980s and early 1990s, China flooded the world with cheap rare earths. It sold neodymium and samarium, which form the basis of extraordinarily powerful magnets needed for precision-guided missile systems and the batteries used in hybrid or electric vehicles. It mined europium, which forms the basis of the high-efficiency lighting industry; lanthanum, without which it would be difficult to refine gas; and cerium, which is used to polish the glass on computer screens and cellphones.
China's prices were so low that it led the once-biggest mine in the world - Mountain Pass in California - to shut its operations in 2002 after allegations of environmental violations at the facility.
"In the Western world, people were happy to give the Chinese this job," said Jaakko Kooroshy, an analyst at The Hague Centre for Strategic Studies. "Mining rare earths is a dirty business. It is environmentally really dangerous. There's radioactivity involved."
From mining, China moved up to refining and advanced metallurgy. They drove rare earths refiners out of the market. They obtained patents for downstream work. They bought magnet makers around the world. They offered to massively overpay for three Japanese firms that dominate the production of magnets for computer hard drives. They made a run at Richardson's firm as well.
"We're an employee-owned operation," Richardson said, "so if they'd bought us up and shipped us to China . . . well, let's just say it wouldn't have sat well with the employees here."
Today, China dominates not just the mining but also the refining of rare earths, and the profits are enormous. Prices of several minerals have jumped 200 percent in the months since China announced it was limiting exports.
Western countries and firms have been slow to respond to the challenge that China posed to key industries from defense to energy to information technology, said Jon Hykawy, an analyst at Byron Capital.
In the 1990s, as China sold cheap rare earths around the world, the United States, which used to stockpile rare earths for its defense industry, sold off its stocks and watched as its industry dismantled what was once a complete supply chain. Europe never maintained a strategic stash. Only Japan understood the challenge and several years ago began setting aside significant quantities of the minerals.
"We never really acknowledged that the Chinese were in a race to dominate this industry even though they publicly stated it," Hykawy said.
China is already being sued at the World Trade Organization by the United States, the European Union and Mexico for export restrictions on raw materials, including some rare earth minerals. The U.S. trade representative is also considering filing a separate case purely on rare earths, U.S. officials said. And in industry, Molycorp Metals is working to reopen the California mine.
In June, the European Union issued its own report on rare earths that predicted that the minerals would become increasingly rare. While the United States has focused on China's increasing leverage over its national defense, the EU report reflected worries that China would control the core of green technology in the future.
"This is the first time that the Chinese openly used rare earths as a geopolitical bargaining chip," said Kooroshy in a telephone interview from The Hague. "They have built up a monopoly until now, but they have been very civil about it. They say things like, 'You don't need to be afraid. We're a reliable supplier.' But now the message is clear. It's: 'Look, guys, we're your most important economic partner, and we want you to change the way you deal with us.'"
Staff writers William Wan in Ya'an, China, and Chico Harlan in Tokyo contributed to this report.