|China's Complete Control Of Global High-Tech Magnet Industry Raises U.S. National Security Alarms||09.30.09|
Foolish Assumptions About Reliability of Global Supply Network Imperil American DefenseRichard McCormack
China controls 95% of the world's supply of rare-earth magnets necessary to high-tech defense systems and consumer electronics. Their decision to restrict exports calls the American bluff. Rare earths will be the new oil. China will be the new OPEC.
Reports of China's impending decision to restrict exports of rare-earth minerals has suddenly awoken the U.S. government to its dependence on China for virtually all of the permanent magnets and rare-earth materials used throughout the defense industrial complex. China controls more than 95 percent of the world's supply of rare-earth permanent magnets.
High-profile articles in major newspapers describing China's intention to restrict or end exports of rare-earth minerals have thrust a critical light on the Pentagon's policies that have embraced cheap global production and that downplayed or ignored the potential negative national security implications of the loss of U.S. industrial capabilities.
Executives working in the U.S. rare-earth metals industries have been warning the Pentagon for years that the country no longer had the ability to produce the powerful magnets that are used in virtually every weapon system and a vast array of consumer and industrial goods. The rare-earth magnet industry is the most vulnerable, since the U.S. has lost almost its entire production capability over the past six years.
Congress has perked up, barely and belatedly, calling for a study. In the Senate version of the Defense Authorization Bill for 2010 (S-1390), Sen. Evan Bayh (D-Ind.) has requested a report from the Pentagon's Defense Science Board to determine the extent to which weapons systems are currently dependent upon rare-earth materials "by sources that could be interrupted." He wants the Pentagon to describe the risks involved in U.S. dependence on foreign sources of these materials, and any steps the Department of Defense has taken or plans to take to address risks to national security.
According to those in the industry, it won't be any time soon before the United States rebuilds an extensive and technically complicated supply chain for rare-earth minerals, especially for the powerful neodymium-iron-boron permanent magnets used throughout the defense, industrial and consumer goods sectors.
The main problem, they say, is that the U.S. manufacturing knowledge base has virtually disappeared along with the industry. Most of the knowledge of how to manufacture high-tech magnets was in the heads of the people working the industry, and they are gone. "Without the ability to manufacture, we lose the ability to innovate," says Ed Richardson, vice president of Thomas & Skinner, an Indianapolis producer of permanent magnets made from alnico (aluminum, nickel and cobalt).
Those doing the study "are going to be shocked because it is going to be much easier to find where these materials are not being used than where they are being used," says Richardson. The strongest of all permanent magnets is neodymium-iron-boron, for which there is not a single U.S. producer. By contrast, there are 100 producers of these magnets in China, according to Peter Dent of Electron Energy Corp. of Landisville, Penn.
Neodymium-iron-boron magnets are used in every computer hard drive. "What doesn't have a hard drive?" Richardson asks. "They are going to find that these rare-earth magnets are used everywhere and then they are going to say, "Uh, oh, we have to do something."
The industry has been warning DOD for years of its vulnerability. But to no avail. The most recent "Foreign Sources of Supply" report produced by President Bush's Undersecretary of Defense for Industrial Policy claims that "the Department is not acquiring military materiel produced overseas to the detriment of national security or the U.S. defense industrial base. The record indicates there has been no difference in the reliability between the Department's U.S. and non-U.S. suppliers." It goes on to state: "The Department incorporates foreign items and components into many important systems, and in some cases the Department may be dependent upon foreign suppliers for these items. However, this does not mean the Department suffers from a foreign vulnerability. Foreign dependence usually does not equate to foreign vulnerability. The Department is not vulnerable if it is dependent on reliable foreign suppliers, just as it is not vulnerable when it is dependent on reliable domestic suppliers. The Department of Defense is not aware of any foreign vulnerabilities within its supply chains."
That policy, which has benefited the large defense contractors, has riled American producers of basic industrial products like printed circuit boards and specialty metals. This "market view of reality [was] installed in the heart of our Defense Department," says Jim Kennedy, president of Wings Enterprises, a company that owns the only known heavy rare-earth oxide deposit in the United States in Washington County, Mo. The free-market orientation of the government in the area of military security "has no historical precedent and is a total farce -- an ideology that feeds financiers and multinational corporations and has led to America being a 'service' wasteland," says Kennedy.
The U.S. industry has been "decimated by China's unfair trade practices," adds the recently created United States Magnetic Materials Association. "Currently, China dominates the magnet materials industry and has successfully manipulated the rare-earth metals market."
China is acting it its own best interests. With growing global demand and China controlling 97% of the global market for mining rare-earth metals (and nearly 100% of the conversion of ore to metal), China could reach its production capacity by 2012. Its Ministry of Industry and Information Technology has issued a draft industrial policy that calls for a "total ban on [the export of] some rare-earth elements in the near future, cutting off the international community's access to vital materials," says the Magnetic Materials Association. By doing so, China will supply only Chinese users, which means that foreign manufacturers that use rare-earth minerals in their products will be induced to open manufacturing operations in China.
According to a September 2009 report from the USGS. ("2007 Minerals Yearbook Rare Earths [Advance Release]") rare-earth minerals are used in rechargeable batteries that are in camcorders, cell phones, PDAs, laptop computers and other portable devices. Rare-earth minerals are used in wind turbines, drinking water filters, petrochemical catalysts, in polishing powders, hydrogen storage, fluorescent lighting, flat panels, color televisions, glass, ceramics and automotive catalysts. They are used in fiberoptics, dental and surgical lasers, MRI systems, as medical contrast agents, in medical isotopes and in positron emission tomography scintillation detectors. They are important in magnetic refrigeration and in the fast-growing world of rechargeable batteries used in hybrid vehicles. Permanent magnets make electric motors more efficient and light.
In the military sector, rare-earth permanent magnets are used in internal guidance systems, microwave communications systems, radar and motors and generators that power aircraft and ships. They are used in actuators for electric propulsion, in space systems and in nuclear reactors -- in pumps and control rod actuators. They are found in missiles (Trident, Minuteman, Patriot, AIM, AMRAAM and Tomahawk); in the Aegis destroyer radar; in M1A1 Tanks; and in the Bradley, Paladin Howitzer, Apache Stryker, Humvee, F-15, F-16 F-18, B-52, towed decoys, Joint Strike Fighter and Predator weapons systems.
"Existing production is currently not sufficient to meet world demand," says the U.S. Geological Survey. In the second sentence of its report, the USGS states: "Rare earths were not mined in the United States in 2007." It also notes that "the last of the U.S. government stocks of rare earths in the National Defense Stockpile was shipped in 1998."
In 1999, Chinese president Jiang Zemin stated that China would "improve the development and application of rare earths and change the resource advantage into economic superiority." In 1992 Chinese president Deng Xiaoping said: "There is oil in the Middle East; there are rare earths in China. We must take full advantage of this resource."
The total worldwide market size for rare-earth magnetic materials was $9.1 billion in 2007 and is projected to grow to $12 billion in 2011 and to $21 billion by 2020, according to Peter Dent of Electron Energy Corp.
In the 1990s, U.S. magnetic materials producers employed 6,000 workers. There were five alnico magnet producers; five samarium-cobalt magnet producers; four neodymium-iron-boron magnet producers; and many suppliers. But the industry has unraveled. By last year, there were only 500 workers remaining in the U.S. industry, with three alnico magnet producers, one samarium-cobalt magnet producer and zero neodymium-iron-boron magnet producers.
The U.S. industry has long warned of potential supply disruptions, but China's recent plans to curtail exports makes the situation "dire," says Richardson of Thomas & Skinner. "We've been talking about this since the Mountain Pass [Calif.] mine closed [in 2002] and the last neodymium-iron-boron magnet manufacturer closed in 2005," he says. "Once that happened we knew we were in trouble."
But things got worse. In 2003, the former GM subsidiary Magnequench plant closed in Indiana, laying off 225 workers, and moved its equipment to China. Shortly thereafter, VAC closed its Elizabethtown, Ky., operations. In 2004, China National Offshore Oil Corp. tried to purchase Unocal, the owner of Molycorp and the Mountain Pass mine. In 2005, Hitachi closed its Edmore, Mich., production facility, which it acquired from General Electric in the 1990s.
What is to be done? "We can't just fly out and do something without some basis for it," says Richardson.
DOD's study on rare earths is a good first step. It needs to include the U.S. Geological Survey and the Department of Energy, since the next generation automobile depends on the availability of rare-earth minerals. "They have to determine a baseline before they can develop a strategy," says Jeff Green of the magnetics trade association. At some point there will need to be a combination of public and private investment to reestablish the North American supply chain
"If you look at what is left of the North American industry, all of the players exist," says Green. "It's a matter of bringing them together in a way that creates a competitive marketplace." Incentives will have to be put in place to entice private investment, and there will need to be new policies "that deal with trade or domestic preference regimes or the Defense Production Act," says Green. "Unless there is a strategy that creates some type of sustainable market, then it won't work."
Mark Smith, CEO of Molycorp Minerals LLC, which owns the Mountain Pass mine, says "federal leadership is required." Congress and President Obama must "commit to directly addressing the capability gaps between rare-earth mining and magnet production." They can do this by promoting science, technology, infrastructure investment, direct capital assistance and loan guarantees.
Richardson says what he finds "disturbing" is that there are U.S. producers claiming they can solve the problem "just by having the government give them a whole big chunk of money." Such an effort would likely fail. "It is not accurate for one company to say they can solve the problem of the entire supply chain," says Richardson. It's one thing to mine ore, it's another to process it and refine it for use by industrial companies. "It's going to be many years and a lot of money -- millions of dollars to reconstruct this value chain," says Richardson. "If we don't talk about our industry as being a cluster of businesses that need to work together to enable the United States to manufacture magnets, and that this cluster needs a comprehensive industrial policy that takes all of the elements into consideration, then we will be flailing in the water."
It would be nice if there were industrial policy specialists in the Pentagon who could do the hard work of crafting viable strategies for an industrial revival, Richardson notes. "Don't get me wrong, it's a monumental job, but if it's something you work on every day and you have good ideas of what the risks are and where the weak points are, then after several years you might get good at it and maybe after five or 10 years you might have something that is pretty valuable. Unfortunately, there is nothing. We have been fighting with the very people who would do this just to keep alive what we already have."
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