Strategic Metals and American Competitiveness in the 21st Century

by Michael Silver

The importance of strategic metals to the U.S. economy came into sharp focus last November when China cut off Japan’s rare earth metals supply over a territorial dispute and Japan immediately backed down. Since then, Americans have learned that the majority of rare earth deposits are in China, accounting for 97% of world production.

China’s action against Japan also exposed a more threatening strategy in the works‐‐ to create a two-tiered price structure with China’s manufacturers receiving rare earths at significantly lower costs than the rest of the world. Prices outside China are now 20 times what they were 2 years ago and 40% higher than inside China.

Is America confronting a situation similar to the 1970s OPEC oil embargo? No, the current situation is actually far worse. Deng Xiaoping famously noted 30 years ago that “the Mideast has oil, China has rare earths”. What he didn’t say was unlike the Mideast, China also has the means to manufacture and distribute globally every product that requires rare earths, which today includes automobiles, computers, cell phones, fluorescent lights, much of our military equipment and nearly every green technology‐electric cars, wind turbines, fuel cells, solar panels, etc. This is precisely what makes the current situation so dangerous to the long term prospects for the U.S. economy and American jobs. A two‐tiered price structure could make it impossible for American manufacturers to compete with China in the 21st Century.

A constant refrain from economists and politicians is that American innovation is our way out of the current financial dilemma. Breakthrough U.S. discoveries in the past have created whole industries such as automobiles, commercial flight and computers, generating millions of jobs and national prosperity. But what if we are unable to participate in the next great American discovery simply because we can’t get the necessary raw materials at competitive prices? The millions of jobs would blossom where the materials are available. Today, that is China.

Yes, mines are now being planned in the U.S., Australia, Canada and elsewhere to take advantage of these high prices. But even under the rosiest projections for increased world supply, China’s vast rare earth resources will allow it to continue to function as the OPEC of rare earths ‐‐ dictating high global prices while providing lower costs domestically. These non‐ Chinese mines are as likely to sell below China’s high foreign prices as Venezuela would have been to undersell high Mideast oil prices during the 1970s. It just doesn’t make good business sense.

To prevent this will require a dramatic change in the way the U.S. public thinks about strategic metals and mining. The following is a 5 Point Plan to assure the next American technological revolution results in American jobs.

#1 ENVIRONMENTALISTS MUST ACKNOWLEDGE THEY’RE IN A DANGEROUS CATCH‐22

The U.S. environmental movement needs to realize it is in a Catch‐22 that threatens the very future of our country AS THEY THEMSELVES ENVISION IT! Environmentalists cannot both demand a green technology future involving wind/solar energy and electric cars and simultaneously prevent the mining of the very raw materials essential to manufacture these products. It presently takes DECADES to bring a metal mine on line due to the constraints of environmental requirements. America does not have decades if it wishes to participate in the global trillion dollar Cleantech revolution that some say will pull us out of our economic doldrums. The environmental movement must immediately acknowledge this serious dilemma and aggressively support legislation to expedite mining of at least those metals essential to green energy.

#2 GET IN THE GAME

America needs to get into the global competition for the few remaining strategic resources. We have been far too lax in our quest for critical minerals. Besides developing domestic sources, China has built deep financial and political ties with any country holding significant deposits, investing billions in mineral‐rich Africa alone While the U.S. continues to treat Africa as a post‐colonial charity case, China’s much more modern view of the continent is as an important strategic opportunity. China links its good deeds in places like Africa to mining opportunities. American policymakers need to consider this in the context of our own foreign aid and bring its Africa policy into the 21st century. American capital needs to recognize the huge long-term opportunities available in competing toe‐to‐toe with the Chinese for world domination of remaining metal resources.

#3 CHANGE THE MINDSET OF THE NEXT GENERATION

We need to encourage our young to pursue careers in exploration, geology and high tech metallurgy the way they now compete for positions in internet start ups and investment banking. This requires a change in our very culture e.g. less “Social Network” and “Wall Street” and more “Indiana Jones.” Presently, Americans have so little appreciation for this field that most young people view metal mining as a career choice that died with the 49ers. In stark contrast, the current leader of China, Premier Wen Jiabao, received his college degree in geology. His first job was in rare earth mining! China gets what we don’t. Can you imagine an American parent telling their child “if you want to be U.S. president someday, better study geology”?

#4 REVISE FEDERAL ANTI‐TRUST LAWS PROHIBITING VERTICAL MONOPOLIES

Wall Street needs to be permitted to facilitate “bottom up” manufacturing consolidation. China plans to make electric cars cheaper than we can by making rare earths available to its automakers at or near extraction costs. In order to encourage our mining companies to keep their costs in line with Chinese domestic costs in spite of higher world prices, we are not going to simply nationalize them as China did last year. The only alternative is for U.S. mining corporations to move further down the supply chain through joint ventures and acquisitions so they realize their profits in the added value products, such as wind turbines, electric cars and fluorescent lighting, that are manufactured from rare earths. Thus, corporate profitability becomes dependent on low internal rare earth costs rather than high world metal prices artificially sustained by China. These more vertically integrated U.S. companies can then generate the many jobs that will flow from American innovations built with strategic metals. Securities laws that stifle such vertical integration should be rescinded in favor of rules that encourage this behavior. Molycorp, owner of a California rare earth mine reopening next year, has the right idea in its forward thinking “mine to magnets” strategy (electric car motor magnets require rare earths) and in its recent partnering up with Boulder Wind Power (wind generators also require rare earths).

#5 ESTABLISH A STRATEGIC METALS RESERVE

Finally, America needs to establish a Strategic Metals Reserve similar to the Strategic Petroleum Reserve created by Congress during the oil embargo. Such a reserve would have no impact on prices during times of peace, however, much of our advanced military equipment require rare earths and an embargo such as China imposed on Japan last year would today prevent us from maintaining our defensive readiness.

Listen to an exclusive interview with Michael Silver and Dr. Leeb below:



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Posted Nov 27th 2011 at 9:00 pm in Environment, Featured Story, News, energy | 41 Comments