How Not To Manage Rare Earths


Rare earths were in the news a lot in 2011.  Right now, it seems as though the news coverage paralleled the bubble in prices, but there’s no reason to be complacent.  The government continues to make mistakes in dealing with these resources, missing opportunities to do it right, and eventually costing not only the taxpayer in cash, but also the country in national security.

First, a refresher on what rare earths are used in:

Late in 2010, Colorado-based Molycorp announced that it was ready to reopen one of the world’s richest rare earth mines in California, about an hour south of Las Vegas.  The stock price soared, and soared even more on the news that it was working on vertical integration with a prime use of rare earths, magnets for wind turbines.  Then, in mid-2011, China announced that it would begin cutting back on its rare earth quotas.  Initially interpreted as China throwing it weight around, it now is clear that they were simply responding to demand information that they, as a near-monopoly, had before everyone else.

The metal prices themselves have followed suit, in a number of cases down well over 50% from their mid-2011 highs:

Some of this was simply a bubble bursting, but it’s also possible that the catalyst was more than just an amplified cyclical downturn.  Vestas, along with a number of other wind companies, has found out that government subsidies aren’t forever, as the Spanish, Germans, and even the Americans are cutting direct subsidies to wind turbines.  At the same time, other mines are increasing output, with Chile’s molybdenum output up 11% in 2011, and Toyota is threatening to release a rare-earths-free Prius.  Rare earths prices are starting to stabilize, and it’s hard to see them going much lower.

While the world figures out a way around the problem, the US continues to throw environmental roadblocks in Molycorp’s way to actually re-opening the mine.  Cong. Coffman’s well-intentioned proposal is to create a strategic reserve.  By the time the bill actually passes, prices will quite possibly have risen again, and it’s not as though, in the long run, companies lack the incentive to retrieve these metals from the ground.  To the extent that this is a national security issue, the solution is to let the companies mine the damn things, and to develop an ongoing industry capable of supplying the country’s needs, not only to guess as what we might need and stockpile them.

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