U.S. Defense Department Sees No Rare-Earths Crisis; May Aid U.S. Producers

The U.S. Defense Department has concluded that China’s monopoly on rare-earth materials, used in military hardware such as missile guidance and radar systems, poses no threat to national security, according to a person familiar with a year-long study by the Pentagon.

The report notes that rising prices and supply uncertainties are spurring private investment in new mining operations outside of China that will help meet American military needs, which require less than 5 percent of U.S. rare- earth consumption.

China now provides 97 percent of the world’s rare earths, a group of 17 metals that includes neodymium, samarium, and dysprosium.

The study, conducted by the Pentagon’s Office of Industrial Policy, raises the possibility that the Defense Department may help prospective U.S. providers such as Molycorp Inc., the person said, speaking on the condition of anonymity because the report has not yet been released publicly.

The findings and recommendations may be presented this week to U.S. lawmakers, who have been alarmed by China’s actions since July to reduce rare-earths exports by about three- quarters. The House on Sept. 29 passed legislation that includes authority for federal loan guarantees for domestic rare-earth producers, and House members such as Representative Bart Gordon, chairman of the Committee on Science and Technology, have urged senators to act on the measure during the post-election session because of concern about China’s market dominance.

Bombs and Lasers

China’s export-quota cuts and delays in Customs’ clearance have led to sharply higher prices and supply concerns among users, including manufacturers of mobile phones, computer hard- disk drives and flat-screen monitors.

Supply constraints haven’t stopped production of equipment such as radar, precision-guided bombs, and night-vision equipment that require powerful magnets and lasers made with rare-earth materials, the Defense Department study found.

The Pentagon expects the supply situation to improve by 2013 once rare-earth mines outside of China, such as one planned by Australia’s Lynas Corp. Ltd., begin operations next year, said the person familiar with the findings.

The study says that demand-supply gaps for neodymium, dysprosium, praseodymium, each used in magnets, as well as for yttrium, used in lasers, are likely persist longer than for the 13 other elements, and that commercial manufacturers such as General Electric Co., maker of wind turbines that use neodymium- iron-boron magnets, are likely to face more shortages than defense contractors, the study found.

Loan Guarantee

The study recommends, among other steps, an examination of how the Defense Department could aid companies such as Molycorp, which has applied to the Energy Department for $280 million in U.S. government loan guarantees to help finance restarting its open-pit, rare-earths mine in Mountain Pass, California, in the Mojave Desert.

The mine once met almost all the world’s demand for rare- earth metals. It shut down in 2002 due to competition from cheaper Chinese supplies. Molycorp plans to resume production by the end of 2012.

Under Title III of the Defense Production Act of 1950, the Pentagon can provide financial incentives to industry to make investments in production capabilities for materials deemed to be in the national interest.

The study recommends more international cooperation among mine operators, magnet-makers and governments that use the components. It also calls for more research by national laboratories into alternatives or substitutes for rare-earth- based components.

Tracking Materials

The Pentagon found that neither defense contractors, like Lockheed Martin Corp., Raytheon Co., and General Dynamics Corp., nor government agencies currently track the use of rare-earth materials in the thousands of weapons bought by the U.S. military. The rare-earth components that go into the systems are treated like commodities, the person said.

Magnets made with samarium-cobalt are widely used in defense applications because the material maintains its magnetic properties even in high-heat conditions found inside missiles and bombs, the Pentagon found in its assessment.

China accounts for about 36 percent of global rare-earth reserves, the largest share, and the U.S. is second, with 13 percent, according to the U.S. Geological Survey. Chinese officials including Premier Wen Jiabao have said the country has not halted shipments of material and will continue to supply the material.

To contact the reporter on this story: Gopal Ratnam in Washington at gratnam1@bloomberg.net.

To contact the editor responsible for this story: Larry Liebert at lliebert@bloomberg.net

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