America's New Energy Dependency: China's Metals

Falling behind. This is not just a story about metals, though. It is also a story about decline and innovation, about what has happened to American manufacturing, and about the gap that exists between where the country's political leaders want to go—to a "clean-energy economy," with thriving factories and state-of-the-art research facilities—and where some industries stand today.

That the United States was once the leader in this field is a fascinating byproduct of the country's nuclear past. In the aftermath of World War II, with the Cold War setting in, U.S. officials were terrified that the country would run out of uranium. So they began encouraging prospectors to look for uranium deposits.

Radioactive materials were rarely found alone. They came with other metals, like rare earths. This was the case at Mountain Pass, Calif., in the Mojave Desert, where the world's largest rare-earth mine opened in the early 1950s. Thus began a nearly half-century reign for the United States. By the late 1960s, Mountain Pass was the world's leading supplier of europium, a rare-earth metal that creates the red color in color TVs. The mine's owner, Molycorp, poured millions into research.

By the mid-1980s, China wised up. The terrain of Inner Mongolia, where there was already extensive iron mining, became ground zero for a new venture. Backed by a deliberate national push, rare-earth production boomed.

China's rise eventually triggered the end of a proud chapter of American innovation. But this fate was not immediately apparent. A poignant example involves General Motors. In the early 1980s, GM scientists invented a new way to make magnets. Rather than use pure magnets, they developed a magnetic powder, which they could mix with rubber and inject where needed. This powder, like many high-performance magnets, required neodymium, a very strong rare earth. With the powder, less metal was needed, so car parts could be lighter—in the auto industry, a good thing. GM's magnet division got its own name, Magnequench, and a 175,000-square-foot facility was built in Indiana in 1986.

But the timing proved terrible. As the 1980s wore on, China's strip mining accelerated. Production soared, and global prices dropped. American magnet companies began to close down or, seeking cheaper resources, moved to China. In 1995, two Chinese companies, with the help of American investors, purchased Magnequench. The move, a report to Congress later found, was part of a "detailed strategy" by China to control rare earths. To win U.S. approval, the buyers had promised to keep the magnet facility in Indiana. They moved it to China in 2002.

By then the mine at Mountain Pass had fallen idle, hurt by excess supplies and, some say, Chinese competition and fallout from a mid-1990s incident involving a contaminated water spill. This leaves the United States with no active rare-earth mine (although Molycorp continues to process ore it had already dug up at Mountain Pass). Meanwhile, the number of workers in the U.S. high-performance magnet industry has fallen 80 percent over the past decade. Not a single American company today makes neodymium magnets for wind turbines, smart bombs, or anything else.

All this is very likely just the first act of a bigger drama. For the past year or so, Western analysts had been buzzing about the potential opening of a rare earth mine in western Australia by Lynas Corp., an Australian company. Many saw it as potential counter to Chinese dominance, a friendly foothold in an uncertain market. It is a large mine, with the potential to supply a decent fraction of the world's rare earth needs. But in May, hopes faded. Offering $366 million, a company owned by the Chinese government bought a majority stake in the mine. "I think they've worked their plan to perfection," says Ed Richardson of Thomas & Skinner, one of the remaining U.S. high-performance magnet companies. "If we look at how dependent the world has become on rare-earth elements, it's kind of scary. It all happened right under our nose."