America's New Energy Dependency: China's Metals

An idle mine, niche companies fleeing to China—all this may sound like another case of globalization ills. But it's also a telling example of what's necessary for innovation and economic growth.

In Washington, there is bipartisan support for renewable electricity and next-generation cars, which will require significant innovation. The disagreement is over how to spur it. Republicans favor private investment. Democrats favor public funding and regulations, such as requiring utilities to generate more of their electricity from renewable sources.

Both sides may be missing a key element. Economists generally agree that innovation is a major driver of economic growth. Innovation, however, does not occur in isolation. It is not the product of one company's efforts or of a single lab's work. It is the result of a whole cluster of things, including raw material suppliers, research labs, and manufacturing firms, working together. Remove one of these links, and the innovation chain weakens or breaks.

In the case of American energy technologies, the rare-earth component has been absent for a while. According to a paper published by Brian Fifarek of Carnegie Mellon University last year, its absence has left a mark. As domestic resources have vanished, he found, the number of successful patent applications filed by American companies for technologies using rare earths has declined precipitously since the early 1990s.

There is also anecdotal evidence to suggest that research and development activity, the lifeblood of innovation, has followed resources overseas. In 1999, Magnequench opened a research facility in North Carolina. In 2004, the company, citing access to resources, moved it to Singapore. Another rare-earth facility, in Ames, Iowa, closed in 2002.

Understandably, it has taken some countries and companies a while to make connections between innovation and resources. Mainly, someone in power has to look pretty far down the supply chain, through several layers of middlemen, to spot a problem. In some cases, they haven't or say they don't see problems. "I don't think about it that much," says Siemens CEO Peter Loscher.

But events have started to open some stakeholders' eyes.

In 2005, the Chinese national offshore oil company, CNOOC, made a hostile bid to take over American oil giant Unocal. Congress rejected it, fearing that the Chinese might gain a foothold in the oil-rich Gulf of Mexico. Ultimately, Chevron acquired the company. But many observers now believe China was also after something else: the Mountain Pass rare-earth mine, which Unocal had acquired in the 1990s. "I was getting phone calls from the highest levels of management at Unocal, asking what it would take to sell Mountain Pass," says Molycorp CEO Mark Smith. "I don't think it's too hard to put the two together."

Next was the incident in 2007 in which W.R. Grace and others felt squeezed by China's threat to withhold rare earth shipments. Then, in 2008, prices for all commodities, including rare earths, began to skyrocket. Neodymium jumped from $8 per kilogram to $50 per kg. Suddenly, people became concerned about the supplies of rare earths. The same year, a report by the National Research Council found that shortages of rare earths would have a bigger impact on manufacturers than problems with the supply of any other commonly used metal.

U.S. revival. Can the United States make a comeback? "When you have given up the capacity to innovate and manufacture and build, it is difficult just to buy it back," says Mary Poulton, a geological engineering professor at the University of Arizona and a coauthor of the NRC report. "You've given up a lot of the leads to other countries."

There is first the challenge of reopening a mine; that in itself is difficult enough, requiring money and an appetite for risk. In the business world, mining investments are considered among the riskiest of deals. The full challenge, rebuilding a supply chain, is much greater. Metals have to be purified, refined, and assembled into components. These steps require money, technology, and expertise. In the United States, according to government estimates, there are only three facilities that refine rare earths. Most of the engineers who understand the processes are either retired or dead.