America's New Energy Dependency: China's Metals

A clean-energy economy needs rare-earth metals to succeed. China has a near monopoly.

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In 2007, a standoff unfolded between China and several American companies, including W.R. Grace, a major supplier of oil refining products. China was threatening to withhold supplies that keep refiners in business.

A worried State Department intervened. By then, W.R. Grace had only a three-month supply of the special metals it needs for its refining products. Because the metals come almost exclusively from China, if the government had not acted, sources say, oil refineries could have been forced to shut down, possibly triggering shortages across the country.

The metals W.R. Grace needed belong to a group known as "rare earths." They are the backbone of the Information Age and, potentially, the clean energy future. They are in iPods, Blackberrys, and plasma TVs. They are powerful and compact; they are exceedingly efficient. In many cases, there are no substitutes. On the periodic table, they have their own section, 17 metals in all, reflecting their unique atomic structure.

Fifty years ago, the world's economy was built on steel, aluminum, and iron. Today, rare-earth metals are reshaping it. But they are not easy to acquire, not anymore. In the 1970s and 1980s, the United States was the world's leading producer. Today, China provides nearly 97 percent of the world's supply. It has a near monopoly, and it is cutting exports.

Dominance. The strategic implications of this growing imbalance are vast, particularly for defense and energy. Wind turbines and electric cars have become clean energy symbols, but they are merely final products, the visible results of a supply chain that spans international borders and, for the most part, is largely overlooked by policymakers. At the bottom of this chain, at its most basic level, are rare-earth metals mined from the Earth's crust and made into magnets or other parts, then put into motors or batteries.

China's dominance in this arena, and its displacement of American leadership, are not accidental. In 1992, Deng Xiaoping, then the country's most powerful politician, outlined a plan. "The Middle East has oil; we have rare earths," he said. "We must develop these rare earths." Today this phrase is emblazoned, like a campaign slogan, across the roof of at least one Chinese factory.

Deng's call to arms has been carried out nearly flawlessly. China dominates the world market and in recent months has taken control of mines in Brazil and Australia, thereby eliminating potential competitors. It is poised to do with rare earths what the Organization of Petroleum Exporting Countries has done with oil: make the world dependent. In 2002, China exported about 60,000 tons of rare-earth metals. In 2008, it exported about 45,000 tons. In 2009, based upon preliminary estimates, that will drop into the 30,000s.

The slide will most likely continue, with potentially serious implications for President Obama's energy goals. In 2008, an Australian analyst named Dudley Kingsnorth released a report in which he calculated that China's rare-earth supplies could become off limits to the world as early as 2012. The severity of Kingsnorth's projection has been questioned by some, and the global recession has probably pushed the date back a few years. But the general trend holds. Resource production is limited, and China's internal demand is soaring, fueled by consumers and new energy ambitions. Within five years, China wants to be the world's leading manufacturer of wind turbines and electric batteries.

Global demand for rare-earth metals, meanwhile, is expected to grow at least 10 percent annually. If no new mines open, the scenarios are daunting. At best, if China continues exporting, global prices seem sure to rise. At worst, the West could be shut off altogether, left scrambling to find new sources of these metals for turbines, batteries, and other parts. "The very basic question is 'Are we going to trade dependence on Mideast oil for Chinese rare earths?' " says Jeff Green, a lobbyist who specializes in metals. "I think the answer is 'Probably.' "