EDITOR: | March 22nd, 2013

U.S. Military Compromised by Chinese Rare Earth Dependence

| March 22, 2013 | No Comments

Department of Defense awards Three Critical Contracts to address National Security and Proprietary Technology RisksThe latest biannual “Strategic and Critical Materials 2013 Report on Stockpile Requirements” (‘The Report’) published by the U.S. Department of Defense (DoD) urges Washington to  accumulate $120.43 million worth of heavy rare earths as part of a $319.74 million program to stockpile 23 critical materials. Each of these materials is ordered along a list arranged in accordance to how much money – and what quantity – should be spent to secure it. The report reflects the need to revise the U.S. government mineral sourcing requirements in view of their growing importance in security matters, including energy security and the shift to the much touted ‘green economy’. The considerations expressed by the DoD reflect the 2013 National Defense Authorization Act through which Congress has revised the way the Defense Department’s acquires and applies strategic materials.

The idea of stockpiling strategic materials is not new; it was started just shortly before World War II in order for the U.S. military and civilian industrial complexes to gain secure access to the materials needed to produce defense platforms. The problem, today, is the proliferation of the ‘outsourcing’ mantra in all areas of the economy, which means that many of the materials the United States needs the most are being sourced beyond the United States and even beyond the its primary allies. Without beating around the proverbial bush, this means that the United States is taking too many risks by relying so much on China as the source of many critical materials. China has shown itself to be more than willing and capable of using quotas to control exports of strategic materials in order to advance its own political and geo-strategic interests.

China is not the only country to have used ‘checks and balances’ on their critical materials exports. Increasingly, companies are paying more attention to non-tangible business risks, sometimes include under the umbrella of corporate sustainability, which preclude their involvement in supplying technologies that have military applications. Such companies as Caterpillar, which makes construction machinery, have been targeted because of the military use of their bulldozers. A camera manufacturer in Japan – or China – may refuse supplying cameras for missiles and other critical parts needed to make munitions or rockets or hardware. This is especially the case as so many technologies today can address dual civilian/military needs with mere software or configuration changes.

At the end of 2012, the DoD took steps to start addressing some of these risks, signing a series of special contracts with U.S. based potential producers of REE magnets (neodymium-iron-boron or ‘neo’) magnets and equivalents from the raw supplies to the finished product. Neo magnets are used to make missile guidance systems, fU.S.es for explosives and satellite communication devices, all of which, evidently, are important to U.S. national security. Thomas & Skinner Inc., Ucore Rare Metals Inc. (‘Ucore’, TSX.V: UCU) and Great Western Minerals Group Ltd. (‘GWMG’, TSX.V: GWG) were among the beneficiaries. The DoD, therefore, has been trying to reduce its vulnerability to the whims of national and corporate material and technology producers which may or may not agree to supply these. In terms of critical materials, and rare earths in particular, the industry has become extremely lopsided in China’s favor and the time and investment needed to get a dependable domestic REE supply is considerable.

The DOD, therefore, has set out to identify alternative REE sources, especially those driving a resurging U.S. domestic REE industry. Nevertheless, while the intentions of the Stockpiling program are valid, the solution to the problem may be flawed. According to the Strategic Materials Advisory Council (SMAC) if the DOD is serious about stockpiling HREE’s it will be limited to China as the source for the time being.  More importantly, the DoD spears to be contradicting itself by failing to promote the need for a greater role of U.S. mining and industry in securing these critical materials while other departments in government are doing more to hurt than to promote the necessary expansion of the U.S. mining industry that would ease dependency on outsiders. The ‘stockpiling’ plan then seems disingenuous, because left to be deployed under the current conditions, it fails to address the main risk: stockpiling, yes, perhaps; but from whom? The answer can only be China.

It is in this perspective that SMAC has formally cautioned the DoD against the stockpiling of Chinese rare earths. SMAC has also identified a flagrant contradiction in the DoD’s report. Essentially, the DoD recognizes risks of significant rare earth shortages and even observes that there are no alternative materials, owing to natural properties and the complications of the certification process, available to replace the targeted critical materials. The DoD, then, on the basis of these points has recommended stockpiling “to mitigate shortfalls”. Nevertheless, the DoD’s Report also claimed that U.S. production of rare earths could meet defense procurement needs by 2013:

“The assessment determined that by 2013 U.S. production could satisfy the level of consumption required to meet defense procurement needs, with the exception of yttrium”. (p.4)

However, the DoD fails to discuss the nature of the “reliable sources of supply” cited in the report:

“It is anticipated the domestic supply of REEs and rare-earth-containing products will continue to grow between now and 2015, and It will be possible for manufacturers within the defense industrial base to obtain some rare-earth-containing products from reliable foreign sources of supply”. (p.4)

This raises concern, considering the lack of heavy rare earth mining and production capabilities outside of China.  The report hints at the need for recycling, but as noted above, it also finds the caveat.  In larger terms, the DoD report fails to recognize that little is being done in the United States to help address the materials shortfall. However, as observed by Daniel McGroarty, President of the American Resource Policy Network and an officer and director of U.S. Rare Earths (OTC BB: UREE) in testimony presented before during the’ Oversight Hearing of the U.S. HoU.S.e of Representatives Committee on Natural Resources Sub-Committee on Energy and Mineral Resources’ on  March 21, 2013, were the U.S. to be resource poor, this oversight would be entirely comprehensible, even logical; however, it turns out that many critical materials exist within the U.S.A itself, suggesting that the excessive reliance on foreign (i.e. Chinese) minerals has occurred more by design and less by geological circumstance. In other words the DoD report has failed to demand greater access to those domestic mineral resources by easing mining legislation and helping to promote the mining industry.

This would also have an impact on manufacturing jobs, military or civilian sector, as it would reduce costs, and reduce supply chain risks, for domestic manufacturers in securing the materials they need, encouraging them not to outsource to where “the materials are”. Last March 13, Rep. Doug Lamborn (R-CO) reintroduced legislation (H.R. 1063) “that would require the Secretary of the Interior to produce an assessment of the current and future needs of the United States in regards to critical minerals”. The bill also provides for a more accurate assessment of resource needs and supply and the related vulnerabilities and gaps, all aimed at securing higher resource independence and ultimately greater security.


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