Can China choke off U.S. access to 'rare earths' needed for high-tech products?
MOUNTAIN PASS, Calif. -- Rusty tin shacks are all that remain of the gold miners who once prowled this desert hillside about an hour's drive southwest of Las Vegas. Almost a century later, their modern-day descendants are prospecting for the more exotic materials that have become the latest flash point in the U.S.-China trade war.
This is Mountain Pass, the only mine in the United States that harvests rare-earth elements, the raw ingredients used to produce high-tech products such as smartphones, wind turbines, electric vehicles and fighter jets.
China dominates the global market for these materials and has been threatening to take them hostage in the deepening trade conflict. Just the suggestion that Beijing could starve American factories of essential materials has sent rare-earth prices soaring over the past month, with dysprosium oxide, used in lasers and nuclear-reactor control rods, up by one-third.
But the alarm overlooks the rise over the past decade of alternative sources of rare earths -- including Mountain Pass -- and ignores the difficulties China would face in implementing a ban, including the prospect of widespread smuggling and the likelihood of hurting countries that Chinese authorities may prefer not to alienate.
"We have an absolutely world-class resource," said Michael Rosenthal, chief executive of MP Materials, which operates the California mine. "That's our competitive advantage."
President Donald Trump, fresh from an immigration dispute with Mexico, pivoted Monday to his stalled China trade talks. In a CNBC interview, the president -- expected to meet Chinese President Xi Jinping later this month in Japan -- said their "differences can be worked out very easily."
But Xi shows no sign of caving and may use rare earths as a bargaining chip. In the latest sign that China might reprise its 2010 cutoff of exports to Japan, the powerful National Development and Reform Commission said on June 4 it would set new limits on sales outside China.
"We must strengthen export management and control," the state planning agency said. "We need to establish a mechanism for investigating and tracing the export flow of rare earths."
A U.S. Commerce Department report this month fanned industry worries, warning of a dangerous dependence upon imported materials, including rare earths, and calling for "unprecedented" action to bolster domestic stockpiles.
Mountain Pass, which began post-bankruptcy operations only last year, represents the United States' best hope of weathering any Chinese materials blockade. Along with new output from countries such as Australia and Myanmar, the U.S. mine helped cut China's share of global production to 71 percent last year from more than 97 percent in 2010, according to the U.S. Geological Survey.
"We can make the Chinese threat become a hollow threat very quickly by letting market forces take care of it," said Douglas Paal, a China expert at the Carnegie Endowment for International Peace and a former vice chairman of JPMorgan Chase International. "China does not have us by the throat."
From the rim of the open-pit mine, bulldozers, excavators and 70-ton trucks can be seen chewing through layers of ebony and chocolate earth more than 500 feet below. Exploratory drilling has penetrated more than 1,800 feet without finding the end of the rare-earth deposit here, an indication of its untapped potential.
Officials have begun contingency planning to accelerate production in the event of a Chinese cutoff, Rosenthal said. Though Mountain Pass could not fill all domestic needs, it could boost output of substances needed for oil refining and some specialized magnets.
Yet the mine's role at the center of the U.S.-China faceoff over 17 elements with names such as neodymium, terbium and europium is not without irony.
Mountain Pass ships its main product -- a powdery substance that looks like crushed cocoa -- to China for processing before it is sold to Chinese customers. A Chinese rare-earths producer, Leshan Shenghe, holds a nonvoting 10 percent stake in the U.S. mine.
Since June 1, the mine's shipments to China have been hit with a 25 percent tariff from China, retaliation for Trump's latest import tax. For now the company is absorbing the added costs, so officials are squeezing savings out of their suppliers, searching for cheaper shipping companies and making sure they are not paying uniform-rental fees for workers who have quit.
"We are literally going around shutting off lights," Rosenthal said.
Even as the trade war intensified, the Americans and Chinese here continued cooperating. Rosenthal, 41, who speaks fluent Mandarin, says the Shenghe team provides advice on the mixtures to use in the ore's chemical bath. Zhou Jihai, 66, a senior Shenghe engineer, says the Chinese company is learning from MP about automation.
Speaking through an interpreter, Zhou acknowledged that some industry colleagues in China criticize Shenghe for helping the Americans. But he waved off trade-war questions.
"It does not affect too much our cooperation. It only affects the relations between the two countries," he said. "We hope the two sides can reach some sort of compromise."
In July 2017, JHL Capital Group, a Chicago-based hedge fund, and QVT Financial, a New York investment firm, spent $20.5 million to bring the site out of bankruptcy. Production last year exceeded any under the previous owner, Molycorp, and the venture now is operating at a profit. Performance over the past six weeks has been the best to date, Rosenthal said.
"I can't say we're entirely satisfied with our results yet. We have a lot of work to do still," he said. "But we feel good we're on the right path here."
Molycorp filed for bankruptcy in mid-2015, a victim of falling commodity prices and China's market dominance.
MP's hopes of competing with Chinese rivals -- mostly state-owned enterprises that receive government subsidies and face lower labor and environmental costs -- rest on the quality of its ore deposit and the relative ease of distilling it into salable products. Despite the tariff head wind, the mine is profitable, Rosenthal said.
"That says something about our ability to compete," he added.
MP Materials has made progress by reversing some of the previous owner's decisions. Molycorp bet heavily on "caustic cracking," which strips a less valuable material known as cerium from the rare-earth concentrate.
But the process required a roughly $300 million building that Rosenthal said was "extraordinarily expensive" to operate and did not work as well as the traditional method. Now the structure is scorned as the "crack house" and sits idle.
The Mountain Pass operation is as simple as digging a big hole in the ground and as complex as the most sophisticated industrial chemistry.
James Litinsky, founder of JHL, the hedge fund that led the formation of MP Materials, said the mine reflects a shift away from the mutual vulnerability that has characterized the global economy for the past two decades. Trump's 2017 executive order requiring the government to "reduce the nation's vulnerability to disruptions in the supply of critical materials" bears him out.
"The world needs to protect against a single point of failure in the supply chain," he said. "In the context of rare earths, that happens to be China."
Standing in a control room, Rosenthal gazed at a computer display monitoring a critical operation. This is the "ball mill," a building dominated by a giant metal drum that resembles a cement mixer.
A mix of ore, dirt and rocks entered the vessel on a conveyor belt, where it was buffeted by jets of water and steel balls before passing through vats of chemicals -- a laborious process designed to cause the rare earths to bubble to the surface of an industrial stew.
The company's success or failure turns on what happens in this building. Green, blue and purple lines oscillated in a narrow band on the computer screens as the air vibrated with a mechanized hum. One monitor showed a spike like a bad electrocardiogram, a sign that output was not as consistent as desired.
"We have to -- have to -- get this building right," Rosenthal said, adding that MP Materials aspires to produce rare earths "at the lowest cost in the world."
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The task of adjusting the chemical bath for each batch of excavated ore is complicated by the need to recycle and reuse enormous quantities of water. That is a legacy of the facility's troubled history in the 1980s, when spills from a pipeline carrying radioactive wastewater to a distant dry lake bed led to a federal investigation and costly cleanup.
Unlike Molycorp, MP Materials recycles its wastewater by forcing the liquid waste from the "ball mine" through giant filters made of synthetic fiber. Environmental regulations require that even rainwater runoff here has to be captured and treated.
Not everyone is confident the United States can endure an interruption of Chinese shipments.
Though Chinese labor and environmental costs are rising, some analysts doubt MP's chances of becoming a low-cost producer. Jim Kennedy, a St. Louis-based consultant, said MP cannot compete in the long run against China, the only country with a supply chain that encompasses mining, intermediate processing facilities and factories to produce products such as laptops and electric cars.
Kennedy, a longtime advocate of federal subsidies for a more robust U.S. rare-earths industry, said the Mountain Pass deposit also lacks the full roster of rare earths, particularly the "heavy" minerals optimized for technology and defense production.
"There's no challenging China's rare-earth monopoly with market forces," he said.
Any cutoff of Chinese exports would be disruptive. But most of the material needed by American tech companies is used in factories in China -- not the United States. So Beijing would need to choke off exports of products made with rare earths, too, a broader embargo that would probably claim other countries -- and Chinese factory workers -- as collateral damage.
Foxconn, a Taiwanese company, uses rare earths in Shenzhen, China, to make key parts of Apple's iPhone. Tesla relies on the materials for magnets produced by Beijing Zhong Ke San Huan High-Tech Co.
The United States last year imported only $160 million worth of rare earths, virtually unchanged from 2010.
In many cases, there are alternatives. During the 2010 supply interruption, one company that had used neodymium to polish glass "found that they were able to use something else to do the same job that was easily available," said Sage Chandler, vice president for international trade at the Consumer Technology Association. "Many other companies did the same."
It is also hard to imagine any embargo being foolproof. Despite official Chinese attempts to stamp out illegal production, rogue operations last year produced an estimated 60,000 tons of rare earths, according to the U.S. Geological Survey. That means American customers would almost certainly obtain some supplies in the event of an export ban.
"Fears are overstated ... There's plenty of non-Chinese supply at current levels in Australia and the U.S. if you reallocated things for critical needs," said Eugene Gholz, who worked on supply chain issues in the Pentagon during the Obama administration and now teaches at University of Notre Dame.
As the trade war simmers, MP executives are preparing for a future of enduring U.S.-China acrimony. Work is underway on the facilities needed to process the mined material on site rather than send it to China. What remains to be done is a matter of work and money rather than invention.
"We're at this critical point," Rosenthal said, "where things are coming together."