How China came to dominate the race for rare earths

The development race

    Perhaps the most troubling part of this story is that building a new rare-earth supply chain outside of China would probably take the better part of a decade, if not more. The infrastructure takes years to build -- many experts say between seven and 12 years -- and billions of dollars.

    Lynas Corp. in Australia appears to be the furthest along in production. It launched the process of developing a rare-earths business line in 2001, and says it plans to open production at its plant in Malaysia in late 2011. It already has a few customers lined up, and it signed a new contract with a Japanese company last week. Although the company struggled during the financial crisis, it is now reaping the benefits of betting on a rare-earth boom. Lynas's share price has more than doubled in the past three months.

    A U.S. firm named Molycorp is another mining company to watch. Through its July IPO, the company raised nearly $400 million to reopen a mine it closed in California in 2002 due to low Chinese labor costs and challenges from environmentalists, who say rare-earth mining can be dangerous and environmentally hazardous. Molycorp hopes its mine will produce 20,000 tons of rare earths annually by 2012. Interestingly, state-owned Chinese companies have tried to buy both Molycorp and Lynas at least once since 2002.

    There is also a push inside China to head off these challenges and maintain its position in the rare-earth market. Rachel Ziemba of Roubini Global Economics says the development of China's domestic industry is "partly complicated by a power play between state-owned producers and private-sector operators." China is beginning to see a wave of consolidation in which state-owned businesses are buying up smaller operators, which is allegedly slowing rare earth production.

    In February 2010 the government of the Chinese province of Inner Mongolia granted permission to Baotou Rare Earth to build reserve facilities capable of storing 200,000 tons of rare earths, or more than a year's worth of production. Some analysts worry that China could flood the market in order to push down prices and put companies like Lynas and Molycorp out of business.

    China is also moving away from being a low-cost manufacturing hub and is ready for an increased level of domestic consumption, says Ziemba. This, too, could pinch international importers -- as well as fuel the race for industrial development in years to come.