Will a near-monopoly in rare earth metals do for China what oil did for Saudi Arabia?
Not if the U.S. government has anything to say about it.
President Barack Obama made that clear last week when he joined the European Union and the Japanese government in filing a complaint with the World Trade Organization (WTO) about China's manipulation of the global market in rare earth metals.
"We've got to take control of our energy future and we cannot let that energy industry take root in some other country because they were allowed to break the rules," Obama said in a press conference.
It's a clear signal that Obama will do anything to keep China from maintaining a stranglehold on rare earth metals - a set of 17 minerals that are responsible for powering everything from hybrid cars to self-cleaning ovens.
More importantly, the filing is an acknowledgement that the minerals represent a crucial source of renewable energy that are now essential to the way we live.
Rare earth metals: Easy to find, hard to mine
Rare earths have been in the headlines a lot recently.
That's because demand for rare earth metals has skyrocketed in the past few years and is likely to grow exponentially in the years ahead.
The pace of technological innovation is accelerating and the world is producing and consuming more high-tech devices than ever before.
After the rare metal Europium was introduced as a source of the color red in TV sets in 1967, their use has expanded to MRI and x-ray machines, DVDs, mobile phones, lasers and many other devices that we use daily.
More recently lanthanum has become a key component of hybrid car batteries, making it critical to Obama's campaign to double the fuel efficiency of the American automobile by 2025.
Crucial as they are, the elements are hardly rare. They are found scattered around the globe in the earth's crust and are as commonplace as copper and lead.
The problem is, they are usually found in small quantities, making them difficult to cost-effectively mine. They also come with severe environmental hazards because they are often found along with radioactive materials or other harmful substances.
China's near-monopoly on rare earth metals
As it turns out, China has vast rare-earth deposits, mostly in Inner Mongolia. The government has also heavily subsidized state-owned mining companies and allowed them to operate without strict environmental oversight.
That's made China the biggest producer of rare earths, with a more than 95% share of the global market.
Over the past decade, demand has tripled to 125,000 metric tons a year and could exceed 200,000 tons by 2014, the BBC reported.
Prices for rare earth metals soared in 2010 after China slapped a temporary ban on exports in the middle of a trade dispute with the U.S. and Japan. China later dropped the ban in favor of cutting exports to 93,800 tons per year.
But China isn't just choking off supplies. It's also stoking its domestic mining industry with favourable pricing as a ploy to get Western manufacturers to move factories inside China, according to a study by Bloomberg Government.
The average Chinese export price of neodymium oxide - a key component in computers - was $321 per kilogram in the summer of 2011, 66% higher than the domestic price and a 563% increase compared with the same period in 2010, the study said.
The inflated prices have put Western manufacturers on the hunt for alternatives.
"You are seeing a lot of investment by high-tech firms on research to become less reliant on these materials," Matt Robinson of Moody's Analytics told the BBC.
Miners expand
Beijing has denied the allegations in the WTO case, saying that it enforces quotas to ensure there's no environmental damage from excessive mining.
The WTO's rules require China to hold talks with the U.S., the EU and Japan within two months. But the WTO cannot impose a solution, setting the stage for a protracted negotiation and perhaps even a trade war.
Meanwhile, mining companies have been watching the developments with an eye towards cashing in.
Australia's Arafura Resources Ltd. is raising $1.05 billion for a rare earth project.
And Colorado-based Molycorp Inc. (NYSE: MCP, Stock Forum) has restarted the largest U.S. rare earth mine in California, after it was shuttered in 2002 due to environmental issues.
Commodities expert Peter Krauth says the rare metals dispute is just another example of what's been going on for decades.
"Over the last 160 years, humanity has dug up, refined, processed, and consumed all the easy-to-get minerals. Economically viable supplies of much of the "stuff' we take for granted are being depleted at an exponential rate."
Krauth feels a succession of historic profit opportunities await those who know how to leverage this predicament.
In fact, soon virtually every substance vital to modern life will become enormously expensive and profitable for investors who know how to play it.
As commodities and mining expert Peter Krauth explains in his latest report, "today's scarcity and soaring costs could spur the biggest investment gains in history."
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