LDN - Business

Pentagon seeks funds to reduce U.S. reliance on China's rare earth metals

[May 30, 2019] By Phil Stewart and Andrea Shalal

WASHINGTON (Reuters) - The U.S. Defense Department is seeking new federal funds to bolster domestic production of rare earth minerals and reduce dependence on China, the Pentagon said on Wednesday, amid mounting concern in Washington about Beijing's role as a supplier.

The Pentagon's request was outlined in a report that has been sent to the White House and briefed to Congress, said Air Force Lieutenant Colonel Mike Andrews, a Pentagon spokesman.

Rare earths are a group of 17 chemical elements used in both consumer products, from iPhones to electric car motors, and critical military applications including jet engines, satellites and lasers.

Rising tensions between the United States and China have sparked concerns that Beijing could use its dominant position as a supplier of rare earths for leverage in the trade war between the world's top two economic powers.

Between 2004 and 2017, China accounted for 80% of U.S. rare earth imports. Few alternative suppliers have been able to compete with China, which is home to 37% of global rare earths reserves.

"The department continues to work closely with the president, Congress and U.S. industry to improve U.S. competitiveness in the mineral market," Andrews told Reuters.

He gave no details but said the report was tied to a federal program designed to bolster domestic production capabilities through targeted economic incentives.

While China has so far not explicitly said it would restrict rare earths sales to the United States, Chinese media has strongly implied this will happen.

In a commentary headlined "United States, don't underestimate China's ability to strike back," the official People's Daily noted the United States' "uncomfortable" dependence on rare earths from China.

"Will rare earths become a counter weapon for China to hit back against the pressure the United States has put on for no reason at all? The answer is no mystery," it said.

GROWING CONCERN

John Neuffer, president of the Semiconductor Industry Association, said the chances of China restricting rare earth exports were growing.

"I do expect the other shoe to drop," he told an event hosted by the Washington International Trade Association.

The Pentagon has repeatedly flagged its concerns about American reliance on China for rare earth minerals, including in a 2018 report on vulnerabilities in the U.S. defense industrial base.

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Molten rare earth metal Lanthanum is poured into a mold at Jinyuan Company's smelting workshop near the town of Damao in China's Inner Mongolia Autonomous Region, October 31, 2010. REUTERS/David Gray/File Photo

The Pentagon said the latest report was a Defense Production Act III rare earths mineral report. According to a Pentagon website, that program gives the U.S. president "broad authority to ensure the timely availability of essential domestic industrial resources to support national defense and homeland security requirements through the use of highly tailored economic incentives."

John Luddy, vice president for national security policy at the Aerospace Industries Association, said U.S. government funding could be used to bolster production, processing capacity and stockpiling of critical supplies.

Industry officials liken Washington's potential role to the way government funding ensures the capability to launch sensitive military and intelligence satellites into space - another costly initiative.

The Defense Department accounts for about 1% of U.S. demand, which in turn accounts for about 9% of global demand for rare earths, according to a 2016 report from the congressional U.S. Government Accountability Office.

Raytheon Co, Lockheed Martin Corp and BAE Systems Plc all make sophisticated missiles that use rare earths metals in their guidance systems and sensors.

Rare earth minerals are also essential in other military equipment such as jet engines, lasers and night vision devices.

California's Mountain Pass mine is the only operating U.S. rare earths facility. But MP Materials, owner of Mountain Pass, ships the roughly 50,000 tonnes of rare earth concentrate it extracts each year from California to China for processing.

At least three U.S.-based companies have rare earth processing plants under construction or in the planning stages, including one that is set to open next year at Mountain Pass mine to produce about 5,000 tonnes of two popular types of rare earths annually, according to a source familiar with the matter.

The other two aren't expected to open until 2022 at the earliest.

(Reporting by Phil Stewart and Andrea Shalal; additional reporting by Ernest Scheyder and David Brunnstrom; editing by Jonathan Oatis, Sonya Hepinstall and Cynthia Osterman)

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