“The Middle East has its oil, China has rare earth,” Deng Xiaoping, January 1992, discussing the future development of Inner Mongolia.By Carole Lauriat, AJOTIn 1992 Deng Xiaoping encouraged the development of Inner Mongolia and its rare earths resources, he said, “The Middle East has its oil, China has rare earth.” Today China yields 97% of the world’s rare earths’ production, and most of this production comes from Inner Mongolia and Southern China. Recently China reduced their export quotas of rare earth elements (REEs) by 35%. Citing increasing Chinese need and increasing environmental concerns, the national government also curbed Southern Chinese smugglers and took possession of 11 illegal rare earth mining districts. Rare Earth Bargaining ChipChina dominates the global supply chain of the 17 rare earth elements. In September 2010 the Japanese Coast Guard in the East China Sea arrested a Chinese fishing trawler’s crew. This resulted in the Chinese government withholding REEs from the Japanese REE dependent industries. Some claim that China played the same embargo card against the US and Europe shortly thereafter. Now buyers of rare earth are investigating the supply chain of REEs, varying sources, increasing recycling, and developing new technologies to reduce reliance on China’s REEs. Most of these 17 elements are rare because of the difficulty in attaining them, not the lack of them. The ore must be mined from mineral deposits. It is then separated into individual rare earth oxides. Finally it is refined into individual metals and then formed into alloys. The alloys are used in the manufacturing of components in many high-tech industries. This mining process results in radioactive waste which must be disposed of properly so as not to contaminate the surrounding areas. Mining and processing REEs is expensive because of the difficulty in extracting and refining the metals. The heavy rare earth elements are the scarcest and most valuable. Dysprosium oxide is $375 a kilogram on an FOB China basis as of January 31, 2011 according to Lynas Corp.’s annual report. It was $89.10 a kilogram in 2007. REEs are in everything we consider essential: cell phones, televisions, and computers. They are instrumental in the development of hybrid cars and wind-power turbines. The military requires REEs for many defense applications. REE demand is inelastic. How rare is rare? A 2010 US Geological survey shows that there is a 1000-year global supply of rare earth reserves. Sixty-three of the rare earth reserves are outside of China. In the U.S., MolyCorp at Mountain Pass, California has been processing stockpiled ore since 2007. This mine in the Mojave Desert was closed in 2002 due to environmental issues. But now, MolyCorp is predicted to sell 3000 tonnes of rare earths in 2011, and 20000 tonnes in 2012. MolyCorp is coming back online with processes that are more economical and environmentally sustainable. MolyCorp and Hitachi Metals of Japan plan to formalize a joint venture to produce rare earth alloys and magnets in the US in 2011. MolyCorp has also entered a Memorandum of Understanding with Sumitomo Corporation. Sumitomo will offer an equity and financing package, and MolyCorp will provide rare earth products for seven years. Hugh Peyman, the managing director of Research-Works, the leading independent equities research firm based in China, told the AJOT Feb. 7, “Rare earths are not rare - in the long run. Supply soon overwhelms demand when prices rise, as they have. The net effect of this is that instead of outsourcing their environmental pollution to China, industrial countries will have to do it themselves.” REE reserves have been found in Idaho and Montana, and Boeing plans to use remote sensing technology to locate and map all the REEs in the US. According to resourceinvestor.com for the US to be self sufficient, the reserves in Alaska, Wyoming and California need to come online quickly. Alaska’s Sen. Mark Begich and Sen. Lisa Murkow