Rare Earths Shortages May Hurt Tech Firms

China has become the top supplier of metals called "rare earths" essential in many tech products—but it may be hoarding supplies and harming German companies

By Alexander Jung and Wieland Wagner

A massive gray mountain rises from the vast plains of Inner Mongolia. The artificial hill is the pride of the Chinese and the envy of the world—at least the world of commodities traders.

Workers at the Bayan Obo mine refer to the mound as "Treasure Mountain." Up to 6,000 people work at Bayan Obo, China's largest mine, which is completely inaccessible to the outside world. The Chinese authorities are intent on ensuring that no outsiders should gain access to the craterlike landscape, and for those who do somehow manage the feat, it is akin to arriving on another planet.

There is not a speck of green on the site, only the monochromatic monotony of earth and debris. Massive dump trucks rattle around the desolate landscape, looking from a distance like giant bugs. They crawl down into the open-pit mine, which is more than 1,000 meters (3,280 feet) deep, and later crawl back up to the surface, heavily loaded with iron. It is because of these trucks that the treasure mountain continues to grow from one day to the next.

A sign on the edge of the heap lists the 71 substances it contains: iron, of course, as well as 17 metals with hard-to-pronounce names like yttrium, dysprosium and neodymium, the so-called rare earth metals. These metals, used to manufacture high-tech products like lasers and solar panels, are coveted and expensive.

Nowhere on earth are larger amounts produced than at Bayan Obo. About 40 percent of world production comes from these mines, and the People's Republic satisfies a total of 97 percent of global demand. In other words, China controls the world market.

At China's Mercy

It's a situation that has been the source of many a headache for Ulrich Grillo. Grillo runs a zinc and sulfur processing company in the western German city of Duisburg, and he also heads the commodities policy committee at the Federation of German Industries (BDI). He notes with growing concern how German companies are becoming increasingly dependent on Chinese sources of raw materials, putting themselves literally at the mercy of the Chinese. What happens, Grillo asks, if China decides to block access?

There are certainly signs that this could be happening. The People's Republic no longer wants to sell off its rare commodities at rock-bottom prices, as it once did. Indeed, government planners have imposed restrictions on exports recently. This could seriously jeopardize German industrial growth, says Grillo. "We are headed for a commodities gap," he warns.

He is not just referring to problems with the supply of rare earth metals. In fact, Grillo is more generally concerned about the supply of important industrial metals like lithium and cobalt, for example, which are used in batteries, indium and gallium, used in thin-film solar modules, or tantalum, contained in the microchips used in mobile telephones. These are the sorts of metals that are essential in the production of quality, high-technology German products.

As it turns out, the fate of Germany's future-oriented industries lies in the hand of suppliers from Latin America, Australia, Africa and, to a much greater extent, northern China. In a new study, scientists from the German Federal Institute for Geosciences and Natural Resources (BGR), which advises the German government, warn of the possible consequences of that dependence. The imposition of limits on exports of rare earths could "lead to serious bottlenecks," the scientists warn. They believe that there could be "a substantial shortage" of certain metals after 2012, and that it is "not clear" how demand for those metals will be met in the future. Does this mean that the German economy could soon run out of key raw materials? Or can the supply crisis still be prevented?

Watching Carefully

In Hanau, a city near Frankfurt in the western state of Hesse, the answers to these questions are critical to the future of Vacuumschmelze, known as VAC, a company with 3,800 employees that specializes in the production of permanent magnets. "We are watching China carefully," says European sales director Helmut Dönges.

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