Long read: America gifted China its rare-earth monopoly — and India helped too

As China once again turns the screws on the rest of the world using its near-monopoly on large-scale rare-earth production, Praveen Swami’s informative piece tells us something that most of did not know: “The reason China ended up with a de facto monopoly on rare-earth is that the United States gifted it one. Even less known is the role India played in ensuring that the US was pushed to turn to China…the seventeen rare-earth minerals are not rare. Yet, misguided policies allowed them to become the cause of a geopolitical crisis.”

So how did the America and India mess things up and unintentionally hand over to China a major competitive advantage?

The story goes back to the 1950s. In that decade “…engineers in both the US and the Soviet Union realized that rare-earth elements offered a way to move beyond the technological cul-de-sac reached in aviation design at the end of World War II. Tungsten-iron alloys were unstable at the kinds of high temperatures jet aircraft and engines encountered, prone to corrosion, and heavy. Light alloys made with rare-earth metals offered a solution. Applications for rare-earths also emerged in radar, batteries, magnets, televisions and computer hard drives.

Like their counterparts in the West, Soviet engineers began to explore the new material. This led to cooperation to develop the Bayan Obo iron-thorium rare earth mine near the town of Baotou, in Inner Mongolia, beginning in 1951. From 1956, China became concerned that the Soviet Union was denying it nuclear-weapons related technologies, and set up its own programme under the eminent Peking University chemist Xu Guangxian.”

So far, so predictable. The Russians and Chinese were the paranoid Communist empires of the post-WWII world and hence no one should be surprised to see them take the lead on rare earth mining. But, now we reach a surprising – and sad (if you are a fan of democracy) – twist in the story:

“…the US made a similar outreach to India. Facing famine in the years after the Independence, India sought food aid from the United States. The government of President Harry Truman proposed turning a $190 million gift into a loan repayable with monazite, critical to America’s nuclear programme.

“India needs grain immediately; we have the grain,” influential Congressman John Vorys declared. “We need strategic materials from India over a period of years; India has those materials. We should make India a loan which can be repaid in strategic materials.”

Arguing that the conditionality would undermine Indian sovereignty, former Prime Minister Jawaharlal Nehru first responded by rejecting the proposal outright. Likely at the urging of nuclear-bomb-programme chief turned anti-nuclear activist Robert Oppenheimer, he then allowed some strategic materials to be exported, but not those which might be of use to the United States’ nuclear weapons programme. This meant thorium and monazite were off the table.”

America pressed on its search for rare earths and looked to have hit the jackpot in the Mountain Pass mine in California: “From 1951, the Mountain Pass mine began to become one of the world’s most important sources of rare-earth, soon supplying over 70 per cent of both American and global demand. The mine was acquired by petrochemical giant Unocal in 1977.”

Then came a twist in the story – the US authorities realised that sustained exposure to rare earths causes cancer. Enter Richard Nixon’s brother, Edward, with a neat solution: mine the rare earth in California and then get all the processing done in China. That way the bodies on the line were Chinese. This is how in the late 70s the Chinese nailed down their global monopoly in processing rare earths.

However, the Chinese did not want their Han Chinese to face the adverse health consequences of processing rare earths. So, they turned to the Mongolians: “The people of Inner Mongolia paid a hideous price for this commercial success. The Baogang tailings dam, where effluents from rare-earth refining ran into, soon grew into a lake containing 200 million litres of radioactive slurry, Klinger records. Women workers in Baotou’s smelting plants were found by doctors to have significantly higher rates of complications in pregnancies, and their children of congenital birth defects. From 1990, disturbing evidence also began to emerge of high rates of respiratory cancers….”

All of which begs the question, was India right not to become the rare earth sourcing or processing centre for America? Or should Nehru have bitten the bullet and got on the rare earth train with America? We might then have had a rare earth IPO or two in India.

If you want to read our other published material, please visit https://marcellus.in/blog/

Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.