Tuesday, September 20, 2011

Next Stop, Menlo Park circa 1879

Beijing’s bold move toward world domination of high tech manufacturing is into its third month. With 95% of the entire planet’s rare earth metals held within its borders it has cut off supplies completely. Almost everything we think of as a 21st century necessity requires one or more of these elements. The excuse is that China wants to get a handle on the extremely toxic pollutants that the processing of these metals produces. This might be believable hadn’t shut down 100% of operations, while production is slated to resume in October, there is no guarantee that will happen, or if there will then be an adequate supply to provide for any exports.

This move has driven up prices for some metals by 1200%, and an eleven watt fluorescent bulb you could buy for a couple of bucks is now bringing $16 at the big box store. This is not the first effort on the part of China to do this, they been imposing tariffs and quotas on its rare earth exports for the last several years, curtailing global supplies and forcing prices to rise from eight to  forty times for the various 17 rare earth elements it controls.

China recognized its potential to control the rare earth metals nearly 30 years ago, and has spent liberally to acquire and close competitors worldwide. The US used to be the major producer until George Bush approved the sale of the last of the US facilities.  It takes ten to fifteen years to develop a supply chain for this sort of metal production. One concern is that the metals are always found in ore containing radioactive thorium and require careful handling and processing to avoid contaminating the environment.

The timing of the latest price increase is playing into the hands of Michelle Bachman who is making much of the “liberal” green agenda, even though the mandate for more efficient light bulbs was passed by Republicans and signed by Bush. This was another one of those laws written word for word by lobbyists on behalf of industry, the sort of “deregulation” Republicans love.

China did promise when joining the W.T.O. in 2001 that it would not restrict exports except for a handful of obscure materials. Rare earths were not among the exceptions. China is consolidating metal production into four state run companies in the name of pollution control so even if the US and the EU are successful in bringing a case with the WTO this winter, China will probably not be forced to comply in any meaningful way.

Companies have already been relocating to China from the US and Europe for the past decade in order to secure their supply and this will put even more pressure on the holdouts or they will be forced out of the business. Hedge funds and speculators made a lot of money over the summer hoarding neodymium and europium in Shanghai warehouses and are currently the only supply available.

So any talk of bringing the jobs back from China has to be tempered with the realization that thanks to the Republicans and corporate Democrats this is nearly impossible. If China were to resist at all, and they would have every reason to, we would effectively be in the position of needing to start the industrial age over again from scratch.

Any smart talk from right wingers about China being afraid of our military needs to be considered in the light that our high tech killing toys are all dependent on Chinese parts. Similarly the idea that they need our money has to be balanced against the fact that they are creating almost all of the new wealth, and the USD is only worth something because China still accepts it. At some point that will stop.

The unrest that Mayor Bloomberg is worried about would happen very suddenly in the this event. At the peak of the last Depression FDR reassured the nation by saying, “All we have to fear is fear itself”. America is in so much worse shape now than it was then that that phrase is inadequate. Bachman wants to bring back the Edison light bulb, she might get her wish. We’ll be lucky if that’s all the further back in history we go.


Anonymous said...

Right off the top of my thoughts, wouldn't this affect the price of Apple's stock? Right now it seems that company can do no wrong.

On a different but similar note, wasn't the goal of the PNAC to control the last remaining large reserves of oil (energy) and to use that as leverage against any country getting to aggressive with the USA?

It would make sense that China would use as leverage, their control of these rare earth substances necessary for producing much of the new electronic technologies our American based companies need for keeping their profits soaring.

What bugs me is how we have handed all our technologies to a country that could very well end up using them against us and leave us unable to produce anything that would require parts only they (China) manufacture.

I would think that hand over of our technologies would have been something that our national security experts would have not allowed... But the politicians seem to be endorsing all of it.

John said...

And the radical reich can STILL only spit, sputter and fulminate about the futility, not to mention MORAL turpitude, of "central planning."

The ONLY way, sputter-sputter, is total, slavish deference to the free-market, "invisible hand " (apparently affixed to the arm of an economic angel.) Of course, adherence to this non-policy has only served to get us, collectively, and firmly, transplanted, head-first into the bottom of the nearest sewage ditch.

As "cougarlips"™ famously said: "Capitalism neither requires nor guarantees representative government."©

John Puma

Anonymous said...

China dominates? The thrifty will own the debtors. ... same thing.