Critical Minerals and Emerging Technologies

The periodic table is under siege. Or at least that is what one might imagine after hearing some of the cries of alarm that have begun echoing across the United States. We hear that the latest cell phones, electric vehicles, or critical weapons systems might no longer be feasible because some element that most people have never heard of is in short supply or being hoarded by another country.

Among the alarms issued in just the first few months of 2010, The New Yorker published an essay on lithium supplies (which may be essential for batteries in electric vehicles) and the potentially critical role of Bolivia as a supplier in the future. The Atlantic published an article on China’s activities in Africa to secure—even “lock up”—primary commodities needed by its growing manufacturing sector. Science published a special section in one issue describing new materials for electronics, and the report included commentary on possible scarcities of essential elements that could constrain expansion. Even the U.S. Government Accountability Office weighed in, publishing the findings of its investigation on the availability of rare-earth elements for essential military applications and vulnerability to shortages.

One factor giving rise to concerns is that modern mineral-based materials are becoming increasingly complex. Intel estimates that computer chips contained 11 mineral-derived elements in the 1980s, 15 elements in the 1990s, and potentially up to 60 elements in the coming years. General Electric estimates that it uses 70 of the first 83 elements in the periodic table in its products. New technologies and engineered materials create the prospect of rapid increases in demand for some minerals previously used in relatively small quantities. On the list are such elements as lithium in automotive batteries for electric vehicles; rare-earth elements in compact-fluorescent light bulbs and in permanent magnets for wind turbines; and cadmium, indium, and tellurium in photovoltaic solar cells.

On the supply side, meanwhile, some mineral markets are becoming increasingly fragile. The United States has become significantly more reliant on foreign sources for many minerals. Some exporting nations, most notably China, have imposed export restrictions on primary raw materials to encourage domestic processing and fabrication of mineral-based materials into final products. Some mineral markets have production that is concentrated in a small number of companies or countries—such as platinum-group metals in South Africa—creating vulnerability to geopolitical risks and to the possibility of opportunistic pricing. More broadly, supply chains are more fragmented because mining, processing, and manufacturing increasingly take place in different countries. Together, these factors create the specter of supply risks for essential mineral-based elements.

The United States can manage and reduce these risks, however, if government policymakers and industrial producers learn from the experience of previous supply scares, focus carefully on the most important concerns, and plan strategically.

Concerns familiar and new

The availability and adequacy of mineral resources have been perennial, if intermittent, national and world concerns. In the decade after World War II, concern focused on securing the resources necessary to replace reserves depleted during the war and to facilitate postwar reconstruction. In the 1970s, concern shifted to the security of foreign sources of oil and minerals (such as bauxite and cobalt) and to the long-term adequacy of supply of energy and mineral resources generally following two decades of significant economic growth worldwide. Many observers worried: Was the world running out of nonrenewable natural resources essential for modern society? In the 1980s and 1990s, concern shifted away from security of supply and long-term adequacy toward environmental and social issues. Observers then worried: Could adequate supplies of mineral resources be obtained in ways that minimized damage to the natural environment and disruptions to local communities?

Concerns today are similar to those of the past in that they are motivated, in part, by high commodity prices. It is no coincidence that past periods of concern coincided with periods of booming commodity prices. Such periods have included the early 1950s during postwar reconstruction and the Korean War; the early 1970s and the Arab oil embargo, resource nationalism in many mineral-exporting nations, and continued strong economic growth; and much of the past decade, which has been fueled by surprisingly strong economic growth in the developing world and, in retrospect, insufficient investment in new mines and production capacity. The recent two years of financial crisis, from which the United States and much of the rest of the world now seem to be emerging, merely slowed the price boom.

Today’s concerns, however, are different in several respects, starting with security of supply. Concerns about security of oil supplies in the 1970s and intermittently since then have focused primarily on the risks of higher prices and the resulting economic costs on the economy as a whole. The risks were attributed largely to a powerful supplier (the Organization of the Petroleum Exporting Countries, or OPEC) in a politically unstable part of the world (the Middle East).

In contrast, concerns about the security of mineral supplies now mostly center on the physical availability of essential inputs for a variety of products. There are concerns, for example, about supplies of rare-earth elements used in military hardware and compact-fluorescent light bulbs, lithium used in automotive batteries, and platinum-group metals used in pollution-control equipment. In most cases, the cost of these elements is but a small part of the overall manufacturing cost of the product, so a significant increase in price will likely have a relatively small effect on manufacturing costs. Supply risks are less about the prospect of higher prices and more about the possibility that a “no-build” situation might occur. The actions of several nations are helping to fuel such concerns. China, which currently produces almost all of the rare-earth elements used industrially, has enacted export restrictions. In addition, Bolivia, which has large and promising undeveloped resources of lithium, has signaled that it will not welcome foreign investment.

Today’s concerns also differ in that they are no longer focused primarily on major metals—such as aluminum, copper, iron, lead, or zinc—but on rare or specialty metals that are produced primarily as byproducts. Most indium, for example, is recovered during the processing of zinc ores, and most tellurium is recovered from the processing of copper ores. (See Table 1.) In such cases, the availability of the byproduct is strongly influenced by the commercial attractiveness of the main product. In the short term, the availability of the byproduct is constrained by the amount of the byproduct in the main-product ore.

The markets for these rare or specialty metals are much smaller and typically more fragile than those of the major metals. A new use in an important technology has the potential to overwhelm the ability of existing producers to respond rapidly to the increase in demand, especially if the element is produced largely as a byproduct. Mineral demand can change significantly in less than five years, whereas it takes five to ten years for significant additions to production capacity to occur. Moreover, there often are only a small number of important producers of these rare metals, and as a result markets are not transparent.

Drivers of resource reserves

The United States and world are not running out of nonrenewable resources, at least any time soon. The world generally has been successful in replenishing mineral reserves in response to depletion of existing reserves and growing mineral demand. Reserves are the subset of all resources in the earth’s crust that are known to exist with a high degree of certainty and capable of being extracted at a profit with existing technology. Reserves are a dynamic concept. They increase as a result of successful mineral exploration and technological advancements in all stages of production. They decline as a result of production at existing operations. Over time, reserve additions typically have at least offset depletion.

The United States Geological Survey (USGS) publishes annual estimates of worldwide reserves for many minerals. The estimates are presented as ratios of reserves to annual production (R/P ratios)—that is, the ratios indicate how many years today’s reserves would last at current rates of production. (See Table 2.) For essentially all nonrenewable resources, R/P ratios indicate reserve lifetimes of several decades or more. More striking, and illustrating the dynamic nature of reserves, the R/P ratios exhibit no systematic upward or downward trend over time. To be sure, R/P ratios for some minerals, such as copper, now are lower than they were in the 1970s, while for other minerals, such as rare-earth elements, they are higher. Although insufficient information is available (at least publically) to estimate R/P ratios for several of the elements of particular current interest, such as indium, platinum-group minerals, and tellurium, historical experience suggests that more resource is available than current estimates of reserves would indicate.

So rather than focusing on tons (or ounces or pounds) of reserves, it is useful to consider costs of production (as an indicator of the quality of reserves), the location of reserves and production, and the time frames over which there is concern about reliability and availability of mineral supplies.

Nations and industries tend to use lower-cost mineral resources first—those contained in deposits that are large, close to the earth’s surface, high in metal content, and easy to process metallurgically. Over time, users move to lower-quality deposits, resulting in higher costs unless improvements in extraction and processing are sufficient to offset these cost increases. So the limit to mineral-resource availability, in this sense, is what price users are willing to pay for a resource.

Geographic location can be critical in understanding supply risks. Mineral resources in concentrations sufficient to allow commercial extraction are not distributed evenly worldwide. Other things being equal, supply risks will be higher the more geographically concentrated production is in the hands of a small number of countries. But geographic location is not the sole determinant of supply risk. Rather, the concentration of production by a small number of companies or in a small number of mines also helps make users vulnerable to supply disruptions or high prices. Indeed, even domestic U.S. production can be risky if in the hands of a single producer, while foreign sources of a mineral can be quite safe if production comes from a diverse set of companies and countries. Moreover, import reliance can be good (cost effective) if foreign sources are available at lower costs than alternative domestic sources of a mineral.

Time frames also are important in understanding supply risks. Risks in the short to medium term (up to a decade or so) are much different than those in the long term (more than a decade). In the short to medium term, the issue is how adequate and reliable are supplies from existing sources of supply, as well as from new facilities that are sufficiently far along in design and construction to be reasonably certain of coming into production within a few years. The important risk factors include whether supply is concentrated in a small number of mines, companies, or countries; the geopolitical risks; the prospect of rapid demand growth; the reliance on byproduct production; whether or not there is excess or idled capacity that could be restarted quickly; and whether or not there is an availability of low-grade material or scrap from which an element could be recovered in the short to medium term.

In the long term, the important issues relate to fundamental availability and are largely geologic, technical, and environmental. Does an element exist in the earth’s crust or in scrap or products that could be recycled? If so, do users have the technology to extract and use it? Can users extract, process, and use the element in ways that society considers environmentally acceptable?

The power of markets

Markets are not panaceas. As the recent financial crisis illustrates, markets do not always work well and by themselves will not solve every problem. There is an important role for government. But market pressures can be quite effective in encouraging investment that invigorates supply (and reduces supply risk) and in encouraging users to obtain “insurance” against mineral supply risks.

On the supply side for rare-earth elements, for example, concerns about the reliability of Chinese supplies, combined with the prospect of significant demand growth, have fueled a boom in exploration for mineral deposits containing rare-earth elements. There are a significant number of advanced exploration projects in North America and elsewhere around the world. Most of these deposits will remain simply interesting geologic concentrations of rare earths. But over the next decade, a few will become mines if demand grows as anticipated and the Chinese restrict exports. In the United States, Molycorp hopes to re-open the Mountain Pass rare-earths mine, located in California, which used to be the world’s largest source of rare-earth elements until it shut down in the 1990s. The biggest impediment to the opening of rare-earth mines outside of China is the reality that China is and likely will remain the low-cost producer of rare earths worldwide and probably could supply most world demand at prices lower than those necessary to justify new mines. The spanner in the works, however, may be China’s restrictions on exports, which are leading some users to view China as a risky supplier and may provide incentives for users to adopt new strategies to ensure supplies.

Users of elements for which there are supply risks have a number of options. In the short to medium term, they can maintain stockpiles, diversify sources of supply, develop joint-sharing arrangements with other users, or develop tighter relations or strategic partnerships with producers. Over the longer term, they might invest in new mines in exchange for guaranteed supplies.

Over the longer term, users also have the incentive to substitute away from elements that are difficult to obtain or for which there are supply risks. Substitution comes in two forms. The first form involves replacing a “risky” element or material with another element or material that has similar properties but is in greater (or surer) supply. In the 1980s, concerns about cobalt availability led to substituting nickel and other alloying elements for cobalt in certain types of steel. The second type of substitution involves making more efficient use of an element (and thereby requiring less of the element) in the same application. Molybdenum prices increased six-fold in the late 1970s, and in the decade that followed steel makers learned how to reduce the amount of molybdenum needed in alloyed steels by about 25% through more heat treatment. Indium provides another example. Indium-tin-oxide (ITO) thin films are an essential part of flat-panel displays, such as television sets and smart phones. Demand for these products—and, in turn, for indium—exploded about a decade ago, leading to much higher indium prices. Over the following several years, manufacturers of ITO thin films responded by increasing the efficiency of their manufacturing processes by about 50% by recycling indium that previously was discarded in manufacturing waste. Even though the amount of indium in each flat-panel product remained essentially the same, manufacturers needed to purchase less indium per product.

In early 2010, a senior engineer at Rolls-Royce Group, manufacturer of engines and power systems, was quoted in American Metal Market as saying that he would like to “design out” the following elements from Rolls-Royce products: cobalt, hafnium, molybdenum, nickel, rhenium, tantalum, tungsten, and yttrium. To be sure, this is easier said than done. Each element provides materials with specific properties, and some are inherently more difficult to substitute away from than others without sacrificing performance in the material. But the drive clearly is there.

Roles for government

Despite the powerful incentives provided by markets, the federal government has an important role to play in making sure that critical materials are available at affordable prices and are used efficiently. Government activities should focus on:

Encouraging undistorted international trade. One of the central tenets of modern economic theory is the benefit of free and open international trade in goods and services. Although economists disagree on many matters, on this they are essentially unanimous. The reduction and removal of barriers to international trade is one of the major international success stories of the past 50 years, increasing incomes and improving living standards around the world.

Export restrictions are analogous to import restrictions. Both isolate the domestic market from the world market. Import restrictions on a good or service create advantages for domestic producers of the restricted good or service while hurting domestic users and foreign exporters. Export restrictions create advantages for domestic users while hurting domestic producers and foreign users. When China restricts exports of a primary raw material, such as rare-earth elements, it presumably is doing so to create an advantage for those manufacturing industries that use rare earths domestically in goods that will be sold both domestically and internationally.

Thus, the U.S. government should fight policies of exporting nations that restrict raw-material exports to the detriment of U.S. users of these raw materials. Similarly, the government should fight import restrictions on processed and semi-processed minerals and metals that create an artificial barrier to downstream processing of mineral resources in mineral-exporting (usually developing) nations.

Improving regulatory approval for domestic resource development. Although foreign sources of supply are not necessarily more risky than domestic sources, it remains true that in some instances, at least, domestic production can offset the risks associated with unreliable foreign sources. Developing a new mine in the United States appropriately requires a pre-production approval process that allows for public participation and consideration of the potential effects of the mine on the natural environment and on local communities. Similar processes apply to all proposed industrial or public infrastructure projects. However, these processes are time consuming and expensive—arguably excessively so, not just for mining but for all sectors of the economy. No simple remedy is obvious. But it is clear that more attention should be paid to finding better ways to balance regulatory approval requirements with the benefits of augmenting domestic production of needed minerals.

Facilitating the provision of information and analysis. Within the private and public sectors alike, sound and rational decisions require good information. Government plays an important role in making sure that sufficient information exists. Consider, for example, the requirement that food producers include nutritional information on food packages. Perhaps an even better illustration is the macroeconomic data that the government collects (on gross domestic product, housing starts, investment spending, and retail sales) that users throughout the private and public sectors analyze in making a variety of investment decisions.

A 2008 National Research Council (NRC) report on critical minerals, Minerals, Critical Minerals, and the U.S. Economy, recommended that the U.S. government enhance the types of data and information it collects, disseminates, and analyzes on minerals and mineral products, especially as they relate to elements that are essential in use and subject to supply restrictions. The report identified gaps in existing public mineral information and recommended that special attention be given to those parts of the mineral life cycle that currently are underrepresented. This category includes reserves and subeconomic resources, byproduct production, stocks and flows of materials available for recycling, in-use stocks, material flows, and materials embodied in internationally traded goods. At present, the USGS Minerals Information Team is the focal point of federal activities on mineral data and information. The U.S. Energy Information Administration, which has more autonomy and authority than the USGS Minerals Information Team, provides a possible model for expanded federal activity in minerals information.

Facilitating research and development. Over the longer term, the keys to responding to concerns about the adequacy and reliability of mineral resources are scientific and technical. There is a need for better knowledge about the earth’s resource base; more-efficient techniques for mineral exploration, mining and processing, and material manufacturing; improved recycling; and better materials that provide improved performance using elements that are more available and abundant and subject to less supply risk. Government can play key roles in facilitating research and development, especially pre-commercial, basic research and development that is likely to be underfunded by the private sector because its benefits are diffuse, difficult to capture, risky, and far in the future. The NRC’s 2008 report on minerals and the U.S. economy recommended that federal agencies develop and fund activities, including basic science and policy research, to encourage innovation and to enhance the understanding of mineral resources and mineral-based materials. It called for, among other things, the development of cooperative programs involving academic organizations, industry, and government to enhance education and applied research. The report also said special importance should be given to the recycling of rare and specialty metals used in small quantities in emerging applications.

Ensuring materials for national defense. The U.S. Department of Defense (DoD) and its use of mineral-based materials comprise a special category of public policy. At one level, the DoD is simply another user of materials. As such, it should be in the best position to “buy its own insurance” against supply risks by stockpiling some materials, striking special purchase arrangements with suppliers, diversifying its sources of supply, and so on.

As the chief protector of national defense, however, the DoD is not simply another user. Since just before World War II, the DoD has relied largely on the National Defense Stockpile to deal with threats to the supply of materials essential for national defense. But an NRC report, Managing Materials for a Twenty-first Century Military, issued in 2008, concluded that the National Defense Stockpile is ineffective, that the DoD does not seem to fully understand its materials needs, and that the department lacks sufficient data and information on which to evaluate its materials needs and vulnerabilities. In its recommendations, the report said that the Department of Defense should establish a new system for managing the supply of strategic materials, and the federal government should enhance its systems for gathering data and information on materials necessary for national defense. Since the NRC report was published, the DoD has begun to respond to and act on these recommendations.

Attention, not panic

The bottom line is that although the chorus of critics is right that the United States should be paying more attention to the supply of many important minerals, there is no need to panic. If the nation’s policymakers and industrial producers take a few sensible actions, there is no reason to expect that the nation will be in crisis anytime soon.

As they generally do, market forces will help to encourage producers and users of critical minerals to undertake activities that reduce supply risk or the need for the critical mineral. Where market forces alone are not sufficient, government can step in to help shape and determine how well markets work. The government has an essential role to play in facilitating international trade in critical minerals, ensuring that domestic mineral production can occur where appropriate, facilitating the collection and dissemination of mineral data and information, making sure that the military appropriately deals with supply risk, and—perhaps most important—seeding the basic research and development that over the longer term will be the key to understanding the nation’s mineral-resource base and designing better materials.