No Crisis in Rare Earths

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"The market is responding perfectly: Participants have plenty of funds and are moving aggressively."

Some commentators mix the value of rare earths and the location of their production and discover a crisis that demands various forms of government action. But an understanding of how markets work indicates that no crisis exists.

The crisis crowd says there is a problem, and its name is China. They observe that China makes nearly all rare earths. Yet the PRC has been producing nearly all rare earths for years.

Rare earth elements show different results, but a quintupling of prices in two years is not uncommon, and some elements increased more than that.

Adding up several categories that may contain rare earths, rising prices pushed the total the U.S. spent on rare earth imports to $1.4 billion last year. We spent $2 billion on Chinese fish. Rare earths are not contributing in any noticeable way to aggregate energy or defense costs.

Further, it is almost never wise for the government to respond to high prices. Price movements are how markets work. As prices of rare earths fell while the PRC sought to win the market, demand rose. Now that China's near-monopoly is driving up prices, demand will fall.

It is true that all of this will take a while. Exploration, mining, building refineries—even with a running start from the money pouring in, the best hope for a significant new supply is 2014. And it will be longer for some rare earths. If federal and state governments were to remove barriers they've imposed to market operations, that would be helpful. But the market is responding perfectly: Participants have plenty of funds and are moving aggressively. Government aid cannot change production timing except to delay it.

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