 Now, what we're going to be talking about in a roundabout way is one of the two or three glories of the human mind, which is, of course, the periodic table of Mendeleev. This was a marvellous construction because for the first time it made sense of the material world, what the world was made of. But the funny part was, after Mendeleev had sort of sorted it all out, there was a big bit in the middle which was all a bit confusing and hadn't been, it was, some elements were predicted, some had been seen sort of, some had been got out a little bit, but there was a swag of things which didn't quite fit the general ideas of metals, the general ideas of things that weren't quite metals, the general, and this was a conundrum because these things were also rather useless, or so we thought in the 19th century. Since then, of course, we found uses for these odd elements and we're going to hear a talk about why they're important and useful, why they have strategic importance, and most importantly of all, the strategic issues to do with the fact that they're not distributed around the world in any sort of a fair way. They seem to have been given to some countries in abundances that are quite disproportionate to where they should be, where they should be found. So our speakers tonight are Eugene Golds from the University of Texas and he's worked for the DOD and he works on the economics of strategic minerals. And also Professor Dudley Kingsnorth from Curtin University who said he's worked for a long time in the mining industry and also for a long time on rare earths. So we've got true experts to give us a guided tour of this issue. So gentlemen, they're going to present in their own inimitable bib and bubway. I'll hand over to you guys and then after we've been given the lecture, we'll open it up for Q&A. Thank you. What are we doing this evening is talking about rare earths, giving an introduction to rare earths, saying what they are, giving an overview of the market. And then when I've done that, then Eugene will be talking more about the geopolitics and as Roger said, after that we'll be having some Q&A. I'm totally independent, I don't have any shares or I don't work for any company so my views are not based on any commercial concern, they're based upon an independent analysis. And in addition to that, there are a number of forward looking statements here which I have to assure you that they're not firm forecasts. I just want to begin this by saying that in uncertain times we need to think about diversity of supply for sustainability. And China is seeking to diversify its sources of iron ore away from Australia and Brazil. We've seen a lot in the press about the dominance of China, which is correct. But we have to be very careful that our assessment of the rare earths industry doesn't turn into a China bashing session. They're very good at what they do in the processing of rare earths and they have a very important role to play. But that's no reason to criticise them unduly. So I'll talk about with a brief introduction to rare earths, a recent history of the rare earths market, future demand and supply, China's role and end up with a few conclusions. Those are the rare earths and people refer to light rare earths and heavy rare earths. Now there's nothing really magic about that. As you go from the top of the table to the bottom, the atomic weight increases so the light ones at the top and the heavy ones at the bottom. As you go down the table, they get more scarce and therefore more expensive. Rare earths have unique chemical, luminescent and magnetic properties which is how they're found in their major applications. And the major application that's driven the industry for the last 15, 20 years is their use in magnets. When you have a rare earth magnet, it's a very powerful magnet that enables you to make a smaller electric motor. So initially the sunny walkman would not have been possible without rare earth magnets. Today your laptop computer would not be possible without a rare earth magnet enables the drive to be very, very compact. They're also used in the drive of hybrid vehicles and in the more expensive vehicles they use to put the windows up and down and the seats back and forwards. Because they're lighter they can save a lot of weight in the vehicle and therefore improve fuel consumption. Rare earths are also used in Lansom and Nickel Hydride batteries. That's a rechargeable battery. That's still the rechargeable battery of choice by Toyota for its Prius vehicle. When the Prius was originally introduced it was thought that lithium batteries would have replaced Lansom batteries by now. But it looks as though we're uncertainties associated with lithium batteries. Lansom and Nickel Hydride batteries are going to remain the battery of choice for a while which may create problems for a little while. The other major use for Lansom is in fluid cracking catalysts. A catalyst enables you to improve the efficiency of the amount of petrol that you are able to extract from a barrel of oil. For luminescent properties rare earths are used in light. Now in the typical fluorescent light that you see up there a meter long contains a gram of rare earths. If you want to know it's in European and Turbium largely. But it's only a gram of rare earths but those are very expensive rare earths. They're also used in polishing powders. That's primarily cerium. It's got a unique physical and chemical reaction. When I first started in the rare earths industry 24 years ago that was a major use of rare earths. That was cerium in polishing cathode ray tubes. So rare earths market history technology changes can often have a bigger impact on the rare earths market than growth alone. When cathode ray tubes are replaced by flat tubes the consumption of cerium dropped significantly. And currently we're going through a phase where LEDs are replacing fluorescent lights compact fluorescent lights. Lumen for lumen, light power for light power. And LED uses about 10 to 20% of the phosphors that the fluorescent tube does. So we're seeing a big shift in demand for phosphors. So I like to use the hybrid vehicle as a very fine example of the use of rare earths and you'll see that in a number of applications in there. If you're wondering what UV cut glasses that's cerium in the glass cuts down to the transmission of UV light in the car. Now that's not because the Japanese ladies want to retain a pale complexion. By putting 50 cents of cerium in the glass you can save two to three dollars in UV stabilizers in the plastic. So as you can see rare earths have got a wide range of uses and they're continuing to find new applications. Over the last few years we've seen actually very little growth in the industry. And I'll come back to that in more detail but primarily that's due to the global financial crisis in 2009 and the actions that China took in 2010 with respect to restricting supply and suspending shipments to Japan. Worthy of note that in 2011, the year after China suspended shipments to Japan of rare earths and supported their dispute over the St. Coco Islands that Japan invested $1.1 billion in replace reduced recycled rare earths. I'll give you an idea of how important that was. At that time Japan's consumption of rare earths was about three to four hundred million dollars a year. So in other words they were prepared to invest three to four times as much as that to find alternatives to rare earths or better ways of using it. In actual fact most of the money went into using them more efficiently. For example way back then in a typical hard disk drive the weight of the magnet in the hard disk drive was about 30 to 40 grams. Today that same magnet is 10 to 12 grams. So although we see that demand has not increased significantly over the last few years it is being rarely used in an increasingly increasing number of devices itself through better efficiency and in term also better efficiency of extraction and processing. So the rare earths market today when we talk about the rare earths market it's always talked about in terms of rare earth oxide, REO. Total demand today is about 125,000 tons. The value of that market at rare earth oxide stage is only two to four billion and I'll be returning to that. China is dominant, supplies about 90% and consumes about 70%. There are constraints that China has placed on the market to ensure it maintains its dominant position and continues to add value, add processing to create more jobs. In response to that dominance that China has we have had, we have got two projects that are coming online at the moment. Linus which has a project in Australia, it's a mining concentrator at Mountwell near Laverton and then the processing is in Malaysia in a company called Molecorp that has processing facilities in mountain parks. Processing rare earths is really not like a mining operation, it's a chemical operation. Both Linus and Molecorp have experienced big problems in the construction startup of their facilities which has caused the stock markets great concern. Some people who don't believe that they will exist in meeting longer term, personally I do believe that they will and probably sometime in the middle of next year they will be in a position where they'll be cash flow positive. Whether it's an except for return on the capital invested is another issue but there are certainly very complicated operations to bring online and you take a long while of acquiring a lot of expertise and a lot of money. In response to what happened in 2010, a lot of Western companies have put themselves towards becoming new producers. There are about 200 projects out there at the moment. My best guess is three, maybe four of them are going to be in production in 2020. A lot of opportunity but significant risk. That's just a slide that shows demand last year. I just just draw your attention to a couple of things here. If you look under USA, that figure there used to be catalysts. That's because the US, three US companies dominate the production of SCC catalysts so that's why that is something very high and the US is a major supporter of Molecorp and Linus being non-Chinese for the supply of them. China is the major producer of magnets. Produces most of the rare oxides but it produces about 80 to 85% of the world's rare magnets. If anybody's got any questions we can talk about it later. When we look at supply and demand and the first table I put up talks about different applications. We look at the growth in each sector. When I forecast future demand and supply I look at each sector and forecast of growth rate in each and within that there might be some subtexts upon which that's based. Now I don't propose we go through that table in any great detail with people. On the copy of my presentation they can have one if they email me and I'll send it to them at PDF format. What I said earlier, magnets is the dominant growth area, very important area. Phosphors used to be a very big area, used to constitute about 7% by volume and about 35% by value. Today it's probably at about 4% or 5% by volume and only about 20%, 25% by value. Whereas the magnetic sector today constitutes about 25% by volume and about 50% by value. That's just a summary of how we see it over the last few years. When you look at the rare earth market you cannot look at it as one whole amorphous mass of rare earths. There are 17 rare earths and when the rare earth industry meets the major conferences every year the major issue is the issue of balance. The ratio in which rare earths are consumed doesn't match the ratio in which they are produced. Therefore at any one time there's rare earths that are in surplus and rare earths that are in short supply. When we look forward there's a surplus of lancetum and cerium. Those are two right at the top of that table of rare earths that I see there in greater abundance. Typically in a project that has light rare earths they constitute about 70% of volume. In terms of heavy rare earths looking forward there's an issue there where supply is going to fall well short of demand. And that's where illegal production in China comes on when we return to that. In the case of the rare earths used in phosphors, if I'd shown this graph a year ago it would have said that we were going to be short of rare earths for phosphors but now it looks as though it's not such a critical issue. Although at the present time there's no production outside China so the rest of the world depends wholly upon China for its supply of heavy rare earths for phosphors. So China. China takes a very long term view of things and they started on this journey of rare earth back in 1970 and progressively over the last few years they've gone further and further down street adding value, creating jobs. In running the Chinese economy the first priority is a case of social harmony, creating jobs so that they keep everybody under control and happy. There's no uprising. So that's why there's a big focus on rare earths because there's a great opportunity for them to create high-evaluate jobs and major employment and rare earths can become the basis of a high technology manufacturing industry. I've referred to this earlier in 2010, China significantly reduced export quotas. Now the numbers are not really important except that they reduce the export quotas such that the sum of those export quotas plus rest of world supply was less than the rest of world demand and like the normal law of economics when demand exceeds supply the price goes up and the prices in some instance went up by a factor of five or six or ten for a moment or two with some rare earths. Then in September, as I said earlier, China suspended shipments to Japan. So that really caused a big surge in interest in rare earths and that's why we see about 200 projects that have been assessed at the present time. So how does China control the rare earths? It has production quotas in place but unfortunately those production quotas don't produce enough rare earths to meet demand. They're trying to eliminate illegal production but that's not successful because in the case of magnets demand exceeds supply. There have been many tales in the past about their poor environmental management. The government is making efforts to improve that but it is taking time, it will take a while before they meet international standards. Earlier this year there was a decision by the WGO that these practices that they had in place, export taxes, export quotas, to persuade overseas companies to locate their manufacturing facilities utilising rare earths in China were illegal according to the rules of the WGO. So the WGO said those practices are not allowed under the rules of the WGO. China appealed and the decision was confirmed. At the present time China is negotiating with Japan, the EU and the USA who brought that action under the WGO as to how they're going to, what measures they're going to put in place on the draw to make sure they're abide by the rules of the WGO. The expectation is the export quotas will disappear, the export taxes will be faded out over a period of time and there'll be a number of other changes. This illegal mining until a couple of months ago I thought was probably 15,000 or 20,000 tonnes. A couple of months ago I was at a conference in China and Dr Chen, who's secretary of the China Rare Earths Society and he's also a deputy chief executive of the China Rare Earths Industry Association. The person who knows the Rare Earths Industry and is respected. That's the slide that he put up. In summary, according to the five year plan in China according to the production figures, last year they produced about 21,000 tonnes of neodymium and praise the dimium which he used in rare earth magnets. But in order to produce the 36,000 tonnes of magnets, sorry, in actual fact the consumption of neodymium and praise the dimium that went into production of magnets and other applications of neodymium and praise the dimium was 36,000 tonnes. In other words, there was a shortfall of 15,000 tonnes. So China or the world as a whole is relying upon illegal mining and production in China for 40% of the world's rare earth magnets or about 30-35% of the global or world's rare earth magnets. And this is a matter of great concern because it makes it very difficult for people to plan long term if they know that a major component, a major part of their manufacturing process is based upon illegal production. That's the slide. So what China is also doing, it's not only going downstream, it's vertically integrating. What it's doing, it's selected six major state-owned enterprises to be the vanguard of the industry and carry it forward. This enables China to have greater control over production and prices. It's a different scale, but in China we have six state-owned enterprises who control about 90% of the production of the world's rare earths. OPEC, which is a Lo, which is a loose association of 12 countries, controls about 40% of the world's production of oil. It's a very different scale. A colleague of mine at Perth University says China on rare earths is like OPEC on steroids. So it's a pretty powerful tool that they have to control production. So as I said, China is progressively moving downstream the rare earth supply chain to create jobs and a high technology manufacturing industry in the interest of social harmony. And this is what pictorially, one could see happens, is that there's more and more jobs shifting to China as they progressively go downstream to persuade manufacturing companies to relocate their manufacturing facilities in China where they have ready access to rare earths at a lower price because they're exempt from the export taxes. This is real, I was in Europe last week and this is a real concern to Europe because what they see is jobs are being lost from Europe to China. China is making the most of its rich abundance of rare earths for its own economy. So for the rest of the world, this is real issue in that China can become very dominant in the manufacturing sector. And what we need to do is to look to diversifying our sources of rare earths to ensure that we retain a fair portion of manufacturing industry outside China. And with that, I'll hand over to Yuxiang. I do my best to follow on to Doug Lee's introduction to the rare earths industry. So we tried to coordinate a little before, hopefully we won't have left gaps. So normally, I would also present a little bit of an overview about the rare earth industry and I sort of figured Doug Lee's covered that and I'm hoping to build on what he had to say to talk about my own views of the type of vulnerability or really what I would say is actually not that big of vulnerability because of concentration in the rare earths market. So, you know, a little preview of the end, simple commodity or strategic vulnerability, I come about somewhere in between but closer to the commodity side. This is an important, it's a valuable commodity, there's money at stake, but whether it's strategic or a critical vulnerability for countries in a national security sense, that's another matter. So I guess I should start though by saying, like Doug Lee, a little bit of a disclaimer, I got into the rubber to business, I started learning about this when I was working in the Pentagon. Part of that I had background in economics and national security, which is kind of what I do for a living as a professor, but so I ramped up my knowledge, but I was one of a whole bunch of people working on this issue in the Pentagon. I'm not responsible personally for all the major policy decisions, any major policy decisions. I was part of the process and what I say now is speaking for me as an analyst, not for anything official. Also, I would say, I'd like to thank one of the wonderful things about working at one of the biggest research universities in the United States, the University of Texas at Austin, is we have a wonderful array of research centers that have been endowed for various reasons. And we have the Edward A. Clark Center for Australia and New Zealand studies, which are sponsored by TRIP here, I'm very grateful to them. So Edward Clark was the ambassador to Australia during the 1960s, and there have been strong UT ties to Australia going back much longer than that, but they raised an endowment to formalize these ties and need to turn back to Clark, and we're much in favor of strong ties between Texas and Australia. So what I'm going to talk about today mostly is about whether there's any geopolitical leverage in the rare earth industry, whether you can gain political advantage by manipulating the rare earth market by saying we're not going to sell as much, I'm not going to sell to you and with you. Somehow, by having a government intervening in the market, generally on the supply side to gain importance, to coerce other countries to gain important political leverage. There are other things that might lead you to think there could be a geopolitics of rare earths, the way we talk about geopolitics and oil. People have questions about other issues, other international political issues that pertain to rare earths. I'm happy to talk about those. But in a short presentation, this is what I'm going to focus on just for a few slides and a few comments. And so I thought I would start the way I was going to work through this in just a couple of slides. I'm going to talk about, in principle, what would make an industry or a commodity a source of geopolitical leverage, a source of political influence. And then for a couple of slides, I'll talk about what made people think in 2010 especially, a peak of the crisis when China allegedly barred export to Japan. I'm just going to point to Dudley and say he said they really did it and we're going to go with that. And at that peak, there was a frenzy of fear about how much influence went to gain from rare earths. And then the market changed. Dudley talked about some. And I'm going to talk about how those changes might have affected political leverage and kind of conclude with what that tells us about the potential, both for rare earths and in general, to gain political leverage by manipulating markets. So I think in the ideal industry, these would be the characteristics that we, there might be some others, there might be wrinkles and critical injuries. But in general, if you were looking for an industry that you could use as a sender of a geopolitical message to influence a particular target, what would you want? Well, you would want to control all the supply, right? So if you control the 100% of supply, that's the best because then nobody else could, you don't have to get anybody else's cooperation, right? OPEC, a dozen countries, a handful over the core of OPEC that really matter. If they want to do something, they all have to agree. They can negotiate and all decide they want to do this jointly. But the more concentrated, the fewer people you have to get on your side if you want to manipulate the market. So sender controlling all supply helps get leverage. Even better is if the country you're trying to influence, if the country you're trying to get leverage over is the only person who buys that product from you, right? Because if you're trying to influence one country at a time, but you sell to a whole lot of other countries also, you have the problem that those countries that you want to keep selling to might buy the product from you and resell it to the person who you're trying to prevent from getting the product, right? So if there were five countries, if you wanted to target Japan, but you were also trying to sell lots of rare earths to, I don't know, let's pick some Asian countries, right? Korea, the Philippines, Vietnam and Australia, right? On the same region, you could say, well, we're not selling to Japan anymore, but if Japan really wanted it, they would buy some of what you gave to Korea. They would divert that to Japan, right? You wouldn't have as much leverage as if the target was the main person who wanted it. You didn't have rare earths or anything else just sloshing around in a global market. The third thing when people focus on quite a bit and the reason why people have very exercise about rare earths is consumer demand. You want it to be large and inelastic, right? So you want the consumers to want a lot of it. So if you cut them off, it has a big effect on their economy, on their preferences, on the things that they want. And you want it to be the case that no matter how much the price changes, people still want the product. So even if you jack up the price a lot, one of the problems when you jack up the price, if you're a monopolist, is that people stop buying, right? It reduces the equilibrium quantity of consumption. But if demand is inelastic, you have to buy it anyway, right? And so you can really squeeze someone. If there's a product that no matter how much it costs, they want to have it and you're the only person that sells it. The consumer demand being large and inelastic helps gain leverage. And that's one of the things that contributes to that is if substitute products are vowsy, right? So you can't switch it out for something else. And these two things combined is what people really thought about Rare Earth. So I didn't keep a slide about this and I'll just highlight what Doug Lee said. He went quickly over that graphic of all the uses of Rare Earth. People talk about Rare Earth like fairy dust. Their wonderful magic can sort of toss into all kinds of industrial processes and poof, wonderful things happen, right? It just makes them better. It makes all kinds of great things. And so these are, and it's specifically politically resonant type of demand. Like this is great fairy dust. It's not fairy dust that people go to the club and party or whatever with. It's not that kind of thing. This is defense products that people are very excited because maybe a magnated youth is an actuator and a missile guidance system. Or maybe they're used in lasers or in certain kinds of sensors or in radar emitters or advanced radars. These kinds of things are defense. That sounds stereotypical. People think, oh, it must be strategic. Or the whole green energy revolution, right? So the big quantities of demands that people are projecting are you use magnets in generators. You use magnets in lots of products like in a wind turbine. So if the wind industry takes off, potentially that's a lot of Earths. It's the Prius, all of those kinds of things. So those are politically resonant types of demand. The last thing is that the product need is time sensitive, right? If you need it now, you have to disrupt the production line to delay it. That would also increase the leverage. I'm not going to focus on that. Anyway, so to briefly recap some of what Dudley was talking about leading up to 2010, the Chinese sort of took over the market increasing in the 1990s. The mean non-Chinese mine, in fact the mine historically supplied much of the rare earths consumed in the world in not past California. Closed in 2002, left China dominant in the market. We talked about China rationing down their export quotas. And they produced an increasing proportion of rare earth metal downstream products like magnets and compact fluorescent light bulbs. They gained this market dominance. The main point is it looked like with this level of concentration, OPEC on steroids, right? This should work for geopolitical manipulation if anything works. And of course on the demand side, it also looks good for geopolitical manipulation, right? So these kinds of products were very sensitive products. They're products that people cared a lot about. There were a lot of products that were spread across the economy. So people draw wints. Dudley talked about this whole sector is two to four billion dollars maybe in the economy. That's actually very small, right? The world economy is a lot bigger than two to four billion dollars. You're trying to get a lot of leverage over manipulating two billion dollars in industry. It seems like that might actually be difficult to do. But people who tell the scare stories say yes, that's just the cost of the rare earths themselves. But if you think about the value of the products that user add up all the pre-uses and all the wind turbines and all the missiles and all the airplanes and all of these things that all the cell phones and disk drives, they talk about somewhere in the supply chain of trillions of dollars worth of products, there's a nickel of rare earths, right? And so if you want to exaggerate the impact with people talk about, people that's generated the fear, they said this touches a huge portion of the economy. And this maybe is the most important thing because China of course turned out to want to gain influence, wanted to manipulate Japan. And downstream production was really concentrated in Japan because especially for intellectual property reasons, some Japanese companies owned key intellectual property for making magnets out of rare earths. And as a result, for intellectual property reasons, there was concentration in the downstream market that made that downstream market vulnerable to Chinese upstream manipulation as of 2010. So the market is large, important, inelastic and relevant to politics, especially in Japan. So it looks like this is a good scenario for geopolitical manipulation. But the truth is it was only for an instant. It was fleeting. So sometimes everything aligns just right and you have a second where you might get leverage. But then, poof, Kaiser Jose vanishes, right? The leverage goes away. I don't know, you guys may not remember the movie The Usual Suspects, but there was just a second when there was a moment of leverage. But private investors, this is the interesting thing. People saw long before the crisis that there was an opportunity because they understood that people downstream who were buying rare earths products were going to be nervous about a Chinese monopoly. And it didn't take just governments to understand that, right? So it wasn't waiting for government policy to say, oh my gosh, here's a crisis, here's a bunch of money to fix it. But private investors started in the early 2000s, right? Linus was starting up in 2002, you know, when they really started investing. In fact, even before that, we knew this has to be very well. But people were, where the business sees the market concentration that reacts because they view that as an opportunity to enter the market and make money through competition. So the significant non-Chinese supply was already coming online, it was already scheduled, the investment was already being made when China had its peak influence in 2010. And by 2013, it was online, there was actual production. Now, it's not in every element, we can talk about the details. There is actually production in every element, it's just different amounts in different elements, right? And maybe there's some amount of Chinese leverage left. But think about it this way, the whole rare earth industry was only two to four billion dollars. And if many of the high volume parts of the rare earth industry no longer are really concentrated in China, even if some of the smaller volume elements still are quite concentrated in China, now China's geopolitical leverage is resting on a smaller and smaller pillar, right? It's not all rare earths, it's only resting on yttrium, or it's only resting on dysphrosium, or these smaller rare earths that are subset. So you're down to a few hundreds of millions of dollars. On the demand side, we had adjustment too, Dudley talked about this some time, I won't spend much time, but the main point is there's actually innovation happening in the rare earths industry. And many people feared that because China was dominating the production and dominating the manufacturing, has so many scientists working on rare earths that China would get a lead that no one could ever catch up to. And that really hasn't proven to be the case. In the past five years there have been quite significant innovations in the rare earth industry in all phases. New techniques used in mining and separation, ultimately in recycling as a new source of demand, and especially in magnet production that demands less rare earths for equivalent magnetic capabilities. All of these innovations are happening outside of China. Some of the production ends up in China, whatever, but there's all kinds of smart capability outside China. Just because China is producing the products doesn't mean China is gaining a huge intellectual edge. So I don't want China to be a big bogeyman. So the bottom line is there a strategic vulnerability? Well, I think the answer is they had a brief window in which they could manipulate the market for political gain. And so in this alleged embargo case, the New York Times wrote that Japan suffered a humiliating defeat. And I don't really think it was that big a humiliation because it didn't matter in the end. So Japan gave back the captain of a fishing trawler that was badly behaved to the Chinese. They didn't put the guy in prison. They gave him back. But China did not get the islands. The islands are still administered by Japan. The international legal status of the islands has not changed. No country in the world said, oh my gosh, China has leverage in rare earths. We're going to recognize China's claim to these disputed islands. They got very little for all of the hoopla over rare earths. And it turns out in peace time, in normal situations, China has a big role in the industry. But there's a complete supply chain outside of China. It's not very big, but for high priority uses, if push came to shove, you can do pretty much everything you want to completely leaving China out of the picture. And the question is, so in peace time when China's offering things cheaply, you buy from China. But if China wanted to mess around, do you have alternatives? And the answer is yes. So I would say rare earths are a valuable commodity. I think the market's growing. I think it's a very exciting product. It's very salient products. I think there's money to be made in this market. I think many investors are going to lose their shirt because there are 200 companies running around and not that much room for that many companies in the market. But somebody, not sure exactly who, I have some ideas, but I'm not going to forecast. I'm not a crystal ball guy. Neither is doubly, he says. But somebody's going to make a lot of money. But that's different from strategic. And so I'll just leave you with this. I wish there was a better cover, but on Monday I had a report published by the Council on Foreign Relations in the United States. You can find on this website that talks about some of these strategic issues, goes into some more detail anyway. If you're interested, I hope you'll look up the council paper and we're happy to talk more and answer some questions. George Brown from the Security College. I thought I might invite you to expand a little on how you're thinking about national security. It almost seemed like you were saying national security in this context equals strategic defence needs. And I imagine it isn't quite as narrow as that. So can you just maybe give us an idea of what you've got in mind when you talk about when it comes to, when it comes to a weaker meet our needs. And that might prompt a bit more discussion too. Sure. Defining national security, not easy. Somewhere in the mix, there probably are prosperity concerns somewhere in the mix. If somebody can bring your economy to its knees in the short term, you want to prevent that as a protection against threats to national security. The truth in rare earths is there's a whole range of essentialness in the consumption of the products. So you can go online, if you want, go to Amazon, I assume in Australia, not just in the United States. And you can order yourself some rare earth magnets that are a toy for your desk. Like an executive toy that falls murder and you don't want to snap together and they're really cool. We don't really need those, right? They're kind of cool, right? Or fancy headphones, you know, Dr. Dre's company Beats Inc. uses a fair amount of rare earths in their headphones. That's not national security. I mean, it's nice. Don't get me wrong, I have a nice headphones. I just flew across the Pacific and I'm glad. But you can get rid of a whole lot of the important demand if there's a price spike or a problem or someone manipulating it. And it's clearly not a national security threat, it's an annoyance, right? Now it's not just defense needs that might be noticed by politicians to the point where they would think it's national security, right? But if you're trying to think of an interruption in the market, a disruption in the market that's big enough to qualify as national security, it's got to be pretty big. So defense needs in the United States, Gary, for example, element by element, but generally they're less than 10% of total consumption, right? And there's just enough rare earths sloshing around that even moving beyond defense to other things you might think of as critical needs, you can satisfy that with stuff that's sloshing around and with on-the-fly innovation. This is Bolton from the Fenner School, which is the environmental area of ANU. I was just wondering if you had any comments about the environmental impacts of mining rare earth minerals. And if that presented any problems with China, you may hear about these environmental rights and things. I'm not exactly sure where these are located within China and if that has any importance at all. Thanks. It has a big impact within China and they recognise that. But the rare earths are so important to them that the pace at which they're enforcing that environmental, better environmental standards is very slow. Particularly now we realise that illegal mining is such a large portion. I think recent equipment manufacturers will put more pressure on China to reduce the amount of illegal mining that's taking place. Keith Bradshaw, you're probably aware, did an excellent series of exposure articles on the impacts of illegal mining. China's need to create jobs and social harmony sometimes means that the environment comes second, but they're certainly recognising now that they can't neglect it any longer, but it's going to take a long time to correct that. In the West we do have different standards. They are raising the standards in China. For instance, some of the emission standards, some of the standards with respect to water are higher than they are in Europe and they make a lot of that. But they tend to enforce it fairly strictly on the companies where they have foreign ownership, like Molycorp has subsidiaries in China. So there's Rodeo and Solvay and so there's some of the Japanese companies and they allow the Chinese companies longer to meet those standards. So in answer to your question, it is a concern and it's being rectified, but not as quickly as we would like or probability. I'm going to add one quick thing about the US side of this, which is also a lot of controversy on the environment in Malaysia. Many people take Molycorp fact closed down in 2002. Molycorp that mine in the US was open for about time, closed for a few years and now it's reopened. And they associate with environmental problems because kind of approximate cause at the end there were some environmental incidents that they didn't want to spend the money given the market situation to ameliorate at that time. But Molycorp has one of those innovation areas I talked about. They're using some different processes now that involve, say recycling of some of the assets that are used in separation or a better way of disposing of some of the waste that they have to take out of the waste so that it doesn't blow in the atmosphere as easily or a series of things that got new technology that is not widely used internationally. And they claim not only is this better for the environment but it's cheaper. The result of this is that we'll see the proof in the pudding as the market competition takes place but their claim is that their production costs are now lower than many of the Chinese production costs based on their environmental improvements which is a huge step that it actually turned out to be true. Thanks, we've got to throw it to you. Do you have a question now? Yes, my name's Richard Arculis. I'm with the Research School of Earth Sciences here at Yan Yu. I've got a couple of questions actually you might grab. The second one is unfair. But the first one is an investor. The illegal mining sounds really quite attractive. There's an opportunity to make lots of cash if we could get into it. But the second one is there another metal or metals that you think are closer to your definition of strategic vulnerability such as the platinum group metals? If you're a consumer of rare earths, the illegal mining, especially the parts of China, I don't know if they would want to say this or not, in southern China it's the most mobbed up part of their rare earths business and that's the part of their rare earth business that produces the things that we think are scarcer and we're more worried about to the southern Chinese or where they produce the heavies. And so the fact that the government can't control the illegal mining of precisely the things that they might be able to get leverage out of if they could control it suggests that the consumers, now nobody wants to rely on illegal mining and it's not really the same because you don't know if that's reliable supply. What if they did successfully crack down on organized crime? But the fact that it's so hard to crack down on organized crime suggests either it's a pretty reliable supply of heavy rare earths and that needs to be more comfortable on the demand side. Are there other things that are real vulnerabilities in the economy? Yeah, I mean from time to time like these things pop up but in general they're fleeting and are easily exaggerated. So in just a few years in the United States we've gone through panics on national security grounds about titanium supplies, about perillian supplies, now about rare earth supplies. There was a mini one about lithium that was coming and going and no one knows what it was really doing. So these things all turn out to be not as big a problem as people were. Like we've never had one that's turned out to be, like never is a long time. So I can exaggerate a little bit when I speak. But the answer is I'm not freaked out, right? And if you find specifics there are policy tools that you have available but you should hesitate to use them because I really do believe that not just government is looking for this, but business is looking for opportunities. Like when there is concentration in the market somebody thinks I can make a lot of money here and that the problem is the way. Well, I do like that definition of organized crime, the positive spin-off. That's why, that's wonderful. As a result of what happened with rare earth there's been a big change in procurement procedures in many of these industries. If you simplify it and you say there's nine steps between the mine and the showroom, prior to 2010 people only dealt with somebody two steps down the supply chain. Once people realize, I mean people in BMW didn't really know quite what rare earths were. They sort of did. But somebody bowls into their office and says well as a result of what's happened in China the price of the motors that puts the windows up and down and the seats back and forth is going to double next year and we're not sure whether there's going to be enough in two or three years time. There was a radical change in procurement procedures and now in the larger companies whenever there's a new product comes out people look at the whole as a supply chain. It was very interesting. In 2012 I went to Europe on a visit and in three major companies they changed their procurement director, vice president whatever you thought they were and the person in charge was somebody in each case was somebody who come from a search who understood the total supply chain. You know what happened at the front in terms of mining right the way through and we'd like to hear of the three, two of them were women and they all came out of research. So now particularly at General Electric whenever they bring out a new product a new piece of equipment they have a look at the total supply chain and say this great innovation if we put this in practice is this going to cause a problem in the world are we going to grossly inflate prices and it is something that's now very much part and parcel of development of a new product. So I'm afraid to be a procurement director you no longer have to be a smart ass lawyer who can negotiate a good contract you've got to understand the supply chain and negotiate with everybody along the supply chain to make sure that your process is the most efficient. Hi David going up, I guess I'm here really to satisfy personal securities great presentation I really enjoyed it and very good economics I think. Look two questions I guess one of which is illegal supplies are they people running a legitimate mind diverting part of their production or are they separate holes in the ground completely illegitimate and two what are the barriers to entry for other people opening up a mind to compete in this market. As Eugene said most a large part of this legal mining is in the south and it's where they mine these very high-value rares they don't get into too much detail the rares are clearing the ground in clay what they do is they inject acid into the ground and they dissolve the rares and come up to the surface and then as a result they pollute the water sources and because they're high-value it's they mine the sites are not very big so they can go in and put the pumps in and all the structures and do it overnight and move within a few days and it's it's illegal and it makes a lot of people a lot of money I really think that we've got to perhaps persuade the Chinese government if they increase their production quotas there's less incentive for illegal mining now whether those production quotas are less than they should be through incompetence or whether it's a deliberate strategy because they know the illegal material is a lot less and therefore it's helping the Chinese the wholly-earned Chinese companies to compete very successfully with the foreign companies who really have to tow the line in terms of buying approved material it would be hard to say so various entry to enter a new mine around the world again there's a punch about it I thought it was unanswered all of these 200 people with projects they're dreaming they're bringing to fruition they all have a story about how they have a new prospect there are lots of places around the world where the cliched it's in the newspapers all the time now is rare, it's not really rare they're sort of everywhere you go outside and they throw up and you'll find in a non-commercial concentration but to start out from scratch to get all the to get the art of doing it just right takes a long time and a lot of serious backing and there are problems with many geological problems other people in the room are much better qualified to answer that I but a lot of rare words are associated with various radioactive elements which gives trouble to some of the mining prospects or they have geology where people know there's a rare earth but it hasn't been processed in commercial scale from that geology in the past so there's new things to figure out which means that there are substantial barriers to entry for a greenfield mine in a lot of places but there are also a lot of non-greenfield mines there are ones that are sort of closer to commercialization that you could build on the way I sometimes like to look at these there's a ton of lithium in a cubic kilometer of sea but that doesn't mean it's economic to extract the lithium and what we have here is a whole lot of rare earth resources relatively few of which are proven to be economic Thank you, Tony Harris I suppose I'm an interested amateur I have two questions, one for each of our speakers the first perhaps is an easier one I understand there's a mine in Mongolia the largest producer of rare earths which produces it as a byproduct of iron ore and the economics of iron ore is changing so does that affect that large producer of rare earths the second question to Eugene we shouldn't be surprised I suppose that everyone wants to be a monopolist and China in this area has got more advantages than most but if you try to hypothetically adjust for the 40,000 tons of illegal production which is presumably what China is trying to do as well would the outcome be much different than we've seen so far Tony, correct Bayonet where it's a mine in Inner Mongolia it produces rare earths as a byproduct of an iron ore mine it produces about 60% of China's rare earths and about 70% of the world's light rare earths China's production quotas are 105,000 tons of which 60,000 tons are allocated to Bayonet two years ago there were a whole series of articles about the problems associated with the mine and their control of the tailings the Chinese government has assured us that they're investing money to make sure that the operation of the mine is not in jeopardy as a result of those and they're carrying out a lot of remedial work on the tailings but more recently the price of iron ore could well impact on Bayonet when the price of iron ore was 130 to 150 dollars a ton the percentage of local iron ore that went into their steel making was about 70% when the price fell to 100 dollars a ton the amount of local ore that was used was about 50% so one would assume that as the price of iron ore falls the company that owns the mine is called Bautau iron and steel and rare earths so they produce steel and rare earths so as the price of iron ore falls for their competitors they have to compete so most of the Chinese steel makers are tending to use more and more foreign material and if they do that then they mine less so there could be an impact theoretically there could be an impact on the supply of rare earths I don't think that will happen I think what will happen is they will continue to mine sufficient amount of material to generate the rare earths that they want but the good news is for those people outside China is this will inevitably add to their costs so it should enable the differential between their costs and their costs to be reduced so all strength to the iron ore producers in the Pilbara might well help some of our rare earth producers by putting pressure on the cost of ban over to try your question on taking account of illegal production in your behavior as a monopolist the Chinese government wants to control the industry and their priority is to stop the illegal production and I think they've been saying this for 20 years there's nothing new here it's just hard to stop so in principle what a monopolist would do an economics model would be to say at whatever price I'm setting I need to take account of the competitive fringe let them peel that off in the market and say now how much demand is left for me as a residual demand as a monopolist and then I'll set my production accordingly the fact that there is a competitive fringe doesn't stop you from gaining market leverage from gaining rents but it probably does stop you from getting geopolitical leverage in terms of the ability to do a complete cutoff to bring someone to their knees or to threaten to be able to do that to make them cave in on something that matters to them if you imagine the kind of scare stories that people told in the U.S. press at the time in 2010-2011 they were talking about well if the U.S. is in a conflict situation with China in the future not that we would ever think that could happen because we like China but if that ever did happen if you're in a conflict situation what if they cut off our rare earths at that moment with magnets to build more missiles to shoot at China and that was the kind of story they were telling and the first thing to point out is we already have a lot of missiles to shoot at China and those missiles wouldn't stop working just because we couldn't buy rare earths at that point but also the amount that we would be buying for new missiles to shoot at China is not you know it's not enough to overwhelm the other sources of demand so again, it's not getting in a national security sense it's maybe getting you China gets to earn extra money and as consumers we resent paying the extra money if they manage to take account of illegal production Lou Ellen Hughes from the Crawford School here at the ANU we are on camera so I thought I'd give both of you the opportunity to talk about what you thought and the idea of the issue what you think the optimal policy should be for governments both to Dudley in Australia and to Eugene in the United States you could think about that in different ways it sounds like national security should be relatively disinterested and the WTO is a useful avenue to think about issues of market power but national security policy would be one area you could think about reducing the market power kind of dealing with monopoly issues might be another area in which you think national policy might play a useful role in either country and lastly for industry policy that is, you know, is there an opportunity here to secure some of these rents in either country and if so what would be the optimal policy what part of the supply chain perhaps would be useful for doing so thank you I'll go first and then Dudley can save Australia so so the traditional thing the United States does when they get in a panic about any product really is have the government initiate a program to buy a bunch of stuff so we're worried about alternative energy the government says let's give a huge tax credit to people who install solar panels this month and the electric generating companies create giant solar fields that they're going to use to generate power and then eventually people get tired paying the subsidies, they turn off the subsidies and that electric facility goes bankrupt, it gets closed down because it was only at current technology it only worked with the subsidy in rare earths we managed not to do that our instant response was not the price is really high let's buy ourselves a big stockpile of rare earths now that the price is high and it was kind of a small miracle that happened but what we did instead which makes more sense so in terms of a reasonable policy is we did spread around a relatively significant increase of money for R&D in the rare earths business for new production technologies to make it cheaper for new uses that used less rare earths a spread of the things that government in a fairly simple understanding of the government's disadvantages of spending money in an area where you could easily tell a quite reasonable story about a market failure that justifies good government spending would be at the front end of the R&D process and that's a very reasonable thing to do in areas where you identify critical materials short calls when people say you should have a policy to expand production capacity which the United States has actually done in some of the other metals crises we've had usually that means government subsidizing expanding production capacity with current technology which would have already existed if it was good competitive technology so it's a money-losing proposition to subsidize that better to subsidize developing the new technology for the future think about the future not the present and the other thing to say about new technology that's spreading the money around that way to increase plant capacity at present as a response so that would eliminate the monopoly by increasing production capacity outside the monopoly area is that again businesses aren't dumb right if there's a nickel to be made by attacking the monopoly through new entry over here we have robust capital markets molly corp you know it looks like molly corp did very well just before the peak of the crisis molly corp raised $500 million to fund their initiative to reopen the mine there was a lot of money they got from private markets because people were excited about demand prospects in their earths it turned out just a little bit later the price skyrocketed and molly corp felt bad because they said if we just waited until October instead of August we could have gotten a billion dollars and then the price crashed and then molly corp was like thank god we got $500 million when there's an opportunity the market works and molly corp became very concerned that the government was going to spread around a lot more money and develop competitors to molly corp who've done the right thing by going to capital markets and getting money to invest so the long answer is short answer that was a long way of saying investing R&D at an appropriate level from the government otherwise be very careful I would support what Eugene says that governments are no good at picking winners they've invested in jean stockpath a long time ago and lost a lot of money and invested in other companies in the states they've actually put a lot of money into something called the critical materials institute and they've been promised $25 million over 5 years and that's got to be matched by industry and it's for research but it's not it's talked about as being part of research but it's not research the money that goes into the projects they do have to go into innovation to reduce the dependence on rare earths and critical materials and improve the efficiency of use there's no money at all for basic research and I think that's a great approach so in Australia what do I think we should do we certainly should not be picking winners I think we should be having some initiative like they have in the US where we support research in our case probably to support more research into developing processes to process our ores and arcane resources to receive funding for all rare earth companies so they've all benefited from that and I think that should continue apart from that I think that the government should be making every effort it can to make sure we have a level playing field and I talked about establishing independent supply chains supply chains that are independent of China and where the government can it should be facilitating discussions between the original equipment manufacturers and the primary producers and identifying people in the supply chain in between to come to a narration whereby we can have a supply chain that's independent of China but Australia's role should be encouragement and probably funding of research but certainly not championing a cause unduly or putting a whole lot of money in trying to pick a winner