China Sole Manufacturer of Material for U.S. Missiles (More crap of which we were unaware?)

It was in his 2003 State of the Union Address that President George W. Bush expressed his administration’s objective to “strengthen global treaties banning the production and shipment of missile technologies.” It was thereafter, between 2003 and 2004, in which the Committee on Foreign Investments in the United States (CFIUS) allowed the last manufacturer in the U.S. that provided a key element instrumental in cruise missile guidance, to be relocated to the Peoples’ Republic of China. During this week’s U.S. visit of China President, Hu Jintao, and his meetings with President Bush and his advisors, it would be apropos to revisit a strategic corporate deal which occurred over a period of several years. With its finality in 2004, the U.S. now remains totally dependent upon China for key rare earth metals and their production necessary in the manufacture of the most crucial of U.S. military warfare.

The CFIUS decision in January 2006, regarding the approval of the Dubai Ports World Company, to take over port operations of the six largest East Coast ports in the U.S., not only raised many U.S. Congressional eyebrows but set off a strew of newly proposed legislation, to include more transparency between CFIUS and the U.S. Congress. But CFIUS has long had a precedent of approving such business transactions, and the ports deal was only the latest of such. As the deal approval became known to the public via AP reporter, Ted Bridis, in February 2006, apparently even he was more in the loop than the lawmakers on Capitol Hill. However, there have been close to 2,000 other deals approved by CFIUS since its inception in 1988, many of which should have involved and concerned the U.S. Congress much sooner.

It is the lack of accountability of the secret CFIUS committee, presided over by the Secretary of the Treasury, which has only of late concerned the U.S. Congress, and with its machinations just recently disclosed to the public. And it was the Dubai Ports deal which exposed the seemingly arbitrary fashion, and unanswerability to any other branch of government which was disturbing. For the decisions CFIUS makes ultimately becomes the responsibility of the U.S. federal government, while possibly compromising its best interests, including U.S. national security.

As it is, the Department of Defense has problems procuring necessary equipment and manufacture of parts from foreign entities, where national security must be weighed over acquisition of parts from offshore. Yet at the same time, the U.S. government has pushed the concept of global trade, often in direct conflict with the protection and national security of the U.S.

Producing powdered neodymium-iron-boron permanent magnets is critical to enabling control of aircraft and more specifically cruise missiles guidance systems as well as the Joint Direct Attack Munition or JDAM bomb, used prominently in the 2003 bombing of Baghdad, which preceded arrival of U.S. ground troops there. Magnequench UG, although still headquartered in Indianapolis, IN, is the sole provider of specialized magnets for military aircraft systems. But it closed down its manufacturing arm permanently in 2004 and finished relocating operations to China at that time, with its operations now solely controlled by Chinese companies with direct ties to the Chinese government.

Magnequench magnets are produced from a unique patented process of sintering specialty metals. They are used by various electronics and aviation companies, but Magnequench’s primary client is the Pentagon, leaving the U.S. in a rather precarious position with China. Enjoying 85% ownership of the world’s market of rare earth metals, required for its magnet production, Magnequench’s factories are now located in Batou, China. It is there that the world’s only operating rare earth mine exists. Thus, China now owns a monopoly on the manufacture of missile magnets which the U.S. military is dependent upon for its most sophisticated technology and weaponry.

Magnequench’s relocation culminated following several years of what started out as a General Motors subsidiary company in 1986. General Motors was responsible for the development of the manufacture of a permanent magnet material in the early 1980’s and began its production in 1987. In 1995, Magnequench’s majority interest was purchased from General Motors by the Sextant Group, which was comprised of two Chinese companies, San Huan New Material and the China National Non-Ferrous Metals Import and Export Corporation. It is reported that few in the industry or in the federal government knew which companies formed Sextant at that time.

Three years later, after commitment from Magnequench CEO, Archibald Cox, Jr., that its two Indiana-based plants would not be shuttered, its assembly line for magnets in Anderson, IN was shipped to China. In 2000, GA Powders, a subsidiary of Magnequench, originally a Department of Energy project, was relocated from Idaho Falls, ID to Tianjin, China. And in 2004 Magnequench’s other Indiana plant in Valparaiso, IN, responsible for production of elements of the JDAM bomb was shut down and shipped to China. Although there was an “agreement with GM” from Cox that the plant would remain in Anderson, IN according to Clyde South, a negotiator for the United Auto Workers Local 662, Magnequench proceeded to eliminate all of its domestic manufacturing jobs anyway.

Under the 1988 Exxon-Florio Amendment to the Defense Production Act, President Bush could have ordered San Huan New Materials to divest its holdings in Magnequench, as it manufactured a strategic asset. The President was pressed to do so by Congressman Even Bayh and Congressman Pete Visclosky, both of Indiana in 2003, but the President chose not to intercede. In 1990, however, President George H.W. Bush ordered China’s government-owned National Aerospace and Export Company to divest its interest in Mamco Manufacturing of Seattle, WA. At that time it was feared that China would use Mamco to acquire its jet fighter technology.

In addition to this particular example of guidance missile manufacture, the acquisition of titanium is also becoming a problem for the military in procuring spare parts and for its manufacture of its aviation vehicles. The Pentagon continues to have conflicts with the Congress on waiving the Berry Amendment. Enacted in 1941 and updated in 1972, it requires that specialty metals, including rare earth metals, titanium and super alloys, be manufactured in the U.S. for its weapons systems, unless otherwise unattainable. But as more and more American companies relocate offshore, the lines drawn become less and less clear.

And while not appropriate to put the blame of the offshoring of strategic assets on any particular President or branch of government at this time, it is appropriate, however, to see how various factions of the three branches of government, along with the loosening of corporate and industry regulations over the years, have cumulatively jeopardized the interests of the U.S. It is important that lawmakers therefore not become hawkish over the observance of our laws only when it becomes convenient to win political capital, but to how best serve the interests of the U.S. For the ramifications of business as usual when it comes to strategic assets could do irreparable future harm to America’s most vital asset, that being the American people.

Some background info from Great Western Minerals Group on Rare Earth Elements:

What Are Rare Earth Elements (REEs)?

The rare earth elements are also known as lanthanides and include the 15 elements in the lanthanide series of the periodic table plus yttrium and scandium. The better known elements are cerium, lanthanum, neodymium, praseodymium, gadolinium, europium and samarium.

What are REEs Used For?

About half of the rare earths produced are used as catalysts in the petroleum and automotive industries. The other half are used in a variety of high-technology applications including permanent magnets used in many types of motors, computer data drives and magnetic resonance imaging instruments; polishing media used in manufacturing microchips and many types of precision optical lenses; phosphors used in television screens, monitors and lamps; as a "doping" material in fibre optics to increase bandwidth; as an alloy with other metals to remove non-metal impurities; in rechargeable batteries; in fuel cells and numerous other applications that take advantage of the REEs unique physical qualities.

Where Are They Found?

In fact, the rare earth elements are not really rare. Gold, for instance, is much rarer and even lead is less common than some REEs. What is rare, is their occurrence in economic quantities compared to other mineral commodities. The REEs are usually found in commercial quantities in the minerals monazite and bastnaesite. China produces over 80% of the world's rare earths - 77% of world production coming from one mine. The United States used to produce approximately 6% of the world's supply from one of the only in-situ rare earth mines in the world at Mountain Pass, California. Mountain Pass, the only producing mine in North America, has recently closed its separation plant, and reduced production of concentrate.

The Hoidas Lake rare earth showings are somewhat unique in that the REEs are found in the silicate mineral allanite and the phosphate mineral apatite as opposed to the monazite and bastnaesite mined in China and California. Should the project prove feasible, Hoidas Lake would likely become the only producer in North America operating at full capacity and join Mountain Pass as one of the only in-situ rare earth mines in the world.

Are REEs Valuable?

In a word, yes. Typically, once the rare earth ore is mined and concentrated, it is further processed (either by the mining company or a third party) into a mixed rare earth powder (as oxides or chlorides for example). This mixed rare earth product can be sold as is or processed further by separating the individual REEs into a purer product (ie cerium oxide or neodymium oxide). Depending on the purity, oxide powder, for example, varies in price from US$3.00 per kg for cerium oxide in a one tonne lot size to US$15,000 per kg for scandium oxide in 100 g quantities. The individual powders can also be further refined into metal and, depending again on purity and lot size, can range in price from US$15.00 per kg for lanthanum metal to US$30,000 per kg for scandium metal. To put this into perspective, gold is currently worth about US$8,800 per kg. However, a high-grade gold deposit might have a gross value of only US$100 per tonne, but a high-grade rare earth deposit could easily have a gross value of US$1,000 per tonne or more.

Who Consumes REEs?

The major consumers of rare earths are Southeast Asia (Japan, Korea, Thailand, China) and the USA. The USA is the world's biggest single consumer of rare earths at approximately 27% of the world total. The USA currently imports over 75% of its RE requirement with the value of rare earth products consumed in the USA estimated in excess of US$1 billion per year.

Could A Saskatchewan-Based Rare Earth Industry Compete With China?

Absolutely. Great Western Minerals has established contacts in Japan and the USA who have indicated in writing that they would be prepared to purchase significant quantities of specific rare earth products from a North American producer in order to reduce their reliance on one source. Quality, proximity to market and security of supply are the major selling points with both Japanese and North American consumers.

As China gears up for their own huge industrial and technological revolution, they are consuming a greater percentage of their own natural resources internally and importing more and more metals etc from the West. China will undoubtedly increase their own use of rare earth elements paving the way for a North American producer to become the major source of rare earth elements to Western consumers.

Saskatchewan has no shortage of global marketing experience. Uranium, potash and farm machinery are some of the provinces well-known export successes. A rare earth industry would be well supported in Saskatchewan, from mining, through processing, right down to the research and development of new applications at the research facilities available in the City of Saskatoon.

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