AILSA CHANG, HOST:
Now we're going to take a look at Beijing's near monopoly on refining rare earths. Emily Feng reports on how China developed a stranglehold on them.
EMILY FENG, BYLINE: Rare earths are now so coveted, some people are stockpiling them in vaults.
LOUIS O'CONNOR: Make no mistake - I mean, there's 3 1/2-meter walls and doors and armed security.
FENG: That's Louis O'Connor. He helps run a firm where investors can buy into stocks of rare earths he stores in an underground vault in Germany. China put export restrictions on seven types of rare earths this spring in response to U.S. tariffs, and O'Connor says he and his investors felt the crunch immediately.
O'CONNOR: They're installing what you might call a tap system where they can turn that tap on and off.
FENG: And when China turned that tap off this spring, the U.S. felt the pinch. But as late as the 1980s, however, it was the U.S. that dominated rare earths at a mine in California called Mountain Pass. Mark Smith used to be an executive at Molycorp, a rare-earth-producing company there.
MARK SMITH: At its heyday, it actually was producing 100% of the europium - which is a heavy rare earth - that the world needed.
FENG: Then China saw the potential of these minerals. They wanted to learn from the U.S. So Smith says starting in the 1960s, Chinese executives began visiting Mountain Pass.
SMITH: We toured them. We explained what we do, allowed them to take pictures and everything else. They took it back to China.
FENG: Then Chinese companies ramped up their production and undercut global prices. But the industry in China at the time was highly unregulated and polluting. Here's Smith again. He frequently visited China during this period.
SMITH: They would mine the side of the hill. They'd pour five-gallon buckets of sulfuric acid or hydrochloric acid, pour their ore in it and let that sit and stew for a while, and then they'd take the liquor back into the five-gallon jugs.
FENG: All of this, of course, created huge environmental problems. And by the late 1990s, Beijing had had enough. It started imposing production and export quotas to stop price wars, limit pollution and limit foreign involvement. Rod Eggert teaches mineral economics at the Colorado School of Mines. He explains these quotas created two sets of prices. These controls also had the unintended consequence of creating a thriving smuggling industry...
ROD EGGERT: And so there was an incentive for undocumented or illegal or unsanctioned exports.
FENG: ...To get around export limits. Academics estimate up to a third of the country's rare earth products in the mid-2000s were illegal - smuggled out of China. Plus, in 2014, the World Trade Organization ruled against those export limits. But China was already shifting tactics.
(SOUNDBITE OF ARCHIVED RECORDING)
UNIDENTIFIED PERSON #1: (Speaking Mandarin).
FENG: China was consolidating. In 2012, it started policing smaller mines, even blowing up illegal operations.
(SOUNDBITE OF ARCHIVED RECORDING)
UNIDENTIFIED PERSON #2: (Speaking Mandarin).
FENG: China closed down hundreds of illegal mines and refineries, then formed just six supersized, mostly state-owned firms, nicknamed the Big Six, in China. China could now control both supply and price through the Big Six. And today, Chinese companies basically set the price for rare earths.
(CROSSTALK)
FENG: But American businesses have been trying to find ways to overcome China's dominance.
UNIDENTIFIED PERSON #3: The stuff at the bottom is that chemical that I was talking about that allows you to separate...
FENG: Companies like this one, called Phoenix Tailings - it's a Massachusetts startup that takes mining waste and extracts the rare earths inside.
I just - I love that you have a vat labeled acid.
(LAUGHTER)
FENG: I will not touch that.
UNIDENTIFIED PERSON #3: Please do not.
FENG: They're one of just a handful of American companies prepared to refine rare earths. Here's Nick Myers, one of the co-founders.
NICK MYERS: Our primary customers are in the automotive sector.
FENG: But like other American rare earth companies, they say it was hard to get capital and to gain traction, in part because China has so much market share. Then, this year, things changed.
MYERS: Definite tone shift - I think what happened is the folks at the big automotive companies or defense primes realized that they had told their bosses that China would never shut off the supply for them.
FENG: But this year, China did shut off supply. Phoenix Tailings got a big round of investment, and they and other American companies are hoping to finally catch up to China.
Emily Feng, NPR News, Burlington, Massachusetts. Transcript provided by NPR, Copyright NPR.
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