Sunday, November 07, 2010

Pentagon's Plan For Rare Earth Shortages

The U.S. Department of Defense is preparing to release a study of rare earth metals and their importance to national security. This study comes in the wake of findings from the GAO and other sources highlighting the critical role that rare earths and other “technology metals” play in U.S. national security. Media reports indicate that the DOD report will downplay the impact of rare earth shortages on US military applications. 

On Oct. 8, 2010, the DLA Strategic Materials section released its implementation plan for the transformation of the National Defense Stockpile (NDS) into the Strategic Material Security Program (SMSP).  It discusses process, milestones, and program criteria but does not mention rare earth metals as an acquisition objective. The DLA Strategic and Critical Materials Report for FY 2009 lists the materials stockpiled in DLA’s inventory on page 57. The inventory does not contain any rare earth metals

The coming DOD study apparently contradicts the GAO study from April 2010, which clearly indicated that major defense contractors were canvassing their supply chains for assurances of rare earth metal supplies, and that the Hellfire missile in particular is dependent on a special chemical available only from China at present. The National Defense Stockpile has been shrinking since the mid-1990s as policymakers have authorized the sale of resources no longer deemed critical to national security. Washington allowed this to happen without considering how strategic competitors could affect the availability of resources. America's potential peer competitors are not so short-sighted.  China is considering the creation of its own strategic metals reserve. 

The private sector is not waiting to seize the opportunity posed by latent demand for rare earth metals. Goldman Sachs helped finance the reactivation of the Mountain Pass mine in California, formerly a leading producer of rare earth metals. It now forms part of Molycorp (MCP). Another company, Rare Earth Elements (REE) has seen a massive increase in its share price this year due to investor excitement (panic?). Most other rare earth miners and refiners, like Great Western Minerals Group (GWG.V), tend to be small and unpublicized. That may change very quickly if the U.S. government is serious about addressing its potential rare earth supply problems.

Full disclosure:  No positions in any stocks mentioned.