China's rare earth monopoly: long-term and short-term

In the wake of China's alarming decision to block rare earth exports to Japan, FP Passport published a longer and richer than usual post on whether China is making a rare earth power play, which is a helpful update on the latest global scenario.

As usual, some of the most insightful and prescient commentary came from Geoff Styles, a month ago already:

China's efforts to capture higher returns and more of the value-added for these scarce materials shouldn't surprise anyone; it's basic economics. OPEC tried this strategy in the 1980s, when it built export refineries in the Middle East and bought existing ones elsewhere. This didn't work out very well, because it contributed to a persistent glut of global refining capacity that, with the exception of a few standout years, generally benefited consumers more than producers. China could experience something similar in rare earths, once new, non-Chinese sources are brought online--assuming they are. Mining and processing such deposits entails large capital costs that, once invested, can set up a classic boom-and-bust commodity cycle. Unfortunately, the prospect of a future rare earth glut will be of little comfort to makers of wind turbines, advanced car batteries, and thin-film solar cells for the next several years, at least.

The OPEC comparison is interesting and relevant for the long-term view on rare earths, which are physically not that rare, just difficult and expensive to process. But Geoff is also right that in the short term, China may have a genuine squeeze. And if you believe this report (referenced by FP) that rebuilding the U.S. domestic industry would take 15 years, the short term doesn't look that short after all.