China extracts over 97% of all rare earths. These minerals are at the core of U.S. defense, industrial, and consumer goods technologies. They are used in everything from mobile commucations and sensing devices to wind turbines.

China has increased its export controls to feed its domestic demand. This will directly impede production by manufacturers like Intel (INTC -0.73%), and Siemens (SIEGY -0.65%).

One U.S. company, Molycorp (NYSE: MCP), is poised to soak up the coming worldwide rare earth demand shortage and supply the Siemens and Intels of the world.

How important are rare earths?
Rare earth elements, or REEs, include lanthanides, tantalum, niobium, yttrium, and scandium. Among the lanthanides, neodymium and samarium are used to make magnets for motors and turbines. Lanthanum is used in semiconductor chips for memory and processing devices. Tantalum is used to make steel even stronger and lighter in weight.

Defense and cyber-specific applications include jet fighter airframe and engines, guidance systems, space-based communications, and anti-missile defense.

Siemens makes energy products like transformers for electric transmission, turbines for wind power, and motors for electric transport systems. Each of these products requires rare earths. For example wind power turbines use neodymium rare earth magnets to increase efficiency and synchronization with grid connections especially at low wind speeds.

Intel uses rare earth lanthanum oxide in memory chips, transistors, and other information handling integrated circuits. WIthout rare earth layers in semiconductor devices, it would not be possible to achieve further miniaturization required in mobile telecommunications, computing, and information storage devices. Intel is a supplier of custom semiconductor devices to Siemens.

How much rare earth is there?
Many rare earth elements, or REEs, are more abundant than copper, gold, and platinum. What does make these elements "rare" is the difficulty in discovering deposits, extracting usable ore, and processing into oxide concentrates.

China leads the world in extractable reserves at 55 million tons. It also produced 95,000 tons in 2012. In contrast the U.S. has 13 million tons of reserves and produced 7,000 tons in 2012. The U.S. has more reserves than India, Brazil, Australia, and Malaysia combined. California holds some of the largest deposts of REEs. Other reserves are found along the eastern seaboard and in Wyoming, Colorado, Idaho, New Mexico, Tennessee, and New York.

Over the last 15 years the U.S. has become completely dependent on imports of REEs, mainly from China. Low extraction and processing costs along with government incentives has concentrated REE production in China.

China has begun to concentrate its rare earth production in several provinces. Producers are now required to have government financial and environment audits. Only licensed mines can produce elements. Traders must now have a minimum registered capital.

Security, supply and demand
According to the U.S. Geological Survey over 110,000 tons of REEs were produced worldwide in 2012. Production meets most of the demand with inventories of about 2,000 tons the rest. U.S. domestic consumption was only 5,700 tons in 2012. At that rate, and not accounting for the diversity of mineral demand, it would take over 2,000 years to deplete U.S. reserves.

World demand is projected to rise to at least 160,000 tons annually and will grow by more than 7%. China's demand alone will rise to 105,000 tons annually and grow at 8%. Capacity outside of China is coming on line in the U.S., Australia, and Malaysia as China begins to consume more rare earth domestically. This capacity, not only for extraction, but also for concentrating oxides, alloying metals, and fabricating parts, must reach at least 50,000 tons per year from non-Chinese sources. Only about 20,000 tons are available now.

Defense and industrial demand requires heavy rare earths. Defense budgets for new ships and planes are currently under a two-year lockdown. Refurbishment and upgrading have been authorized. Only about 5% of rare earth demand in the U.S. is attributable to defense applications.

Rare earth prices have been dropping, along with other commodities for the past five years. Chinese supply restrictions, along with fact that it takes anywhere from 5-7 years to develop a new mine, should be enough to strengthen world prices or at least keep them from declining further. Rising prices should help the case to open rare earth mines and processing facilities outside of China.

Rebooting U.S. production
Molycorp owns a mine in Mountain Pass, CA, that was shut down over 10 years ago due to soaring extraction and production costs in direct competition with Chinese mining companies. Molycorp reopened the mine in 2012 and expects to be at its full capacity of 19,000 tons in 2014. Molycorp also operates a separation plant and sells rare earth concentrates and refined products from newly mined and previously mined above-ground stocks.

With China restricting rare earth materials for more domestic consumption, and with a U.S. domestic demand of about 6,000 tons annually, Molycorp will be able to export most of its production. If non-Chinese sourced rare earth supplies are tight, then over the next five years prices should rise, fueling Molycorp's revenue growth, payback for mine investments, and profit to plow back into more mine development.

Molycorp is not alone, though. Ucore is breaking ground in its Alaskan Bokan Mountain mine. This mine will not only extract uranium ore, but also the heavy rare earths needed in defense, industrial, and consumer goods technology. Within 3-5 years Ucore could be able to produce 10,000 tons annually. World supply net of Chinese production may still be short enough to buoy prices for further mine and processing expansion.

Perhaps there is now enough incentive to encourage other U.S. companies to join the rare earth business. Until then, Molycorp and Ucore can enjoy the profits of being the only companies capable of meeting technology demand in U.S. domestic and export markets.