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Followers of the Rare Earths debate, get ready for a feeling video gamers know all too well: Just when you've mastered Level 1, Level 2 hits you with a new quantum of complexity. With a blend of headlines and hype, Level 1 has brought us to an either/or impasse: Either our high-tech economies are about to grind to a halt for lack of Rare Earths - or we're at the brink of a Rare Earths "bubble," with new supply pouring into the market far ahead of demand's ability to soak it up.

That's as far as Rare Earths 1.0 can take us. It's time to step up to Rare Earths 2.0, where geology and geo-politics collide.

Rarest of the Rares

Here's the first ground truth in Rare Earths 2.0: Not all Rares are created equal. Newcomers to the issue are happy to bunch all 17 Rare Earth Elements together, with a pro-forma nod to the Periodic Table. Granted, it may be a bit much to expect civilians to know their Yttrium from their Ytterbium, but inside the industry, it's old news that different Rares have radically different demand profiles - and different market prices.

Rare Earths 2.0 will see careful discrimination between comparatively abundant Light Rare Earths and scarcer Heavy Rares (the designation has to do with the atomic weight of each). With Heavies like Dysprosium - Greek for "hard to get" - the name tells you all you need to know. But the future of Rare Earths will turn on sophisticated projections of which Rares are critical to different technological innovations - photovoltaics and flat-screens, wind turbines, electric car batteries, petroleum-to-gasoline catalytic cracking, to say nothing of missile-guidance systems - and in what volume.

The catch: You've got to mine the full range of Rares before you tease out the particular metals you need. That means gluts in some Rare Earths, punching prices down, which effectively become by-products as demand heats up for the rarest Rares. Figuring out which mines have which Rares and at what cost to extract and refine - a challenge that's still as much art as science - will be the name of the game. Expect it to reshuffle the global list of the most desirable mines, with unpredictable geo-political consequences.

Shovel-Ready Projects?

Rare Earths 1.0 was a simple game: If China's producing 97 percent of global supplies, then it's time to diversify and bring non-Chinese mines into production. Supply increases; Chinese dominance decreases: it's the magic of the market at work. The U.S. Department of Defense report assessing Rare Earths usage in critical weapons systems - due in October, but as yet unreleased - is rumored to rely on this market solution to dampen concerns about scarcity. At least one Congressman on the receiving end of a Pentagon pre-brief - Mike Coffman, lead sponsor of a Rare Earths stockpile bill - doesn't buy it.

After all, in developed democracies, market forces are bound by bureaucratic rules that can turn opening a new mine into a 10-year odyssey. When the old Mountain Pass mine - the California site U.S.-based Molycorp plans to reopen by 2012 - closed in 2002, Rare Earths prices, depressed by over-abundant Chinese production, were part of the problem. The other part: Environmental issues raised by 18 agencies in California alone with jurisdiction over the mine.

In Rare Earths 2.0, will U.S. environmental agencies see the strategic importance of letting miners develop American deposits, even to the strictest environmental standards? DoD may command the most feared fire-power on the face of the earth, but the EPA's lawyers are the Special Forces of bureaucratic trench warfare. As for solar and wind energy, will the EPA stand between the U.S. and the raw materials needed to fashion a Green Tech economy? Savor the irony - and strap on your flak jacket.

"I got mine"

Rare Earths 1.0 saw a lot of talk by policy people about China's chokehold on the market and what governments might do about it. Case in point: Last month's Critical & Rare Metals Summit in Washington, D.C., at which U.S. Department of Energy and European Union officials promised their respective Rare Earths studies would be released "before the end of the year."

In Rare Earths 2.0, the private sector isn't waiting for government studies to tell them it's time to act. Sobered by China's de facto "embargo" of Rare Earths shipments to Japan, Rare users are scrambling to lock up supply, with some pretty inventive partnerships taking shape. Japan's Toyota and Sojitz Corporations are entering tie-ins with Vietnamese Rare Earths claim-holders, while Toyota is pushing to bring a small Indian Rare Earths mine into production in late 2011.

Elsewhere in the Far East, South Korea has announced it will stockpile 76,000 tons of Rares in the next five years - the equivalent of 10 percent of global projected production, including new mines now on the drawing board. In North America, Rare Earth consumer W.R. Grace announced a deal with Molycorp that could lock up a full 75 percent of Molycorp's planned Lanthanum production. In Canada, niche players like Dacha Strategic Metals are building private stockpiles of Rares, a function normally reserved for governments.

Over at the Pentagon, it's touching to see the guys who cut their teeth on Clausewitz demonstrate a faith in free markets that would make Milton Friedman blush. Rare Earths 2.0 will tell us much about the market's ability to override geo-political impulses to uses resources as weapons of economic war.