Pranay Kotasthane on the Political Economy of Rare Earths and Critical Minerals

SHRUTI RAJAGOPALAN: Welcome to Ideas of India, where we examine the academic ideas that can propel India forward. My name is Shruti Rajagopalan, and I am a senior research fellow at the Mercatus Center at George Mason University. Today my guest is Pranay Kotasthane who is the deputy director of the Takshashila Institution and chairs the High Tech Geopolitics Programme. 

Pranay co-writes Anticipating the Unintended, a newsletter on public policy ideas and frameworks, and co-hosts Puliyabaazi, a popular Hindi-Urdu podcast on politics, policy, and technology. He is the co-author of - Missing in Action: Why Should You Care About Public Policy, When the Chips are Down, and the graphic nonfiction narrative We, the Citizens.  

We spoke about rare earths and critical minerals, China’s dominance, the gap between India’s ambitions and opportunities, the potential for recycling, and much and more.

For a full transcript of this conversation, including helpful links of all the references mentioned, click the link in the show notes or visit mercatus.org/podcasts. 

Hi, Pranay. Welcome to the show. You’re here for the third time. It is such a pleasure to have you here.

PRANAY KOTASTHANE: Glad to be back, Shruti.

RAJAGOPALAN: You’re one of my favorite people to chat with. The reason I thought we’d talk about this is that the last time we met in person, I asked you, “What do people mean by critical minerals?” You said, “Even I’m trying to figure it out because most of the conversation, when I follow the train of thought, it ends up being the entire periodic table,” which was a sentence that really stuck in my head.

Rare Earths versus Critical Minerals

Before we go into all the various areas that you’ve written about when it comes to rare earths and critical minerals, for the uninitiated like me and many others, can you just start with what are rare earths, what are critical minerals, and what is the difference between the two, and then we can talk about why it suddenly becomes so important and salient?

KOTASTHANE: Right. What I was saying was not a joke, by the way, because really countries have defined their critical mineral lists—India’s critical mineral list, for example, has nearly 46 elements. I think US critical elements list also has around 50 elements, which is half the periodic table. Really, this is the revealed preference of policymakers that half of the periodic table is critical?

Now, what is critical minerals? Even though it has been defined expansively, the Congressional Research Service has some brilliant papers on this. One definition that I like on critical minerals is they are nonfuel minerals that are, one, essential in use, and two, they are subject to supply risks. These supply risks can be anything—geological, technical, environmental, social, political, economic. That’s the nice definition. These are nonfuel minerals.

Strategic resources, for example, can include oil as well. Oil is a fuel, which means whenever you use it, it gets burned up. You can’t recover oil once it is combusted, whereas critical minerals can be recovered. They don’t burn when you use them. For example, lithium is a part of batteries in electric vehicles, but lithium doesn’t burn away when we use the battery. Those are critical minerals.

Now, critical minerals can be many in number. If they are essential in use, they can be called critical. Of critical minerals is something called rare earth elements. Rare earth elements generally are 17 in number. These are 17 elements of the periodic table. Lanthanide series—atomic number 57 to 71—and there are scandium and yttrium. Totally, there are 17 elements. Why are they called rare earths? Broadly, not because they are rare. We know that they are not rare. They are some of the most abundant elements in the Earth’s crust. For example, the rarest of rare earths is at least 200 times more available in the Earth’s crust than gold.

They are not rare in that sense, but rare because, when they were discovered in the 18th century—they have been a part of human civilization for a long time now, for 200 years at least—when they were discovered in Sweden, people had not seen them before. They were exotic in that sense. The rare meant exotic. Earth because that was the 18th century geological term for rocks which get dissolved in acids. That is how the term rare earth comes.

The name rare actually stuck later also, because these are mostly found in compounds. They are not found very easily in their elemental state. They are so chemically similar, the 17 of them, at least the 15 lanthanide elements, that separating them from each other is difficult. It requires a lot of chemical processes. That’s why rare, even though its etymology was different, that word continued and we still continue to use it. That is rare earth.

Now, why are they critical? Because the analogy I think of it is they are like salt in food. You require them in small quantities, but just like salt does magic to food, they can have some magical properties which can make things really better. As I said, they have been a part of use in many applications. They are made as alloys. They have been used in cigarette lighters for combustion. Recently, we talk a lot about them because they are largely used in electric vehicle motors.

The drive train of electric vehicles uses motors, and those motors require very powerful magnets. These magnets are permanent magnets you require which are smaller and yet powerful. Earlier, we used to have motors. Of course, motors are also an old technology. There were ferrite core magnets which were used, which were made of iron. Then someone discovered that if you put some neodymium into it and you make an alloy called neodymium iron boron, you can achieve the same performance of the motor, even though the motor itself can be small because the magnets around it will be really, really small. That was the beginning, one idea why it was used a lot.

There are some other things. Just like salt, even in neodymium, you can replace neodymium and if you just put dysprosium, which is another rare earth, then that same magnet can also be used at very high temperatures. This becomes a really good property if you want to make EV motors, wind turbines, or you want to use magnets, which are operating at elevated temperatures.

Similarly, if you have samarium, another rare earth, then you can use it for even higher temperatures and for military applications, aerospace, et cetera. That’s how it is. They are used in a wide variety of applications, from lasers to X-rays to others. Like salt in food, they are necessary. They have magical properties.

RAJAGOPALAN: I don’t know the geopolitics of it the way you do. You are able to bring two different lenses to it. If I bring my solo Econ 101 lens to it, it seems like all of this, in some sense, is how we think about demand and supply. The supply of rare earths, they are quite abundant, but they are not easy to convert into an economic resource because they are found in small concentrations in vast parts of the earth. It’s hard to separate. It’s very expensive to actually “mine them.”

In that sense, they become very expensive. They don’t easily fit into a production process until we get a very high-valued use, which is something like an electric vehicle. Then that incredibly high-valued use now makes it feasible to pay for these rare earths to become part of that particular supply chain. We’ve known about this for 200 years, but we really couldn’t do much with it. The moment we could do something with it, there’s a lag in how the production processes catch up and how cheap they become in terms of mining.

All of that will eventually happen, is my guess. Someone’s going to discover some fantastic way of separating these rare earths, or identifying them better, or making it cheaper to mine them. In the meanwhile, there is a lag and the demand is shot up because now suddenly, there’s an incredible high-valued use. Therefore, that converts the rare mineral into some kind of critical mineral. Just the way toilet paper becomes a critical resource when there is a hurricane or something like that, and your stocks are running empty in the shelves. Potatoes become critical. They’re the first two things to go off the shelves. That’s how I think about this in general.

Why Are Rare Earths and Critical Minerals So Important Now?

What I’m talking about has happened over and over with virtually every single resource we talk about that is used widely across the world. What is it about this moment that this rare earth and critical mineral has become so important?

KOTASTHANE: To understand that, let’s understand the process through which the rare earths are made. First step, like you were saying, is mining. Mining means you may have some ores. These ores are different kinds of ores. There are monazite and ionic clay deposits. There are different kinds of deposits. You need to mine them. Some of them are easier to mine. Some of them are difficult.

For example, in India, you can get ores much more easily because they are found in monazite sands on beach placer deposits. Most often, if you have to actually do open-pit mining or you have to go deeper, then it takes a lot of time. Mining cannot happen suddenly if you discover something in Greenland or Ukraine. It’s not as if you can convert that into something economical tomorrow.

In fact, the International Energy Agency’s estimate suggests that converting a mine from the starting point to production is a 16.5-year average process over the last two decades. It is a long period. You can say 10 years over a long-term average. That’s the first stage. Once you get that done, then there is a process called beneficiation. The second stage is called processing, and in this stage, you will essentially increase the concentration of the rarer oxide from the ore that you have found because it will have lots of impurities, lots of other metals, lots of other rare earths.

That entire process is the processing and refining stage. There are many stages in it. There’s nothing technologically complex in it because this thing has been known for 70-80 years, because rare earths did find applications even before EVs. As I said, they were being used for a long time. That entire technology stack existed earlier as well, and there have been improvements, but it’s essentially the same thing.

It is also environmentally very polluting, because one of the processes involved, which is common, is acid leaching. Acid leaching essentially pollutes the environment. That’s why lots of countries which were earlier doing this didn’t want to do it, and there were some countries who were willing to do that. That’s what you get after refining stage. You will get a very concentrated, rare earth oxide.

Once you get that, then the manufacturing stage where you convert the rare earth oxide into an alloy and into a component, subcomponent, like a permanent magnet, and then that will go into the motor. These are the three stages. Now, once we understand that, we know why things have become critical now because refining takes time. Refining is a complex process, though not technologically complex, but operationally complex, and very few countries are willing to do that because it is environmentally polluting.

What has happened is, over time, there is one country which has achieved a lot of dominance in rare earths. For example, China now accounts for two-thirds of rare earth production and 80% of the refining and production stage. In fact, it imports rare earth concentrates, which are the output of the mining stage, and does the refining and processing. When you have 80% dominance of one player, then there is risk inherent in it.

It was fine, and as long as they were supplying it for cheap, the world was also happy because we don’t want to pollute our environment. Someone else is polluting in an area, they are giving it for cheap, it’s fine. But of course, there are market failures if the things are very cheap as well. They have no one invested in alternatives. That was a tradeoff that the world was happy to live with, but then you had US putting some restrictions on China on semiconductors and other domains.

Then China had to retaliate at that. They didn’t want to back down. One thing they thought they would retaliate in is on rare earth because their dominance in this segment is quite phenomenal. That’s why it became a problem. In fact, this is not the first time China has done this. China did this in a bilateral context against Japan in 2010. Again, there was a completely unrelated issue of the Senkaku Islands dispute, but the response that China had was to put controls on rare earth exports to Japan because these were used extensively in the manufacturing equipment that Japan was making.

That was the first instance, and then, in the latest round, what they did is they have actually taken this to an insane level, and now they are not just putting controls on the rare earths. They are also putting controls on all rare earth elements, and also the machines and the processes which are used to make rare earths. If you are an engineer who can support another company which is non-Chinese to make rare earths, then there can be sanctions on that person.

And there is also a de minimis clause, which says that if say any machine in the world which uses small motors—the windshield wiper in our cars has rare earths—even if there is a foreign company in China which is making some machine which uses some part of Chinese rare earths, it will still need a license of the Chinese government to export that product, which is insane. How does that even operate? China has done that. These were the restrictions put in October 2025, which were subsequently put on hold for a year, but these are the restrictions that have been put and these are not just put on US; they have been put on the entire world because there’s now a tight licensing regime which China has put in there.

It’s not an ad hoc thing like it happened in 2010 against Japan; there is a structure within the Ministry of Commerce in China, and these licenses are very difficult to get, as you would imagine once the government comes in. There are lots of other countries and companies which were dependent on these nice, neodymium iron boron magnets, which used to come in blocks, and they used to just break it in smaller pieces and use for their electric vehicles.

Now they can’t apply for a license. If they apply for licenses, licenses don’t get approved. All this has led to this situation. Weaponization of everything has happened in the past, and this is another instance of it.

Supply is elastic in the long run.

RAJAGOPALAN: Again, not to make everything very simple, but you know how we are? Economists force an analytical simplicity to everything. I hear everything you tell me, and I’m like, when I try to boil it down to one sentence, I feel long-run supply curves are always far more elastic than short-run supply curves, and in the very, very short run, some things can be highly inelastic or perfectly inelastic.

What I mean by that is the price responsiveness to supply is the only thing that matters when we talk about things as an economic resource and not as a technical resource or a mining mineral. In the long run, we will find substitutes for everything. In the short run, it is much harder to find substitutes, so you end up paying through your nose. The flipside to that, however, is the more perfectly inelastic the supply, the more it forces people to very quickly find substitutes because the price is just going to skyrocket.

Now, to bring this low-level, almost duh-econ insight to everything you’re saying, China doesn’t seem to be doing something very smart. They’re killing their own market. Unless they have some grand plan that they’re going to do this for nine months and then dump all their stockpiles and then do it again for nine months, and just as people start building capacity, dump again for nine months. I don’t understand how this is a viable strategy.

In some sense, they are signaling to the whole world, “We are really important, and we could hold you hostage over it, so make sure you find substitutes on every margin on which we are really important.” Am I being too optimistic about this, or am I being too sanguine about this?

KOTASTHANE: No. This is exactly how I think about this, and I have written as well. That actually only one country can make China plus one happen, and that is China, and that’s what it is doing through these instruments. Let me roll back and give the other side of the argument. 

One instance, for example, people would argue, is from a revealed policy stance, the US government put some restrictions, then they put tariffs. China put some whole bunch of other restrictions, including rare earths, and the US rolled back its policies. Essentially, at least the dominant narrative is that US buckled under Chinese pressure. One of the main instruments that China used was rare earths, which means that, even though supply curves might be elastic in the long-term, at least at this point in time, there was a policy impact.

In the common balance, if you take out the nuance, people always think of this as everything is inelastic for a long term. People see so many tons of neodymium go into building F-16. Also, many tons go into building a nuclear submarine. If we don’t get neodymium, we won’t be able to build nuclear submarines, or we’ll not be able to build F-16s, which is a silly way of thinking. If you don’t understand the fact that the substitutes are available and this has happened in the past, this can be a powerful narrative.

In fact, the common understanding of this issue is not how you think of it, it is that, one, rare earth’s restrictions will have a long-term impact. Second, the policy stance of the US itself indicates that they were really taken aback by these sanctions, and that’s why they renegotiated things with China. That is the way that rare earths are a powerful geopolitical leverage. At least people think in that way.

Now, if we come back to, has this happened in the past? Yes. Weaponization of everything is not new. We’ve had many such phases, it’s just that in the last 30 years, we were in a slightly different phase. But in the 1930s, rubber was this dual-use material. At the time, it was this brilliant thing which was used for tires and also for tanks and bullets and a whole lot of things. People thought rubber is really important, and in fact, it was grown largely in Southeast Asia and countries there.

Then what happened is Japan occupies in the World War II in Southeast Asia. There is a huge panic that we do not have this dual-use material. The countries in the West started thinking about that. Yet, we did not see any rubber war or anything because the synthetic rubber came up as a substitute. In fact, synthetic rubber existed from a long time ago. It was there since 1908 it was discovered, and yet no one really thought of it much because you have cheap rubber available. Why would you think of synthetic rubber?

It got rapidly productized, manufactured, and the entire supply chain realigned in a few years, and then synthetic rubber became the thing and no one talked about rubber and rubber trees in Southeast Asia ever again. That’s the first instance. There have been several other instances, like cobalt in the 1980s. One US congressman had this term called materials myopia. He said that US has this materials myopia because cobalt, which was again this dual-use material, you needed tons of it to go into an F-16 jet engine. The alloys used to make F-16 jet engines used cobalt, and it was available only in a few places, largely in Congo.

Then Congo, some rebels occupied the region where it was produced, and back then, a lot of these countries had much friendlier relations with the USSR rather than the US. There was this threat that USSR has the control of all these countries. In fact, the interesting thing I found out was, just like we have OPEC, there were attempts to make cartels of bauxite and lot of other things, cobalt also they didn’t take off for obvious reasons, but there were these attempts.

There was this fear cobalt will really be a problem, and yet we did overcome those things. In fact, after that, two or three things happened. One, because of the high prices. What happened is, other places like Canada, Australia, Brazil, they started mining cobalt. Prices were really low, and it was uneconomical elsewhere. That was one reason. Second, people found substitutes, like you were saying. Molybdenum was a substitute which is much more abundantly or easily available than cobalt and less sensitive to geopolitical risks. People started using molybdenum instead of cobalt, and over time, there was no cobalt wars or anything. People found out this.

There was no oil shock kind of a thing which happened. That’s the difference. In fact, critical minerals are different from oil in that sense. Again, people think of it as oil, but oil causes economy-wide shocks, there is immediate inflation, but these are many times required in small quantities. In fact, you can also stockpile, you can smoothen the demand curves. That’s one thing. 

Now, coming back to your China question, I think that’s important because China, in the past, has done the kinds of things that you were mentioning. After 2010, many countries woke up to the threat, and they said, “Okay, they have done this, let us start building some alternatives.” Apart from Japan, not many countries could do that because, again, China’s model is geared toward overcapacity. It’s not that there is some strategic mastermind doing this, but the model itself we know is the same in solar panels.

RAJAGOPALAN: Yes, and they do it for everything. What actually ends up becoming critical is one of those things, right? They’re overproducing on so many different margins, but we just realize that when something becomes critical.

KOTASTHANE: Yes, exactly. After 2010, in fact, some investments began but then the prices of rare earths suddenly dropped. In fact, many critical minerals prices have been reducing even though their demand is increasing. For example, lithium, not a rare earth but a critical mineral which we all know is important for the EV transition, its prices have been dropping because, again, overproduction and the lot of China selling at prices which are uncompetitive.

That’s been the challenge that the fear is even going ahead, that even when we start investing, China will again do this, not for some strategic reasons, but this is just something which happens, and then what will you do? Who is going to buy your two times rare earth concentrate when China can supply it at one time? That’s the challenge which would require some government intervention, even though we don’t like it, if you want to tackle it.

RAJAGOPALAN: Well, one is government intervention, but the price is not the only measure on which people compete, right? The other is volatility. The way we think about a lot of these resources, it’s not like a single resource, which now you have it in your hand, and it’s some magical instrument. It usually needs to fit in with the production process, and production processes are difficult to reimagine or reconfigure. Oftentimes, people may pay a little bit more for a particular substitute if it’s available with certainty rather than something which is available very cheaply but is incredibly volatile, right?

You see this all the time. Actually, you see this most often with human capital. People who are available relatively cheap but completely unreliable, they don’t get hired, and they don’t stick around for a long time. Most companies are actually willing to pay someone a little bit more for the stability and the certainty. I have a feeling there’s only so many times China can pull this trick out of the hat in some sense, right?

It gets old very quickly, and also, there are layers of uncertainty. One is, of course, the price volatility and the dumping uncertainty, but China, from what I understand, both from your writings and other people’s, is creating massive amount of regime uncertainty just because of the licensing procedure, right? You literally have firms going and queuing up, and they have quotas, and they will make sure that you don’t stockpile. They have all these restrictions on when they will make it available and what kind of boards need to certify you. All of that increases the layer of instability or volatility. Price is just one aspect of volatility. China is just making itself very costly, in some sense.

KOTASTHANE: Yes, totally. I think the way I frame it is it’s a card that once you play, its value extinguishes. You can play it once and probably you did also have some geopolitical leverage because the world didn’t have any option and it wasn’t prepared for now. But now it’s so clear to the world that next time something happens, the first thing China is going to do is rare earth. In fact, the first announcement of China’s Ministry of Commerce this year was restrictions against Japan, and also involved something related to critical minerals and others.

Everyone knows that this is what’s going to happen. In that sense, they are searching for alternatives. In fact, I have been amazed by the kinds of things that are happening in the US. Not the things that I would like or I would recommend, but just the fact that the kinds of financial instruments that are being used, there are price floor guarantees, there are off-take guarantees, there’s equity in the same deal, MP materials.

Because of this, there’s a crowding in effect. Now Apple has also said that it’s going to buy from this project, which is happening in the US. Then, of course, substitutes can be of various kinds. One is a process-for-process substitute. For example, can you find recycling as an alternative? In that sense, because all of these things that we are using do have some rare earths in them, and instead of mining the entire Earth, you can probably recover some of them back. 

Geopolitical Uncertainty

RAJAGOPALAN: Before we get into recycling, I’ll tell you how I think about it. You and I are old enough to remember a time when fossil fuels running out was the biggest thing. It was just fear-mongering at a big scale. We’re going to run out of oil one day. One, of course, the cartel itself made oil very expensive. Oil is not costly just because of that. It’s also costly because of all the environmental issues that come with internal combustion engines and so forth.

During our time, solar energy, it was almost a joke. It’s the technology you use to dry clothes is the way we thought about solar energy; nothing more than that. Now, the way we think about solar energy is I actually keep telling people we should not call it solar energy anymore. We should call it nuclear fusion. We’ve managed to tap nuclear fusion that’s happening very, very far away. The more costly fossil fuels get from an environmental perspective, and the more restrictions we have on nuclear fission and nuclear reactors, the more likely we’re going to get nuclear fusion closer home.

Some of it is going to be solar energy. Some of it is actually going to be nuclear fusion reactors. I’ve given EV grants where we’re funding people looking into tiny nuclear fusion reactors. At some stage, it just depends on how costly and how critical something is for the substitute itself to emerge. We think of emergence of substitutes as a chance or byproduct or the long, slow technological progress, but that’s in fact not true.

A lot of these substitutes were hidden in plain sight for a long time. They just became economically viable this moment because everything became too costly or uncertain. Is that the wrong way of thinking about it? Geopolitical uncertainty, if I had to capture it, at some level, just makes this cheaper. It makes things that are hidden in plain sight, more visible and people more willing to experiment and willing to throw some money at it to find other solutions.

KOTASTHANE: No, I completely agree. I think that’s the right way to think about it. As I said, the synthetic rubber example is a perfect case. The technology existed for 30 years, but no one was really invested in it. Yet, when rubber actually became difficult to obtain, that’s when the entire investment and the entire focus of countries also moved toward a particular technology, and we did figure out alternatives. That’s true.

I was thinking of this in terms of an alternate to the Simon-Ehrlich bet. The famous wager. I would think we can do a wager on this, also. Not with you, both of us are on the same wavelength, but with someone else who thinks this is like a real bottleneck because my perception is within two, three years, so December 2028.

RAJAGOPALAN: You said December ’27.

KOTASTHANE: 2028 is a year extra just for the heck of it. By December 2028, China’s geopolitical leverage because of rare earths will go away. They will not be able to use this as an instrument.

RAJAGOPALAN: They may still have other points of leverage, but rare earth leverage, basically, they’ve killed it themselves.

KOTASTHANE: Many people think that will not be the case because they think it will take time because mining takes a lot of time. There are no other substitutes, but as we were saying, substitutes are there. It’s just that you didn’t want to use them because why would you if there’s something which is so easily available? The growth of those substitutes will be nonlinear. It won’t be in a linear way, and you will find alternatives that can work out.

China’s Process Advantage

RAJAGOPALAN: On the substitutes question, at the head of the conversation, you said there are two things that China is really good at. One is the actual mining. This is the part where they’ve absorbed the environmental costs, and they’ve absorbed the experimentation and exploration cost, which initially other countries were doing. Some of this stuff used to happen in California. Now it happens in China.

The second part, which I think is underappreciated, is they have also figured out a production process end-to-end that makes sense. This is China’s superpower across everything. They managed to do this for Apple. There’s a lovely book on this about Apple in China and how they managed to figure out this entire production process, integrate it to the supply chain, make other countries redundant just because they were not just good at price competition, but they were good at logistics.

They’ve shown this for EV [Electric Vehicles]. To be dominant in EV requires you to be good at 700 things, and they managed to show that they are cheap on at least 70 out of the 700 margins. This is how they end up making these very clean clusters of supply chains. It is costly for China because a lot of times these clusters are regional. If a cluster doesn’t take off, that entire region gets hit very badly.

If the cluster takes off, but China puts in import controls or shuts down because of COVID, like Wuhan, then that cluster gets impoverished in a different way. China absorbs these costs. My understanding is that seems to be their huge competitive or comparative advantage, and it’s almost the Chinese superpower, which they first started out with shoelaces and textiles and leather. Then they switched to electronics. Now they’re doing it for rare earths. Is that a good way to think about China?

KOTASTHANE: Yes. The way I would put it is, yes, refining, et cetera, as I said, it’s not technically complex, but operationally complex. There are just many stages involved, and they have done it. Also, interestingly, it’s not as if they made that technology which is required for it. A lot of it, again, it was there in the 1960s in California. A lot of it, once China started doing mining, a lot of it started after the 1970s. There, mining and extraction grows 20% year-on-year between 1985 and 1995, thereabouts.

There is a huge jump in the extraction. Then they said, “We know extraction, now let’s do refining.” Some companies started doing refining. A lot of these are state-owned enterprises. They also start learning refining. There also, they buy out some US companies. In fact, there was a US company which they buy and then they learn that idea. The analogy for me is what China did in refining of rare earths is not very different from what Taiwan did in terms of manufacturing semiconductors.

It is somewhat similar in the sense that, again, TSMC is a contract manufacturer. It has no intellectual property that Apple has, but it has mastered that art, that recipe for making chips, which is operationally complex. There, it is even technically complex, but here it is just operationally complex. You have many steps. That was also environmentally polluting when Taiwan started, now no longer. This was also environmentally polluting. That’s the analogy I would say. 

Chinese companies have figured out how to do this over time. Because they also have other practices, the Chinese model, there is currency depreciation, there is a whole lot of subsidies. All of that leads to the China price, which no one can beat in many other products, including rare earths.

RAJAGOPALAN: The reason I want to separate the mining aspect from everything else other than mining—the refining, the packaging, the making it cheap, contracting, supply chains, right to getting it to the port and shipping it to the final person who’s going to use it cheaply—the reason I’m emphasizing that is there seems to be this idea that if we just diversified and colonized, or not colonized literally, but either colonized or contracted with other parts of the world which have some deposits, then everything will be fine.

Right now, the way I see the geopolitics working out is there is a very quick run to have all these treaties and contracts with, whether it’s Australia, Brazil, India has done one with Argentina, and so on. Of course, Donald Trump wants to invade Greenland, for the lack of a better term. There are parts of Ukraine which are hugely contested, not just because of the historical political reasons, but this is an important part of it.

To me, that seems to be almost beside the point or shortsighted, because none of these places have actually displayed any proficiency at developing the rest of the chain. It just seems like, “Okay, you mine this stuff, but eventually, it’s all going to go back to China. What are we talking about exactly?” The focus seems to be shifting the geopolitical risk only toward exploration and mining, and not toward anything else.

First, am I being uncharitable about the current geopolitics? Are there things that are going on that I’m just missing? Two, what is a good way to think about which are the countries that are best poised to compete with China on the second part of it, which is really make it cheap, not just figure out that they have deposits?

KOTASTHANE: You are being a bit uncharitable because the focus is on a bunch of things. For example, there’s something called the mineral security partnership that the US has started with 14 other countries, including India. There are many projects in it. Last I checked, there were 32 projects. The idea is to catalyze investments because all of this will require clearances, approvals, which take a lot of time. That’s why starting a mine is a huge endeavor.

The idea is how can government commitments and approvals be streamlined and the time to do this reduces, just like we figured out ways to do approvals quickly for the COVID-19 vaccine. Something similar. There are projects in the mineral security partnership across the value chain. There are some 19 projects on upstream, which is extraction, mining. Then there are 15 on midstream processing, and there are three on recycling and recovery as well.

There are a bunch of other things. Similarly, even in the US, the projects are not just about starting a new mine. There are a lot of projects which are on the second stage. Can you make the refining happen in a new way? You can’t do the same way what China does, but are there new technologies through which you can do refining without acid leaching? Can you do the magnet part? After you’ve gotten this rare earth oxide, can you make the magnet?

In fact, a lot of things that have happened in the US are on the magnet manufacturing. One German company, whose name I cannot pronounce like all German companies, has started production in the US. After 30 years, the first rare earth magnet has been made in the US a couple of months ago. Those kinds of things are happening across the value chain.

RAJAGOPALAN: How much of this is the government’s initiative, and how much of this is just private companies trying to contract with other private companies and diversify risk? I want to separate those two because my initial comment about colonization was just how governments are reacting to the problem. The fact that other processes exist or that there are people investing in it doesn’t surprise me. How much of it is just plain industrial policy, I guess?

KOTASTHANE: Some of it is happening because of the US government investing in it. Some of the projects that I mentioned don’t have an equity of the kind that MP Materials has or a price floor guarantee, but there are some state-level incentives. There are some clearances which have been fast-tracked, which weren’t happening earlier. In that sense, government always becomes some form of bottleneck in one of these industries. Sometimes it’s just governments pulling that out. Sometimes it’s investment.

The government saying this is an important project has led to other banks giving money to them. For example, there is this Vulcan Elements project which started. First, there was a 10-year offtake guarantee from General Motors. Once that happened, then there was money given through the banks and through a loan from the Pentagon. There is Department of Defense involved or Department of War now. A lot of financing is being managed by government. It can be an initial investment, but there is government role there.

We were talking about that projects are happening across all three stages. The most interesting thing actually, is to find an alternative which doesn’t require errors. That’s what a true substitute is. We call it material for material substitution. For example, it has happened in many things like iron ore. In fact, in today’s EVs, earlier we used to use cobalt. Again, we discussed cobalt is still found in fewer places. It is geopolitically risky.

Tesla started by using LFP batteries, which use iron or manganese. Those are not so critical in that sense. It is more widely available. We use LFP batteries, and cobalt unavailability or risk is no longer that big a problem. A lot of work is actually happening in figuring out an alternative or figuring out a magnet, which won’t use rare earths. In fact, Tesla itself has announced that its next generation of cars will not be using permanent magnet synchronous motors at all.

They’ll be using an older technology. They have optimized. They have found out a way to make it efficient to absorb some of the efficiency losses through other means in the drive train. Many Indian two-wheeler companies are trying to go that route.

RAJAGOPALAN: Ola has done that, I believe.

KOTASTHANE: Ola has announced. Let’s see whether they productize it. I have met some of the people who used to make these motors, not even the final OEM, but motors. They are saying, “Because now we cannot buy from China, we are actually changing our strategy, and we’ll make the next motor,” only the motor which will be completely permanent magnet-free.

I think these kinds of things, people generally don’t see that rare earth is a problem. Maybe China will restrict it, but you can figure out ways beyond rare earths, also. That’s the thing.

Industrial Policy

RAJAGOPALAN: This brings me to the big elephant in the room. For both geopolitical experts and economists, this is where we converge, which is strategic industrial policy. Everything that China dominates and has shown us that there are vulnerabilities in the rest of the world, the general global response has been, “Oh, we need strategic industrial policy.” There are two reasons for this. One is you’re asking governments to intervene. Governments will intervene. When governments intervene, it is industrial policy. That’s a very obvious answer to this question. 

I think the other part of it is China has gotten where it’s gotten through strategic industrial policy. They discarded the old school command-and-control communism, and they did embrace market liberalization, globalization. They relied on global prices, but that was just the feedback and the competitive mechanism to make sure that they could deploy their industrial policy better. That’s the way I think about Chinese industrial policy relative to erstwhile Soviet-inspired countries’ industrial policy.

We basically closed ourselves off to any market feedback. Whereas the East Asian model and the Chinese model is, do industrial policy, but keep tariffs really low. Open yourself up to the global market. You’ll know what’s working and what’s failing. Now, every government seems to think that they have the ability or the capacity or the government infrastructure to do strategic industrial policy. That seems to be the response. Some of this is obviously announcing that we’re going to have semiconductor fabs in the US. Some of it is equity, financing deals. All of this is going on in the examples you mentioned for Vulcan.

India seems to have announced a bunch of schemes. Semiconductors became critical during COVID, so we have a semiconductor PLI scheme. Now, how do you think about the cascade of industrial policy that follows this critical minerals, rare earth conversation? Two, can anyone other than China succeed at this game? Does India even have a chance of engineering industrial policy and getting somewhere with this? Or India just has to do this very differently?

KOTASTHANE: I think the nature of industrial policy is that there’ll be failures all around, but some things will happen which you didn’t plan to do and yet they will succeed. Just like it happened in the semiconductor domain itself. When Japan was this big player and US said, “we need SEMATECH, which will be this big semiconductor industrial policy instrument,” SEMATECH didn’t succeed, but Intel invented another alternate way to make processors and logic chips more important than memory chips.

The way I think is this moment brings focus of the market, of society, of governments to this topic. What governments specifically do most of the times fails, but that focus, the state focus, eventually brings about some or the other nonlinear change which wouldn’t have happened earlier.

RAJAGOPALAN: It’ll catalyze something is what you’re saying?

KOTASTHANE: Yes. I think that’s the way I would think, but I do think currently the government approach is just a whack-a-mole thing that we will find some way. Now, this is strategic, so let’s find—this is a choke point we’ll plug. By the time you have tried to make a semiconductor policy, then you discover, “Oh, there’s something called rare earths which is important.” Then, when you stop rare earths, you will find out some nut, bolt, or screw is important, which is available somewhere else. This can’t get over. Eventually, you will have to find a way to live with the interdependence. 

RAJAGOPALAN: And become more resilient.

KOTASTHANE: Yes. Right now, China has made it very difficult.

India’s Critical Elements Mission

RAJAGOPALAN: I don’t want to underestimate how China has made it difficult in the short run. My thought process is more in terms of responses. If you don’t mind, if we can switch gears to India a little bit. India has got this critical elements mission right now. Critical minerals are now going to be part of a national strategy, and I have nothing against that, honestly. There is geopolitical risk. Some of these are important for various Indian processes. Some of them are important in terms of military.

At the national critical mineral mission level, I don’t have a problem. Now, the question is what the mission does. There are a few things that the mission does which makes it a little bit odd. It doesn’t just state that these are important areas and there will be fast-tracking or quick permitting or streamlining or something like that. Nor does it say that for these areas, you don’t need state-level licenses; union government will just fast-track licenses. Those sorts of things I can understand. Nor does it say that, for critical minerals, we’re going to have a nodal agency. Maybe the way you have for atomic energy. You have a nodal agency, and then everything passes through that nodal agency. 

Now, if that’s what the critical mission did, I would think that’s a relatively good idea. Governments need to get involved, and that makes sense. It seems to be going in a very different direction. It almost has targets for the number of patents that India should hit when it comes to critical minerals. It’s such a bizarre thing to put in a critical minerals mission because now people are just going to left, right, and center file patents. It’s the same government which is approving these patents. So it just feels like, what was even the point of something like that? 

A second category is saying that mining is really important. It’s unclear how that mining process is going to be different for critical minerals relative to regular minerals, the way we have coal or aluminum or bauxite or any of the other things that we mine in India.

It seems to me that there is some confusion in the overall mission, where it’s not clear to me that all of this is actually going to hasten the process of India, either developing its own production processes or finding substitutes. So again, am I being very uncharitable to India’s mission? What is a good way to think about this?

KOTASTHANE: I think the good way to think about it is government likes PLIs because that’s the thing which they understand, right? Production linked incentives. This is largely a PLI scheme because you start doing mining, we’ll give you some money, and we’ll reduce your cost. Some of them can be upfront capital costs. Some of it will be actually after you start production. That is one thing which the government understands. It has done it in several domains, and it is applying that same template to this problem as well. That’s how I would think of it.

Broadly again, the national critical mineral mission has focus across the supply chain that we spoke about. There are incentives for mining, there are incentives for refining, there are incentives for recycling also. The priority is a bit messed up because recycling, which we think should be a priority, isn’t a big priority. A lot of money is going into mining and others. The interesting thing is, again, mining comes to a broader problem.

Mining is not happening in India, not because they don’t have a miner, doesn’t have money, but we have made it very difficult for anyone to do mines. For example, in fact between up to 1998, after the liberalization, there was a time when a lot of international miners used to come in India. There was FDI into mining, all that. After that, we entered a period, and this is around 2012, Coalgate scandal, and all those things happened, and because of that, we actually cancelled many of these licenses.

Also, one more thing which we made is that exploration. Exploration is different from mining. Exploration is just trying to figure out whether something exists in an economically viable way. Most of the places in the world, it is on a first-come, first-serve basis. People tell me that, in countries like Australia, you just have to file an online application and provided that you meet some of the other criteria, you get it in two, three weeks. It’s that simple, because you’re not doing mining, you’re just doing exploration.

In India, it is actually an auction. To do exploration, you need auctions. Those auctions take a whole lot of time, and you know how government auctions can get. None of our mining has actually started. In fact, a lot of our critical mineral mission things should have been to reduce these bottlenecks, to actually make things happen faster, but that’s not what they’re doing yet.

Auctions

RAJAGOPALAN: Yes. Here, this is a good place to get into this. You’re absolutely right. When you said Coalgate, just for the listeners, this is the scandal with coal mining licenses, not Colgate, like the toothpaste. I don’t know, young folks listening to this, if they actually remember how crazy things were when the supreme court cancelled a lot of these licenses. 

Now, I want to just zoom out for a second to a broader question on auctions themselves. The way I think about auctions is, auctions are a good idea when there’s very little uncertainty over the value of a particular resource. Now you’re just doing price discovery, because we want to make sure resources go to their highest-valued use. If you design an auction well for something like oil or something for coal, where the existence of the resource is not under question, how the resource fits into production processes is also not under question; it’s just how much do you value the resource and how cheaply can you produce it. That’s where I think auctions are a great idea. 

Auctions are a terrible idea when there is high uncertainty at the geological level. Now you don’t know what you’re going to find. The only people who are going to try and get these auction licenses are people who are very good at mining overall and who can integrate it into a broader supply chain, or people with deep pockets who like to actually collect these licenses and then share them with partners abroad or things like that.

What you actually want for exploration or reducing uncertainty at the geological level is the opposite of auctions. You don’t want a winner-takes-all thing. Is it fundamentally just the wrong thing applied to the wrong stage of critical minerals? Is it just that we’re applying auctions to an earlier stage, when we should have not applied it to an earlier stage, or are critical minerals just a separate category where auctions don’t function?

KOTASTHANE: No, I agree. Auctions can be fine for the mining stage, and that is the normal stage, not for the exploration.

RAJAGOPALAN: And well designed.

KOTASTHANE: Yes, well-designed auctions in the Indian context, because the history is another question. Yes, technically speaking, auction should work well for a resource whose investor knows what they are getting into, and that’s why the bidding, et cetera, will happen early. In fact, for exploration, I would argue there is an information asymmetry problem which exploration is solving. You don’t know what is there, and someone is solving that problem for you. In fact, for exploration—

RAJAGOPALAN: You should subsidize. 

KOTASTHANE: —I would say upfront capital support will also be fine. Forget the fact that once you explore and five years later, we’ll reimburse some money for you. Do upfront capital support just like you are able to do for, say, anything which resolves an information asymmetry problem here.

RAJAGOPALAN: It should be relatively cheap, is my sense.

KOTASTHANE: Yes, few crores, but that shouldn’t be a problem. 

RAJAGOPALAN: What I mean is this is not thousands of crores kind of outlay we’re talking about for PLI schemes. This is relatively low cost, and it’s going to make everything downstream much easier and better, and more streamlined is the way I think about exploration capital subsidy.

KOTASTHANE: Yes, exactly. Now, the government has created a separate exploration license, which is supposed to do that, but the upfront capital support part has not happened yet. That’s where we are.

RAJAGOPALAN: I would actually say do the opposite of a license. Don’t make young people stand in queue if they figured something out.

KOTASTHANE: Yes, exactly.

RAJAGOPALAN: Why do we think like this, and everyone else thinks in an upside-down way? Pranay, at some point, you have to explain that to me, too.

KOTASTHANE: Mai-baap sakaar…..

India’s Position in the Value Chain

RAJAGOPALAN: Now, when we think about this process, where does India fit in? In its current capabilities, I guess, on exploration versus mining versus further upstream on the rest of the value chain, where is India at right now?

KOTASTHANE: Reserves of rare earths, as we discovered, because they are not so rare, they are found in many places. India, in fact, has the fifth-largest reserves of rare earths. They are found in many places, in rock deposits, as I said, in monazite sands.

RAJAGOPALAN: From Kashmir to Kanyakumari, we have found rare earths is the way I think about it.

KOTASTHANE: Yes, in many states in India, you have rare earths. Converting that to mining, selling those blocks, although that is really difficult. The example I always give is, a couple of years ago, there was this news that India has found the largest deposits of lithium in Reasi district in J&K. It’s not a rare earth, but a critical mineral. There was this, “Oh, we’ll become independent of that.” I think, as of now, that block has still not been sold. That’s how it happens. Mining, et cetera, takes time.

One thing we know is mining of getting these beach-placer deposits is much simpler than doing this for digging a mine—

RAJAGOPALAN: Below the earth, yes.

KOTASTHANE: —destroying a forest, below the earth, all that. These beach-placer deposits do exist. There has been lots of studies of it. Again, the government comes in to say, because these beach-placer deposits have an ore called monazite, monazite has some rare earth, but monazite also has thorium. Thorium is important to India’s three-stage nuclear cycle. It’s not as if it has been realized, but there is this idea that thorium is really important.

The government has actually made this a prescribed substance. In fact, monazite is only available for mining by a government-run company called Indian Rare Earths Limited (IREL) and a private miner cannot extract it.

RAJAGOPALAN: Even there, so just to pause for a second on this particular mineral, so the Indian Rare Earth Limited mining monazite, as far as I know, they’ve been doing it for decades. They’ve even been profitable post-liberalization since 1997 or something like that. India has the extraction capacity and the processing and refining capacity. Indian PSU has it, but it hasn’t translated into an earth magnet industry further upstream the value chain the way one would expect.

Is this just because it’s nuclear energy and there are other parts which are not standard-issue PSU problems? There is an additional element of thorium and nuclear reactors and nuclear energy, which makes this a controlled substance and that was a problem. Or is it just that public sector enterprises in India can’t innovate at this level, and they can’t figure out value chains that are further downstream or upstream of what they find or what they manage to process? What does this India Rare Earth Limited example tell us? You’ve written specifically about this.

KOTASTHANE: I think the way I see it, it tells us it is not a focus area for Indian Rare Earths Limited because it is under Department of Atomic Energy. Even back then, the idea of IREL—it was started long time ago, after independence—so the idea was rare earths are these important things which are also found with thorium. Mainly you find out rare earths so that you can separate rare earths out because we need thorium. Rare earths had some applications, but they were not really core strategic or other thing. I don’t think it was ever the main focus of the Department of Atomic Energy. This is just some nice second activity that you are doing.

In fact, one of the recommendations we had done is you remove it out of the Department of Atomic Energy, even if you don’t want to sell it, put it into something like the Ministry of Natural Resources, which actually does exploration. There is ONGC, there is ONGC Videsh and all that. That way its mindset, its game plan will change. Now it is looking at some things. IREL is trying to do some rare earth magnet-making in Visakhapatnam. It is planning to start, but the approvals have to come in. All that just takes much longer in a PSU, and in this sector, just the fact that it was never the focus of Department of Atomic Energy.

RAJAGOPALAN: Also in every country, the country that finds the monazite or whatever equivalent mineral is not the one that actually makes the magnet, right? There is a supply chain or a value chain created around it because someone will find the monazite and they will sell it. There is something unique to an Indian PSU, especially one that is under the Department of Atomic Energy, where there was no incentive to monetize any of it. They could have just sold it at thrift prices once upon a time and an entire industry would have emerged. What is it that stops them from doing that? Is it actually a restricted activity or is it just bad PSU incentives? I guess that’s what I’m trying to figure out.

KOTASTHANE: No, it is a restricted thing. First of all, because thorium is this strategic reserve, so there was a lot of illegal mining also happening. That happens usually. One of the concerns for the government to become stricter was that illegal mining when it happens, there is monazite going outside, and monazite also has thorium, and thorium is this thing which others can use, when we have a lot of it, why should we give a material which can be used for nuclear process to another country? In that sense, the government’s restrictions became even stricter.

RAJAGOPALAN: No, I’m saying something more basic. I’m saying you find monazite as the side product. Like you said, they’re finding the monazite just because they’re separating it from thorium. Thorium is what they’re going to use. Why aren’t they selling it like the raddiwala saying we don’t need monazite, but let’s monetize it and be profitable? Is it a PSU thing or were they not even allowed to sell the monazite?

KOTASTHANE: Once you have monazite and there is some thorium in it, and there will be some rare earths, et cetera, so now you need to find ways to do that separation. There will be some capital costs required in it. That was never the focus. We don’t want to do this.  

RAJAGOPALAN: It was literally like a waste product which they didn’t know what to do anything with and they never figured out how to actually make use of it.

KOTASTHANE: Yes.

RAJAGOPALAN: This is closer to a PSU incentive than the fact that this is atomic energy, because any other firm would have figured out that if there is even a tiny market for this, we can monetize a little bit just like every single household actually sells its newspaper to the raddiwala. That’s not a huge income source, but we still do it. It’s interesting how these things get complicated just because of simple incentives. In my mind, given the kind of monazite deposits we have in India, we could have easily become an earth magnet industry ages ago. Right?

KOTASTHANE: True.

Recycling

RAJAGOPALAN: Now I want to come to the next stage which is recycling. You’ve written a lot about recycling. The way I think about your recycling work is the way I think about some of your semiconductor work. There you argue that India should play a slightly different game; it should leverage its comparative advantage in design rather than compete on cheap fabrication. For rare earths, you’re talking about something very similar. Which is, our comparative advantage, one is not this kind of deep mining and entire production processes getting integrated.

Even if one day we develop that advantage, it can’t be done immediately. What we can do immediately is recycle. Recycling has many advantages. One, we’re a huge consumer of these products, so there’s obvious elements within the Indian borders. Second, it’s not as capital intensive or as environmentally polluting or dirty as the original discovery of rare earths in the first place. As you mentioned, rare earths are not like fossil fuels. They’re not one and done, so you can actually recycle them fairly easily. 

One, have I understood the argument correctly? Two, what is preventing Indians from recycling these rare earths or critical minerals? Because India does have a huge market for recycling, for instance, gold and copper, and aluminum. There are actual raddiwalas and kabadiwalas. From the tiniest shops to people upstream, there are people who are doing this. What is it about critical minerals and rare earths that that doesn’t fit into some of the supply chains that India has already developed on recycling?  

KOTASTHANE: What you said is perfectly how I think about it, that this is a comparative advantage and the time horizon of this policy will be the only one which can actually make a difference within two to three years apart from trying to do other things. In that sense, what we estimate is because the stream of equipment which will reach their end of life and have more rare earths is only going to increase.

Earlier, we didn’t have electric vehicles. Now, we’ll have electric vehicles which have a lot more rare earths per unit. Earlier, our source was magnetic disks, hard disks, and other things which were small. Now, we are going to have electric vehicles, wind turbines. All those will have a larger amount of rare earths. We did a projection for around a decade. We found that in a decade, around 35% of our rare earth oxide needs can be met by recycling alone. We don’t need to make 100% of it. We just need a backstop which prevents China or any other country from using it as a leverage. That’s how I would think of it.

To get that 35%, yes, the way you would do it is because once you have these materials, you would need to manage the end-of-life cycle. You need to figure out a way for it to travel up. Once it is discarded, you need to find a way to extract rare earths from it. There are various techniques, hydrometallurgy, pyrometallurgy. New techniques are being invented. US is doing a lot of work. US universities are doing a lot of work on this as well. That supply chain and this idea exists elsewhere also, and we can do that.

In fact, what we should do is we should import some of these end-of-life things from other countries. Then we can do the recycling and do that. A couple of companies in India are working on this. In fact, they have started with it. The challenge right now is their feedstock is limited. They are not able to source a lot of the rare earth material that they need. Why is that the case? As you know, a lot of our e-waste is like the kabadiwala, we again come to the raddiwala ecosystem. For a raddiwala, there is no incentive to extract rare earths because rare earth prices are actually very low, because China has subsidized them.

RAJAGOPALAN: It’s costly to extract. Gold is easy to figure out and extract, and rare earths are much harder.

KOTASTHANE: Correct, yes. They don’t have to extract. They need to give it to someone who can extract.

RAJAGOPALAN: Give it to someone, yes.

KOTASTHANE: That company didn’t invest in it because why would you do that when you can buy it from China? There were zero economic incentives to do that. That is one. Now India does have this extended production responsibility, EPR rules.

RAJAGOPALAN: Those are terrible.

KOTASTHANE: Yes, those are terrible. In fact, one of the things is those are also not putting any credits for rare earths. They do have mandates, credits, et cetera, but they are uniform for whatever material you extract. 

RAJAGOPALAN: If I read your work on this correctly, one of the problems is the cost of extraction of each of these elements is not the same, nor is the market value the same, but it’s a one-size-fits-all EPR or recycling requirement that the government has put in place, which basically means that only the highest value, easiest-to-extract elements will get extracted, and the lower value, much rarer minerals that are currently running cheap because China is dumping, those things are just not going to be part of the process. Is it just a pricing mismatch, or is there something more fundamental in the design that they goofed up?

KOTASTHANE: Their idea was EPR, the idea was to prevent waste. That is the focus. It is not recovery of important materials. It was agnostic to the importance of what you extract from it. Now we are adding an additional layer, and we are saying because rare earths are important, there is a constraint, then can you give more credits to rare earth extraction compared to silver or whatever other things? That’s the real challenge.

The fundamental issue is it is too cheap thus far because China was subsidizing it. Now hopefully prices will rise. That’s the thing. Once prices rise, all of this, the government doesn’t have to coordinate. Like I said, two companies that I know of are already doing this, trying to figure out ways to extract this better, not just rare earths, but lithium and others as well. A lot more can happen. India has that talent to do this, but the prices were the constraint.

RAJAGOPALAN: Here, I can think of a very straightforward design. We have credits for everything. You have carbon credits. You have a market for these credits. What if we create a market for the credits of each mineral? Let the market discover the price of each of those credits. Then just link the PLI scheme based on the credits. That way, a recycling infrastructure will develop.

Basically saying that for companies that are going to recycle or use recycled materials, we will give a subsidy as long as they buy N number of credits or such a percentage of their overall use comes from these credits. That way, you both create a thick market for the mineral recycle credits itself and also a bigger supply chain. This should be straightforward to design without intervening too much with the market mechanism is my point, or am I just making this too simple?

KOTASTHANE: No, I think that kind of design would work, but as I said, for now, that’s not a focus area for the government because the focus is on the other segments. They are also doing something on the downstream magnet manufacturing facility, the 7,000 crores of outlay announced. This requires more than giving a financial incentive, which is not the stance that governments really like.

RAJAGOPALAN: Also, it’s a little unsexy. What ribbon-cutting ceremony can you have if it’s 700 small recycling units or raddiwalas who are upskilling as opposed to this new shiny, fancy magnet industry where everyone’s going to fly in from all over the world and there will be a fancy ribbon-cutting ceremony? I think there are a lot of terrible, low-base-level political incentives, not even corruption. It’s just lack of imagination and poor political incentives at play. This should be straightforward to design. I think the critical minerals mission is actually the appropriate place to design the incentive appropriately.

KOTASTHANE: Also, for example, we should be importing some of this. Then there is this concern that the world will dump waste onto us. Why should we be that country?

RAJAGOPALAN: India already does that for textiles. The world dumps textiles on India.

KOTASTHANE: Yes, and for shipbuilding and others.

RAJAGOPALAN: We do a great job.

KOTASTHANE: These are political economy issues which come up. 

RAJAGOPALAN: Also, mindset issues. Raddiwala is lower down the caste order, is how I think about it. They want to be engineers and doctors and semiconductor fab. There’s a caste system, I feel, in manufacturing also. That mindset just comes in. There are activities that are just considered low level and there are activities that are considered high level. Recycling is very much considered a low-level activity. Does it permeate everything we do in India? I don’t know.

KOTASTHANE: True. I think that’s why people are trying to refashion recycling as urban mining. 

RAJAGOPALAN: Oh, yes. Urban mining is a fantastic word. That’s the same thing, I want to relabel solar as nuclear fusion so maybe we’ll have less of a bad reaction to nuclear. I want to stay one more minute with this question of recycling. When I was reading all your recycling work, there is now a new tension that I see where if we develop a fantastic recycling industry, then we should actually eliminate a lot of the protectionism and PLIs, and subsidies for producing at home.

Those kinds of protectionism, and all that exists because people think that China has this huge dominance in electronics or semiconductors, or turbines, or electric vehicles, or something else, and that prevents us from a homegrown system cheaply. On the other hand, if we basically reduce those protective barriers and we’re allowed to import that cheaply, it can actually get us more rare earths very cheaply because now we’ve imported someone else’s completed process and all we need to do is the urban mining to extract it. Is there a fundamental mismatch between the rare earth schemes and the other protectionism we are placing for all other electronic products?

KOTASTHANE: Slightly different view because you will still probably get to 35%. There also, you will be vulnerable to Chinese mercantilism.

RAJAGOPALAN: That’s true.

KOTASTHANE: Suppose they say we’ll not supply to you, now what will you do? That risk exists in that segment also.

RAJAGOPALAN: It exists in that segment, but it’s not one segment. It’s across the board. It’s everything from the cheap phone and the cheap battery that you’re importing to things further up the value chain and semiconductor chips, and wind turbines, and then electric vehicles and so on. It’s hard, but we have relatively high protectionist barriers against all sorts of things, especially against Chinese imports. Are there margins on which some things can be lowered to improve our competitiveness on rare earths, especially if recycling takes off, if they actually take your advice?

KOTASTHANE: Despite all our constraints, restrictions on China, we will be importing a lot of things from China either way.

RAJAGOPALAN: No, but cheaper.

KOTASTHANE: We are doing that. It will be cheaper. We’ll become more competitive once we figure out the recycling bit. If we figure out the domestic policy constraints, remove them, and actually have a market, then this step can help in that sense.

RAJAGOPALAN: The way I think about China, and again, everything that you’ve written about rare earths, I was thinking today morning that it reminds me a lot of Michael Kremer’s O-ring theory. This suggests that complex production, which requires lots of sequential steps, those production processes will gravitate toward locations where every step is reliable, because the entire point of the O-ring theory is one weak link can disrupt or ruin the production process.

To me, rare earth magnet manufacturing, especially the high-end use of things like magnets, they seem to be like textbook O-ring production processes where you need mining, separation, refining, alloying, machining, coating. There’s an entire production process which you described. What China seems to have figured out is it has spent decades not just figuring out each part of this production process and making it cheap, but it’s also got very high fidelity on how each of these production processes work and how they integrate.

Now, India’s mission is a little bit different. It’s all about subsidizing individual steps, especially the individual steps that they think are suddenly critical. There’s always a lag here. Sometimes something will be done for exploration, something will be done for mining, some big factory PLI will be announced for magnets, but it never manages to connect the links and it never provides high fidelity such that each of these links can be connected and don’t fail, like the O-ring.

Is that why Indian industrial policy just cannot work here? One, because we can’t do it as well as China and two, everywhere else it’s not industrial policy but economic growth, competitive markets and innovation which takes care of this. What is a good way to think about how India can actually replicate this?

KOTASTHANE: I would say don’t try to replicate it in this way at all. Just figure out some part of the supply chain where you can be a critical node and you have some backstop arrangement. I would actually think we would need to think of, as I was saying, not all critical minerals and not all rare earths are also important in the same way. What you would want to do is figure out different strategies for different kinds of rare earths.

For example, some of the rare earths are required in such small quantities like terbium and others that you don’t need to have even your own stockpile. You can just stockpile with some other country. That’s why some of the international relationships matter. Maybe quad countries figure out that we’ll have a joint stockpile of these 15 elements. Not all of us will require and if we use it, we’ll refill whatever we’ve used. We can figure out a middle. That should solve it for many of those.  

For some which are required in larger quantities, there you might want to do some mix of recycling, some form of offtake guarantees that also can be jointly managed. For example, US doesn’t need to have its own offtake guarantees for only its companies. What if it can be done in a bilateral or a multilateral fashion that four countries or 5-10 countries which want to stand up to China come together and say that, if any one of you does the mining, we’ll give you an offtake guarantee for the next 10 years such that we will protect you from the Chinese subsidy and lowering prices later?

That can be one more way. Idea is you will need some form of interdependence with other countries, and then you figure out what is the one part of the supply chain which aligns with your competitive advantage. 

RAJAGOPALAN: That’s exactly why industrial policy can’t fix this. Exactly the reason you said. The best the government can do essentially is reduce the volatility and say that if you actually invest in this long-term production process, we will limit the uncertainty that comes with it. Run with it, is all the government needs to do and then people will run with it.

KOTASTHANE: I was thinking a couple of things that maybe some form of offtake guarantees or price floor mechanisms might become important just because of this fact that China will, for some or the other reason, start selling it at half the price and then all your investment will face a bottleneck.

RAJAGOPALAN: How would the price floor guarantee actually work to make this China-proof?

KOTASTHANE: The way US is doing it is it has just said that for the next 10 years, it is completely making your companies uncompetitive. But it is saying that for MP materials to survive, right upfront they are saying we’ll purchase neodymium from you at this price, which is much more than the price that China is giving neodymium now for. They are saying for 10 years, we are giving this guarantee. The cost is being paid initially by the government departments. As you were saying, there’s a resilience tradeoff.

Now certain other companies, like Apple, is saying—see finally, neodymium cost for the Apple iPhone will be really minute. For example, Ather Energy’s CEO was saying that in a two-wheeler, the entire rare-earth magnet that they use costs around 200 rupees. That’s all. That 200 rupees, even if it becomes 600 rupees, 800 rupees, I think they’ll be able to absorb it somewhere down the line. In that sense, you can absorb some cost elsewhere and that’s how they will try to compensate. That’s probably the design.

RAJAGOPALAN: I have a visceral dislike for price floor contracts and things like that.

KOTASTHANE: Me too. That makes two of us.

RAJAGOPALAN: Because it kills the information mechanism. Let’s assume we’re in a world where there’s lot of geopolitical risk and it’s not that simple, there’s lot of interdependence, we do need governments to intervene. I will grant that assumption. There has got to be a better way than price floors because the way I think about this price floor that you described is, one, it’s making American companies less competitive, but also the broader dynamic market signal is terrible.

Normally people would have invested more resources in finding substitutes for that particular critical mineral, now basically the signal is the opposite. It’s saying we’re subsidizing this, so never bother finding a substitute for it. So one, not only does it kill your resilience, it actually increases your dependence. It’s a double whammy almost. The second part is I think it’s a phenomenal amount of hubris to think that what is a critical element today is going to be critical 10 years from now, that you write these phenomenally long price floor guarantees.

If there is support that needs to be given, it probably should be given in slightly different ways which are maybe like easier financing backstops and basically things that are a little bit more adjustable and don’t kill the price signal. At least that’s my immediate visceral instinct. Can you think of a reason to kill the price, the knowledge or the information signals that price gives in these instances?

KOTASTHANE: I think like you, but on this I would say, a response would be China also killed the price mechanism and yet it was able to use it as geopolitical leverage, so that is a response people would give.

RAJAGOPALAN: Actually, I would say the opposite, that China competes entirely on price. That’s the one mechanism they don’t kill. It’s the only way they figure out whether their state-owned enterprises are doing well or doing badly, by not killing the price system.

KOTASTHANE: In that the price generally would reflect scarcity, production costs, right? Here, because you are subsidizing, government is putting money into the system, the price of something was not reflecting the production costs as well. That’s the concern that many other companies have even now, that tomorrow it’s not necessarily because China is efficient, but you can’t compete with the Chinese suppliers because they’ll not just be 0.8 times of your price, they’ll be 0.3 times, 0.2 times, 0.1 times.

A lot of that will be because there will be subsidies, there will be misaligned incentives in their system which spill over to the entire world. They use that, but the result of all this was that they got dominance in this sector. Now once they have got dominance, they can use market power as another instrument to squeeze the others. 

RAJAGOPALAN: There’s still a fundamental difference. They are still trying to signal that they can produce things more cheaply. We are trying to signal in the United States or anywhere else in the developed world or outside of China that it’s okay to produce it less cheaply, it’s okay to make it expensive, and I think those are fundamentally two different things.

KOTASTHANE: In terms of effects, it will be the same. Like you said, because China will supply for rare earths so cheaply, in other countries, you wouldn’t look for alternatives or substitutes either, right? The effects will be the same.

RAJAGOPALAN: Yes and no, because a part of China subsidizing these things to the extent that it does means that there is a built-in geopolitical risk and volatility, which is not as easily priced as apples and oranges, and semiconductor chips, but businesses do price some of that risk, and they have an understanding of how much of that risk they’re willing to absorb versus not absorb. I don’t think it’s the same here where we are fundamentally not relying on the price signal at all. Let me pull back on the argument. You’re saying that China produces everything cheaply, but the global competitive price signal is meaningless because they are 80% of the market. Is that the argument?

KOTASTHANE: No. It’s not just 80%, it’s just that the price that they are supplying is not—

RAJAGOPALAN: It’s not the true cost.

KOTASTHANE: —reflecting production costs. Yes. It is so cheap that if, let’s say, I wanted to make an alternative to rare earths and I want to figure out an induction motor instead of a permanent magnet, I will never even look at the induction motor because I am just going to buy that cheap motor as well. The effect in that sense is similar to what you were saying earlier.

RAJAGOPALAN: I’m not so sure. Let’s pull back and I’ll give you a weird example. There is a tradition in the United States that on Christmas day, the only restaurants that are open are Chinese restaurants because they have the work ethic to work 24-7, 365, so they won’t even close shop for Christmas. I used to live on the Upper West Side in New York City. The Jewish tradition, because it’s Christmas, is to go out and eat Chinese on Christmas day. I have done this for many years on Christmas day if I was in New York City. Always, the tradition was that we’ll go and eat Chinese food.

Now, if I really think about it as a parallel to what you’re saying, these are people who are absorbing that cost. They are making their family and their teenage kids work on Christmas. It’s not pleasant, but they’re like, we’ll absorb this cost and still offer a service that’s really, really cheap, but we’ll bear that cost. That doesn’t weaken the price signal in any way as far as I understand. It just means that they are not fully absorbing that cost. At some point within China, that cost will become apparent that we have wasted the opportunity and we’ve subsidized certain industries at the cost of other industries, but that still doesn’t weaken the price signal for the rest of the world.

KOTASTHANE: The theory is that at some point of time, these costs will become apparent to China. At least this is what nation states feel that that is not happening anytime soon because China somehow is able to do the same thing across all sectors. The prices of things are really, really low across all sectors. There are subsidies, there is currency manipulation, because of which the prices are so low that others are not able to compete across sectors. That’s the lesson.

RAJAGOPALAN: I’m not so sure, actually, because again, we’ve been studying China’s production and manufacturing hegemony for 25 years. Twenty years ago, the conversation was like shoelaces and sneakers, and our kids won’t have sneakers when they need to play soccer, like China’s got this crazy hegemony. China’s not making shoelaces anymore. Vietnam is. Bangladesh is.

They also moved up the production process, and when it stopped being valuable for them to subsidize certain industries and move up the value chain, that’s exactly what they did. I don’t think of China as this static thing which is constantly subsidizing everything equally. I’m not saying that they should keep subsidizing, but I’m saying I can see a very clear shift in how China has done this. What China used to do 25 years ago, now other countries do it.

KOTASTHANE: I don’t think that’s the case because a lot of studies on this are showing that, in fact, China is not vacating the lower end of the spectrum on many things. That is the idea, that others will start making this because China moves to the higher-value end. FT had this piece that China doesn’t buy anything from other countries because it is able to occupy the lower end of the value chain and the higher value chain. That vacating of the lower-end things is not happening as much as we would have liked, and that’s why there are nonmarket reasons probably for this to happen.

RAJAGOPALAN: I’m not sure. I agree that China can produce everything for its domestic market, but that’s also because its domestic market is enormous. It’s gotten richer, but it has vacated export capability on a lot of the lower-end stuff. That’s how other countries are able to do it. China may not be importing shoelaces directly from Vietnam, but China is no longer the cheapest exporter of shoelaces either, if you know what I mean. Within Chinese industrial policy and subsidizing, I see a fundamental difference in how they are approaching it.

KOTASTHANE: I would say, for example, in many textiles, et cetera, still China is a very big player. It’s not just that Bangladesh is able to displace China. It’s not that as much. There are many segments. Anyway, the whole point is that there was one time when the rare earth price was really low, and that time companies didn’t invest or couldn’t invest because they couldn’t compete with this China price.

Now, anyways, we are not in that situation. We are in that situation where China is doing exactly the opposite. Now, it is saying it is using market power as an instrument to deny things to the other players. That also is a failure in the sense that because it can use its dominance to restrict others from making other materials on top of rare earths, it becomes a big bottleneck.

RAJAGOPALAN: At this point, for the rest of the world, irrespective of what are the price signals going on within China, for the rest of the world, the price signal is very much everything China produces is very cheap, so we got to figure some other way out. Until it’s not cheap, suddenly.

KOTASTHANE: Yes. That’s the thing. Now, hopefully, prices will increase. They have been increasing because of the changes, but they can’t commit to an investment because there is a risk that, again, you might have really low prices coming in. How do you manage that risk is the central challenge for government. You have to figure out, if not offtake guarantees, what are the other ways, but this is going to come. I can guarantee that this is what you have to manage because it has happened in 2010. It’s interesting to see what Japan did back then, 2010. They did a lot of—

RAJAGOPALAN: They diversified.

KOTASTHANE: —work on substitutes. They diversified. They did all the things that we’ve talked about. They figured out some substitutes. Some of the elastic things also happened. In fact, you can also have efficiency improvement. If you needed 10 milligrams of neodymium for the permanent magnet, through better research, you might now need five micrograms. In fact, Japan’s imports from China, in absolute terms, halved. Even though their dependence didn’t go away, they still import 60%, but that is of a much smaller base. Those kinds of things will probably happen.

Law of One Price

I wanted to ask one more thing, Shruti, actually. We talk about the law of one price. I think that also might play out because now think of you as an exporter within China or someone who’s doing this mining. You have removed these rare earths and the prices of rare earths within China are one-third those of what is in Europe or in the West. You now have really strong incentives to figure out a way to export by violating—there are now sanctions. In China, you might be jailed, lot of nasty things can happen to you. Yet, there is a strong incentive for you to figure out this arbitrage opportunity that you supply it to some other country, through Hong Kong or through other places, and then do this. Do you see law of one price operating in this segment, even before the substitutes come in?

RAJAGOPALAN: Let’s think through the law of one price. The textbook version of the law as we teach it is, absent transportation costs or trade barriers or things like that, goods that are identical, homogeneous, their price must converge. The dynamics behind or the underlying mechanism behind that is people are going to be incentivized to have arbitrage. If something costs, I don’t know, 200 rupees in Pune and 250 rupees in Mumbai, then that difference must be the transportation cost. If it’s not the transportation cost, someone will figure out a way to get it from Pune to Mumbai and make that tiny difference, which is the arbitrage, and that’s how the price gets shaved off. That’s the underlying logic. 

Now, the question of one price, it typically operates under certain assumptions, the way we think about it. One of those assumptions is that the good is relatively homogeneous or almost exactly the same. The second is that it has a pretty thick market. Arbitrage works when you have thick markets and when you have mobility and things like that.

What you are talking about inverts a couple of those assumptions. Now, you’re saying China is the only market, everywhere else the market is thin. The arbitrage opportunity in other parts of the world to do this are relatively low. The second part you’re inverting is now the transportation and other frictions are increasing because China has actually put in those frictions.

KOTASTHANE: Barriers are increasing.

RAJAGOPALAN: Exactly. Barriers are increasing. Actually, both of those invert the idea that things will converge toward one price. However, I do agree with your logic that both those things also mean that there are going to be lots of incentives or reasons to break out of China’s command-and-control regime. China’s, by having 80% of the market for some of these minerals and also imposing these crazy restrictions and having overcapacity, messed up its incentives so much, there is going to be leakage. I don’t think the law of one price, the way we teach it in a very textbook sense, is the appropriate framework to apply to this. Does that make sense?

KOTASTHANE: Yes, I think so. True. I guess the trade barrier assumption is a big one here, which this thing violates. There will be leakage, but the price difference will still be maintained to a certain extent.

RAJAGOPALAN: Yes, and also because the price difference is largely being maintained by the subsidy that’s being given, is your explanation. Subsidies can’t be driven away by arbitrage. What arbitrage can do is make processes more efficient, and someone can buy low somewhere and sell high and so on. I’ll tell you how I think about how this will play out. Let’s say that the United States or one of the other developed countries in the Western world has given you the price floor, that for the next 10 years, we guarantee that this is the minimum price at which government will buy these stockpiles or something like that.

Now you have a price floor which is really high in the developed world. China is still selling things very cheap, but has these crazy barriers. The obvious leakage is that there is going to be someone in these in the emerging markets, who will say, I have this sketchy deal going on with this smuggler in China at this particular port, and if I send these signals, then I can get this for cheap. It’ll still be slightly more costly than what China was dumping before, its protectionist measures, but it’ll still be cheaper than whatever the price floor that these countries are offering at.

Plus it’ll give us great movies like we had in the ’70s in India where you go to Madh Island and a 100-rupee note is torn and you have to make it—there will be some cool equivalent to that. But basically you have a sketchy guy in Macau or Hong Kong, or Shenzhen who basically does this. That’s how I think about how this will evolve, but I don’t think it will lead to a convergence of price the way we think about it. There will be some arbitrage opportunity, mostly illegal.

KOTASTHANE: Correct. I guess that arbitrage opportunity, there are strong incentives for it to exist. If it can create some stockpiles for other countries, that’s good. Then again, the geopolitical leverage reduces because some of these elements might not be required in large quantities and you can stockpile them. Again, in that sense, there is an incentive where this leverage loses its value just because of this mechanism.

RAJAGOPALAN: I think the Chinese control leverage will lose its value because overproduction and then completely killing the supply, and then again dumping, that causes a lot of volatility and economic uncertainty at home. Chinese taxpayers have to absorb that cost and make sure people can continue living and their factories don’t shut down even though there’s this government mandate and so on.

It’s a way of impoverishing your own people, which I understand is easier in communist countries than in democracies, but still, it’s not costless to the Chinese people themselves and therefore increases the incentives to keep having these leakages and export them. It’s an interesting question how this plays out.

KOTASTHANE: In fact, the government itself might do a nudge-nudge, wink-wink to allow it because there may be domestic costs at some point of time, which you have to just bind a lot of things and you can’t sell it now. It’s not as if they were making you a huge amount of money, at least the profits, because you were playing a volume game.

RAJAGOPALAN: That’s so interesting. You’re saying that for geopolitical reasons, like the top leadership of the Chinese Communist Party is going to signal this heavy hand and say China giveth and China taketh away; we can give you cheap rare minerals, but we can also take it away. It costs so much at home to actually stick with that policy and there’s so much domestic opposition that leakage is actually better, both for the leadership and for the people. That’s super interesting. That would be amazing. That would be ideal, actually. Everyone gets what they want, except it’s economically so inefficient and such a bad idea that I don’t see it as a long-term fix for anyone.

KOTASTHANE: True.

Pakistan and Rare Earth Reserves

RAJAGOPALAN: Before I let you go, I have to ask you, so that we can both roll our eyes, over Pakistan’s claim of $6 trillion in rare earth reserves. You’ve written about this. Couple of questions. Are they just bullshitting? Is one version I have heard. The second version is, look, there’s a difference between reserves and actual economic value. You may have the reserves. It’s not going to translate into economic value because you’ve killed your own economy and all production processes, and killed your currency, so it’s never going to happen. But the world seems to buy it and there seems to be a lot of self-congratulatory congratulations on Pakistan’s part, there seems to be a lot of overt congratulations on the American part.

First, can you explain what is the geopolitics or the drama that’s happening with Pakistan? Two, as you’ve debunked and pointed out, there’s zero data that this is actually going to increase the overall rare mineral capacity in the world.

KOTASTHANE: Pakistan does have some critical minerals, but it doesn’t have rare earths. There is a Saindak mine and other mine in Balochistan and other places which do have copper. There are some gold deposits which exist. Reserves exist. Converting them into resources, it requires a lot of effort. It requires you to do extensive exploration and other things which have not been done. We know that copper, et cetera, things exist and there are resources.

For rare earths, none of that has been done. Pakistan’s own geological survey data talks nothing about rare earths. I have looked through their document. All that is just bullshit, real bullshit. In fact, there’s a famous photo of the field marshal of Pakistan presenting some rocks to the US president, rocks, anyone can get. That doesn’t show that I have a huge amount of resource, recoverable resource or anything. 

RAJAGOPALAN: It’s a farce. They’re all playing along with it.

KOTASTHANE: Yes. That actually plays out in many other places also. Ukraine, for example, there’s so much talk about rare earths. Ukraine, the last study, which was done about rare earths, et cetera, in Ukraine was when it was part of the USSR. We’ve not even done a recent study which can tell how much of rare earths exist. Are they recoverable? Are they economically recoverable? None of that exists, but it is a part of the conversation. It’s just that moment when weaponization of everything happens, everything becomes strategic, everything appears to be a solution to remove that bottleneck, which it might not be.

Same thing in Greenland. If you start doing mining today in that cold climate, I don’t know how you’re going to be able to do that economically. You will be much better of finding, I don’t know, beach placer deposits in India which might be the solution, but whatever. In Pakistan, it’s exactly this case. In fact, I think even US, for a posturing point of view, it has done this, but even the amount of investment, et cetera—

RAJAGOPALAN: Yes, there’s nothing.

KOTASTHANE: —the MOU that has been said, there’s nothing in it. US is also looking at Australia and other places as the real solutions to this problem. Pakistan is just a sideshow. I think there is more of geopolitics, Nobel Prize, India not giving things involved rather than rare earths itself.

RAJAGOPALAN: You’re absolutely right. We should always follow the money. Pakistan, whether it has rare earths or not, the investment is not going in to translate into any economic resource because the rest of the economy is broken and only servicing one huge client, which is their military industrial complex. There is a bigger issue there at play, which even if it’s not total bullshit, it’s not going to play out the way we want in a sustainable way for the world.

KOTASTHANE: It’s in Balochistan. Literally, the province which is fighting the Pakistani state because of what Pakistan has done. Try doing mining there and doing this. The US president bought it.

RAJAGOPALAN: Well, I will reserve comment on what is happening with the information sources and the information dissemination from the US president’s office. 

Pranay, thank you so much for doing this. This was a lot of fun. I got so much out of reading everything you’ve written. You’ve written so many things about it. We’ll try and link to everything or almost all of it in the conversation. I read it over the last few years piecemeal. Just reading it all of it together has given me a much more coherent picture of what’s going on. Thank you so much.

KOTASTHANE: Thank you.