Last year's panic over rumours that China would ban exports of rare earths shows that Canada needs to get with a program

You probably aren't familiar with the element europium, but if you have a new plasma TV, the metal gives you the colour blue. Europium is one of 16 elements called rare earths that are needed to make components of many leading-edge products. The battery pack inside Toyota's Prius hybrid requires up to 15 kilos of lanthanum. Energy-saving bulbs are made with rare-earth phosphors. Computer hard drives and many wind turbines couldn't function without neodymium magnets.

Yet just one country, China, controls an estimated 97% of the world's production of rare earths. Last year, rumours that China's Ministry of Industry and Information Technology was considering a ban on exports of everything rare earth caused panic among manufacturers around the world. No prohibition appears to be imminent, but the scare exposed a fundamental weakness of free-market economies. How is it that China has a near monopoly on rare earths production, even though it has only about half of the world's deposits? Leaders and bureaucrats in Beijing aren't afraid of implementing long-term national strategies, whereas governments of Western-style capitalist nations are reluctant to do that unless they face a crisis.

Even some corporate executives find that reluctance frustrating. Canada has large lodes of rare earths, as do South Africa and Australia. All three countries also boast some of the world's best mining industry expertise and capital markets with a history of raising money for huge resource plays. The trouble is that "Canada doesn't really have a rare earths national strategy," says Don Bubar, president of Toronto-based Avalon Rare Metals Inc. Avalon is a junior exploration and development company that hopes to bring its Nechalacho rare earths deposit at Thor Lake in the Northwest Territories into production by 2014.

Unfortunately, Avalon and other Canadian producers are almost three decades behind the Chinese. Some of Beijing's top leaders realized the potential of rare earths in the 1980s. Back then, miners began extracting rare earths from a state-owned site in Inner Mongolia in large amounts, as byproducts of mining iron for heavy industry. In 1992, China's paramount leader, Deng Xiaoping, said the goal was to become the Saudi Arabia of rare earths. "The Middle East has its oil. China has rare earths," he said.

The cost of extraction from China's abundant deposits is low, and Beijing ramped up production in the 1990s and 2000s. That caused steep declines in the prices of rare earths, which killed off competing producers in the United States and elsewhere.

Production costs are certainly a factor that Canada has to consider. Many of the elements are found together, and have to be dug up all at once, then separated. Heavy rare earths usually account for only about 2% of the elements in the deposit, and therefore command prices 10 times more than the more abundant light varieties. (Lanthanum is a light one. Europium is a heavyweight.) "It's not so much size of your deposits, but the grade, the distribution between heavies and lights," says Avalon's Bubar. He believes the richest portion of the company's Nechalacho site can yield at least 20% heavy rare earths.

A policy of extraction at any cost doesn't make sense for Canada, but paying too much attention to short-term price fluctuations can also be a mistake. China's success resulted from decades of planning and market intervention. That kind of midwifery has precedents in Canada: Ottawa and Alberta have provided massive incentives to oil sands development over the past three decades, even though they are a high-cost source of production and oil prices have plunged below $10 (U.S.) a barrel at times.

As with oil, the long-term big picture for rare earths is promising. Demand will continue to grow with the voracious worldwide appetite for new electronic gadgets and cleaner technologies. "There are clear opportunities in the automotive sector in North America, Japan and South Korea. With any company making plasma displays. With BlackBerrys," says Bubar.

Last year's panic about a possible Chinese export ban put that big picture in better perspective. China uses up more than 60% of the rare earths that it produces, and a real clampdown on exports remains a possibility. "The reality has sunk in," says Bubar.

The scare also ignited investor interest. An index tracking 12 international producers of rare earths spiked 600% at its peak last year. Australia's Lynas Corp. raised $450 million (AUD). Avalon raised about $20 million, and its share price climbed from less than $1 to more than $3.

Bubar, who's been in the business for more than a decade, says that enthusiasm was gratifying after years of having his words "fall on deaf ears." Ottawa now needs to implement a program of tax breaks and direct financial support, and market up a storm with trade partners. Yes, China will remain a behemoth. But to China's Saudi Arabia, Canada could be Venezuela.