The global metals war taking place in Iowa

Karl Gschneider, chief scientist at Ames Laboratory's Critical Materials Institute, has been tinkering with metals for more than 50 years. He received his Ph.D. from Iowa State University, where Ames is located, in 1957 and is still hard at work.

In fact, not even a federal government shutdown—Ames Lab and the Critical Materials Institute are part of the Department of Energy—has slowed down Gschneider and his colleagues.

The Critical Materials Institute is one of the "lucky ones," in that, though it didn't begin operating until June, it received its funding in 2012.

"Funding came in early and is in the bank, here in town. A whole year of funding in advance and in the bank, you can spend," Gschneider said.

The challenge the institute was created to solve is even more complicated than a government shutdown: finding solutions to the biggest constraints in the market for rare earth metals.

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Not all rare earth metals shortages are created equal. In fact, the term "rare earth" can be misleading. Many such metals are abundant, but those aren't the ones used in industrial applications, primarily in magnets across a number of sectors. For example, cerium is the most abundant rare earth metal—U.S. miner Molycorp finds plenty of it—but its market is limited.

Bill McCallum, a colleague of Gschneider's at the Critical Materials Institute, said rare earths are essential to things we take for granted in everyday life—from hard drives to iPod earbuds and flat- screen TVs. But a hard drive has on average two grams of magnets, while a Toyota Prius has two kilograms of magnets and a wind turbine has on order of one metric ton per megawatt.

"We would have been fine except we decided we wanted Priuses and wind turbines, and each of those has project demand for as many rare earth magnets as all the other products combined," McCallum said.

There are three primary ways to tackle a natural resource shortage: Increase resource efficiency, replace the material or find more of it. The institute is pursuing the first two, and finding more of the rare earths is difficult and expensive for the mining industry.

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The return on investment outside of China for rare earth metal mining can be as long as 15 years,—not a timeline that venture capital investors or shareholders like.

Though a price spike (as happened in the market a few years) can raise interest, time to operation is always an issue: By the time a mining operation is up and running, the window of opportunity may have passed for all but the most advanced operations, and many miners may find only less in-demand rare earths that are too expensive to produce.

"This is not in the same category as fresh water," McCallum said. "Scarcity to me says limited natural abundance. Rare earth metals are not rare, but there are a few where we are facing problems of use where we could be in real trouble."

The shortage is really about two metals: dysprosium and neodymium. Even that shortage is not equal—the world is using three times as much dysprosium as neodymium.

"There isn't enough of it available," McCallum said. "It's not like you can go out and have a dysprosium mine. If you are looking for it, you find all the other rare earths and then you need to process a lot of the material and find a market for all of the other elements."

Molycorp spokesman Jim Sims said, "The really truly geologically rare, rare earth is dysprosium. ... "It's tough to find other elements that do what rare earths do."

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What the rare earths do so well in motors is provide more power at a fraction of the size of iron magnets, but at high temperatures, it's only dysprosium that behaves well.

"We use [dysprosium] now because it allows motors to maintain power under high temperatures, as high as 150 to 160 Celsius," Sims said. "Ultimately, we don't have a lot of dysprosium, and we need to find a way to engineer it out."

McCallum thinks usage can be cut by an order of magnitude. It turns out that dysprosium, uniformly placed throughout magnets, is required in some area areas and not in others. But just getting the rare earth metal where it's needed is a big task, he said.

Cerium does not behave well in magnets, but because it makes up half of all rare earth metals deposits, it may at least reduce the need for neodymium if scientists can find ways to increase its effectiveness.

"It'll be a balance between the lab and increased production," McCallum said. "Cerium magnets may not ever be as good as neodymium ones ... but the gap between the best nonrare earth and lowest-level rare earth magnets is a factor of two.

"If we produce cerium magnets at the top end of the gap then all of these what you might call marginal apps can switch to a cheaper, less powerful magnet, and that changes the balance."

Gschneider said, "We just have to find a substitute [for dysprosium] or get rid of it all together. ... You try to get around the problem any way you can. We're still getting equipment and people in, and breakthroughs don't come overnight."

Sims at Molycorp Sims said the challenge is substantial.

"Karl Gschneider been doing this forever and he is convinced that he can find ways of using more abundant rare earths, using cerium as an additive, but it may not work that way, so we have to ask, how do you make magnets with less?" he said.

Because of its initial funding round, the Critical Materials Institute doesn't have to work with less during the shutdown. And some of these lab veterans' experiences (they endured a lack of interest in funding basic research for many years, until Chinese rare earth quotas were splashed across front pages) might be instructive for those caught up in the current shutdown.

"If we don't put our heads in the sand it's a solvable problem and the economics will balance out," McCallum said. "If we come in with what you might call a balanced approach, this is something we can solve, if nobody is sitting still."

—By Eric Rosenbaum, CNBC.com