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Rare Earth Elements: The Seventeen Metals Crunch; Updated

Last updated: 12:13 08 Mar 2011 GMT, First published: 13:13 08 Mar 2011 GMT

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The rare earths sector is buzzing on all counts.   Prices of the 17 rare earth metals have risen by an average of around 300% over the last year, with the metals most impacted by Chinese export quotas that are up considerably more.  Stocks of rare earth companies are up by an average of perhaps 150%.   The air time, column inches and internet space devoted to the topic seem to be increasing exponentially, as does awareness of the strategic importance of the metals among policy makers in the US, China, Japan, Korea, Europe, and elsewhere. 

Developments in recent months have merely served to accentuate the ongoing fundamentals of the rare earths story.  Demand for the metals, which are critical for many hi-tech and clean energy applications, is continuing to grow both organically and incrementally as new applications and markets are developed.  The "greening" of China (to borrow a term coined by the rare earths analyst Jack Lifton), as the country seeks to reduce its dependence on imported energy, could also provide huge incremental demand; for example, the proposed Chinese wind energy programme to extend installation of wind electrical generating capacity from 13GM in 2009 to 300GM by 2020 could alone require three and a half times current world production of neodymium.
 
Meanwhile, production remains totally dominated by China who accounted for 97% of world production in 2010 according to US Geological Survey estimates. Moreover, China, which has been seeking both to protect its own finite resources of rare earths and to increase its share of value added in the rare earths pipeline, has been cutting export quotas - by 72% in the second half of 2010 and by 35% in the first half of 2011.  China has also been flexing its muscles with Japan, who are the biggest competitor to China in the manufacturing of rare earth-based products such as batteries, magnets and lasers. Although there was no explicit export ban, Japanese businesses are alleged to have found it difficult to receive shipments of rare earths in September and October last year following a diplomatic spat over an incident in the East China Sea near the disputed Senkaku Islands.  These events have heightened concerns globally about the security of supply for the metals.
 
Of course, the race is on to redress the supply gap; the number of companies exploring for rare earths is rocketing.  Rare earths analyst, Gareth Hatch, reports that he is now tracking over 200 rare earth projects in 30 countries outside China, India and Russia.  But most of these are early stage.  Developing a rare earths mine is a particularly long and demanding process. Rare earth developers have to cope not only with the usual geological, operational, environmental, social and economic challenges associated with mine development, but also with tricky metallurgy, (as the metals, which are always found together, must be separated, yet there is not a standard way of doing so as each orebody is unique), and also with more stringent environmental considerations, as the metals are frequently found with radioactive elements such as thorium and uranium. Moreover, there has been a loss of expertise in the West during the period of Chinese dominance of the market.  So far, only a dozen or so mining companies have reached an advanced stage of development with a NI43-101 or JORC compliant resource.  Just two of these are actively under construction.  Construction of a rare earth processing plant may also begin in India later this year.

Looking ahead, demand is likely to continue onward and upward even if current concerns about the overheating of the Chinese economy prove founded.  However, there is no prospect of any significant source of supply outside China until the end of 2011 at the earliest when Lynas' Mount Weld mine in Western Australia is scheduled to begin production followed by Molycorp's Mountain Pass mine in 2012.  Meanwhile, China is cutting exports and Chinese costs are rising in line with input costs and increasing environmental demands.  There is therefore a widespread expectation that prices of the rare earth metals already in short supply will continue to trend upwards in the near future.

Further ahead, a number of additional factors will come into play.  Demand is likely to continue to rise strongly driven in particular by growth for magnets, although there will be some downside pressure from substitution (in the limited applications where this is possible), miniaturisation and recycling as companies and countries seek to avoid the geopolitical issues currently associated with rare earths.  Some car and car part manufacturers, such as Japanese auto makers Toyota and German car part manufacturer Continental AG, are actively researching alternative materials and/or designs which require less rare earth material. 

On the supply side, new projects will eventually come on stream, though there will not be a significant increase in the production of heavy rare earths (those metals with atomic numbers from 64-71) for at least 4 years, and China has given notice that its resources of the heavy rare earths will run out in about 15 years.  At a rare earths conference in Vancouver in January 2011, a paper read on behalf of Dr. Zhanheng Chen, Academic Director of the Chinese Society for Rare Earths, noted that China may well be a net buyer of rare earths by 2015.

There is thus likely to be ongoing upward pressure on prices which could be further exacerbated by changes in the yuan/dollar exchange rate.  Price rises are unlikely to impact significantly on demand, partly as there are no substitutes for many rare earth applications and partly as the rare earth component of most products typically represents only a small percentage of the final product both by volume and by value.  Demand is thus relatively inelastic - even a large increase in rare earth prices only has a marginal impact on the final product price and hence on demand.

A number of key commentators take the view that there will be shortages of heavy rare earths under almost any foreseeable supply scenario, and that there is likely to be upward price pressure on these metals (though note, however, the corollary that since the rare earths are always found together, if production of heavy rare earths increases then production of the rare earths already in surplus will also rise which will exert downward pressure on the prices of those metals).  A recent presentation by industry experts Dudley Kingsnorth of IMCOA and Judith Chegwidden of Roskill Information Services anticipates that neodymium, europium, terbium and dysprosium will all be in supply deficit in 2015. On a slightly different tack, the Critical Materials Strategy Report published by the US Department of Energy (DOE) in December 2010 identified five rare earths, (the four listed above plus yttrium), which it anticipates will be "critical" (a measure defined by a combination of importance to the clean energy economy in the US and risk of supply disruption) for the next 15 years. 

This article is an updated version of a report originally published in October 2010.  Much of the background information and more detailed analysis on the outlook for the metals remains the same, though some points, charts and recent information have been added.  Part two of the article provides an update on the developments in 12 rare earth companies.  Interestingly, the share prices of these companies have increased by a weighted average of more than 50% since October.

Although there has been some water under the bridge since the article was first published, the conclusion remains the same, viz: it is a long, challenging and costly process to develop a rare earths mine.  A company needs a favourable orebody, a careful approach to environmental considerations, appropriate infrastructure, a high level of skills and access to significant amounts of capital.  But the rewards for those who succeed, (or to those who can demonstrate a path to success), could be high.


Background : The Supply and Demand for the Rare Earth Elements

The term "rare earth metals" is commonly used to refer to 17 metals including the 15 lathanides, yttrium and scandium.  They are all listed in Group 3 of the periodic table and have similar atomic structures and characteristics.  Most were discovered during the nineteenth century, though for many years they were barely more than a laboratory curiosity.  Demand in 1953 totalled just 1,000 tonnes of rare earth oxide worth $25M compared, for example, with 2.7 million tonnes of copper production that year with a value of $1.7B.

 

 

 

More recently, however, material scientists have discovered that the metals have a plethora of important magnetic, electrical, chemical, optical, fluorescent, metallurgical and catalytic properties. These characteristics have made the metals vital components in many new and environmentally friendly technologies.  For example, they are used in super-magnets as they have high magnetic strength per unit of weight.  These magnets can be used in electric motors which can then be smaller, lighter, quieter, produce less vibration and be more energy efficient. Wind turbines using REEs are more efficient, lighter (and therefore taller), and require lower maintenance. 

REEs are also used in MRI scanners, LEDs, energy efficient light bulbs, glass, ceramics, super-alloys, aerospace and a whole host of consumer electronics such as Ipods, monitors, hard disk drives, laptops and cellphones. Hybrid cars are voracious consumers, typically using 30kg of rare earths per car in order to lower emissions and improve fuel economy. REEs are also vital components in a number of defence applications including mine detection, missile guidance systems, lasers, radar, missile-guidance systems, night vision goggles and so on. Demand has risen rapidly; by 2010, it totalled an estimated 125,000 tonnes of rare earth oxide with a value of $2.5bn. 

 

 

The metals always occur together in the earth's crust; the fact that they have not separated into individual metals even after eons of repeated melting and re-solidifying is testament to the similarity in the properties of these elements.  However, each deposit has varying combinations of the metals, though the "Light Rare Earths", those with atomic numbers 57-62, typically account for about 97-99% of the rare earth oxides in a deposit leaving just 1-3% for the "heavies" (HREE) – though there are a few known deposits with higher concentrations. The composition of an orebody makes a huge difference to its in situ value as there are significant differences in the prices of each of the elements, as illustrated in the chart below, taken from Lynas' website.  Current prices of the selected rare earth metals range from $61/kg for samarium oxide to $646/kg for europium oxide.

 

Despite their name the metals are not particularly rare - indeed even the rarest is more than 100 times more abundant on earth than gold.  But they are only rarely found in economically viable concentrations. 

Prior to 1948, the metals were sourced principally from placer sands in India and Brazil.  Thereafter, rare earths deposits were identified in a number of minerals including monazite, bastnasite, xenotime and ion-adsorption clays; needless to say, production became more widespread.  By 1990, fourteen countries were mining the metals, with the USA the largest producer thanks to the Mountain Pass deposit in California.

China, meanwhile, began recovering rare earths as a by-product of iron and steel in Mongolia in the 1950s.  It actively supported research and development into the metals, and by the 1980s it had joined the world stage of producers. The industry grew rapidly but in an unregulated fashion, spawning businesses of all sizes from huge state-owned enterprises through small businesses running rare earth processing plants to artisanal miners. By 1992, it had become the world's largest producer, and Chinese leader Deng Xiaoping, recognising the strategic importance of these resources declared, "There is oil in the Middle East; there is rare earth in China".

 

 

Worldwide prices of rare earths plummeted In the 1990s driven down by the triple whammy combination of a rapid rise in Chinese supply, low demand (rare earths were then only used in niche applications), and low costs in China due to low wages, intensive competition within China and its lax mining standards/environmental controls.  This undercut mines in the West, eventually driving them out of business or causing them to cut back production. By 2000, China accounted for 88% of world production. By 2009, that figure was 97%.

Recent Developments and the Outlook for Rare Earths


Demand for rare earths took a significant hit during the financial crisis falling by a third in 2009.  However, it rebounded in 2010 and the number of applications is continuing to rocket.  New technologies to use rare earths, including tidal power generation turbines, hydro power generation, eBikes and magnetic refrigeration and heating; magnetic air conditioning units, for example, can use just one tenth of the power of a standard unit and have fewer moving parts so require less maintenance. 


Chinese supply, meanwhile, is fragile. The industry has been fragmented and extraction techniques have been inefficient and often environmentally hazardous.  China is now therefore taking a raft of measures to protect and optimise its diminishing resources (it recently declared that it has only 15 years resources left of the heavy rare earths), to ensure that it has enough for domestic usage and to maximise the value added in China. It has therefore been imposing production quotas, restricting export quotas (see table below), stockpiling, increasing environmental regulation, closing down small and/or illegal operations and consolidating larger ones in an effort to gain more control.  To attract new investment to the country and develop new industries, it sells REEs domestically at much lower domestic prices than its fob export prices.  Supply from outside China, even though it rose slightly in 2010, has been insufficient to make up for the shortfall in Chinese exports.

 

 

Export prices of rare earths therefore soared during 2010 as can be seen from John Kaiser's composite price index shown below and from the prices in the Lynas table in the previous section of this article. 

 

Although China has a near monopoly on current rare earth production it does not have a monopoly on resources and reserves.  Latest USGS estimates suggest that Chinese reserves now account for 'just' 50% of the world total.  Opportunities are being created to produce outside China thanks to the changing supply/demand fundamentals, rising prices and government priorities.

Lynas should be the first off the block with a mine to market pipeline in place by the end of 2011. The company has recently announced a strategic alliance with Sojitz Corporation to supply the Japanese market.  Molycorp, which owns the former Mountain Pass mine in California, completed a $390M IPO in July 2010 to restart mine production and will come onstream in 2012.  The company has signed a memorandum of understanding by which Sumitomo will provide $130M in debt and equity finance to Molycorp, who in return will supply Sumitomo with 2,500 metric tons per year of cerium- and lanthanum-based products and 250 metric tons of didymium oxide (a combination of neodymium and praseodymium) per year. Japanese companies, notably Sumitomo, Toyota and Mitsubishi are also investing in projects in Vietnam, India, Brazil and Russia. Other new projects are being developed in the US, Canada, Australia, South Africa, Sweden, Malawi, Kyrgyzstan and Greenland amongst others, though none are likely to be in place much before 2014. 

Although development for these projects will be expensive, there may be governmental assistance since legislation such as the RESTART (Rare Earths Supply-Chain Technology and Resources Transformation) Act in the US was passed by the House of Representatives last October.  The act aims to ensure the reintroduction of a competitive domestic rare earth supply chain by all necessary measures including the provision of government-backed loan guarantees, support for innovation, training and workforce development, research into recycling and so on. (A summary of initiatives in other countries and regions, including Japan, Korea and Europe is available in Chapter 6 of the DOE Critical Materials Strategy report).  Financing may also be forthcoming from the Chinese who are seeking to secure supplies from abroad.

So the supply of rare earths is certainly set to rise over the next four to five years though the pace of development will depend on a myriad of factors and hurdles to be overcome.  It seems certain, however, that there will be no significant increase in overall supply until 2012 at the earliest and no major increase in the supply of heavy rare earths until at least 2014.  Forecast supply in 2015 as summarised in the DOE report, albeit with many caveats, is summarised below.

 

Meanwhile, the trajectory for the future demand for rare earths is also subject to a wide cone of uncertainty.  It is no easy task to net out the effect of growth in so many different applications, to estimate the rate of deployment of new technologies, or the intensity to which each material will be used nor to estimate the extent to which there will be recycling or substitution as a result of the current geopolitical uncertainty of supply.  The possibilities for massive incremental demand through the greening of China also add to the uncertainty.  Kingsnorth and Chegwidden, though, have prepared detailed forecasts by market, application and metal, predicting a growth rate of 6-10%pa to 2015, when they forecast total demand of 185,000 tpa of rare earth oxides.

So what does this mean for the supply/demand balance and prices?  Of course there are theoretically 17 different supply/demand balances, one for each of the elements. The conclusion of Kingsnorth and Chegwidden, as already mentioned, was that neodymium, europium, terbium and dysprosium will all be in supply deficit in 2015.  Industry expert, Jack Lifton, identifies dysprosium and terbium as currently the most critical of the elements, and the US Department of Energy has published its view of the "criticality" (defined by a combination of importance to the clean energy economy in the US and risk of supply disruption) of a number of materials including rare earths, in which the four elements listed above, plus yttrium, are defined as critical for the next 15 years.

 

 

And the impact on prices?  Again this is not an easy prediction, and any analysis on the price of rare earths is made more difficult by the fact that rare earths are not exchange traded but are generally traded through long term bilateral contracts.  Prices are also to a degree removed from the fundamentals of supply and demand as (a) the metals are co-produced with each other and often with other metals too and so production decisions can be independent of price levels of any given metal, (b) lead times are long and so there is limited flexibility to provide a supply response, (c) there is likely to be government assistance to develop supply chains and (d), as discussed earlier, demand is relatively inelastic due to the relative lack of substitutes and the fact that rare earths typically only represent a small percentage of the final product price.   But there seems to be a view among many of the commentators that future prices will be volatile, but high for the metals in shortage.

So rare earth developers will be working in an uncertain and challenging world, but one in which there is widespread expectation of future shortages of at least some of the metals, and in which it is easy to envisage considerable upside price potential. Part two of this article provides an update on recent trends for 14 companies in the rare earths space.

 

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