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From SCDigest's On-Target E-Magazine

- Feb. 4, 2014 -

Supply Chain News: Is Rare Earth Metals Crisis Disappearing?

Prices are Falling, Immediate Threat has almost Disappeared, but Risks Still Out There

SCDigest Editorial Staff

In 2010 and 2011, China's near monopoly in production of a family of so-called rare earth metals had companies and governments across the globe in near panic state.

Rare earth metals are a group of 17 elements, such as yttrium and dysprosium, that are used in everything from cars and defense systems to smart phones and "green" energy products. Though they typically only represent a small fraction of the finished product's make-up, these metals add certain key characteristics to the product, such as heat resistance.

SCDigest Says:

Although "Other new mining projects could easily take as long as 5-10 years to reach production, in the long run the US Geological Survey expects that global reserves and undiscovered resources are large enough to meet demand."

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Though the US and other countries once mined these metals, most of those facilities closed by the 1980s, in no small part because processes are messy and very environmentally unfriendly. That left China as nearly the world's only producer, at a time when demand for these materials was rising rapidly from their use in new high tech and green products.

First, prices started to rise substantially. At one point, for example, the price of cerium oxide, a rare earth compound used in catalysts and glass manufacturing, rose to $110,000 per metric ton outside China, up from $3,100 2009.

China also started to apply strict quotas on the exports of rare earth metals, cutting Japan off entirely at one point. The price of the metals inside China were available at a fraction of the global market price, as China lured global manufacturers to move into the country with the promise of these dramatically lower costs.

This led to both fear and anger across the globe, with US Defense officials, for example, saying the lack of open access to rare earth metals was a national security threat, while others warned this was going to move even more production and jobs to China from developed economies. Especially worrisome was that China's temporary cut off of rare earth exports to Japan seemed tied to territorial disputes in the South China Sea.

However, some three years later, the situation seems to have largely corrected itself through basic market forces - at least for now. How this will play out in the mid- and longer term remains unclear.

Global rare earth metal prices have fallen by about 60% from their 2011 peaks. This has come in large part as the soaring prices led to creation of a number of new mining operations in China, many of them operating outside official scrutiny, along with tactics to skirt export quotas.

Two weeks ago, the Chinese government unveiled a plan to consolidate its rare earth industry into six large extraction and processing companies. For example, the Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Company is buying nine smaller miners in the north, with more mergers and acquisitions to come.

The logical conclusion: Beijing is worried about over supply of rare earth metals.

New production is also finally starting to come on-line outside of China. Greenland and Russia both have opened new tracts to rare-earths exploration in the past year. There is activity in Australia as well. In the US, Molycorp's Mountain Pass operation in California continues to increase its production. The company is also producing or developing rare earth metals in other global facilities.

There is also relief coming on the demand side. Faced with soaring prices and supply availability concerns, manufacturers across the globe looked for ways to reduce their dependence on rare earth metals. That included in some cases dropping products with a high dependence on the materials, in other cases engineering alternative approaches to the material mix, and increasing use of recycling techniques.

(Manufacturing Article Continued Below)

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China's share of global production of rare earth now is down to about 80% from 95% in 2010. A Pentagon report leaked last month noted that reliance on Chinese rare earth metals, while still high, is declining.

Separately, a Congressional report released in December on the "Rare Earth Metals Supply Chain" found that world demand for rare earth elements was estimated at 136,000 tons per year, with global production around 133,600 tons in 2010. The difference was covered by previously mined above-ground stocks.

It says global demand is projected to rise to at least 160,000 tons annually by 2016. Some mine capacity at Mt. Weld Australia has come on-stream in 2012, but far below the projected 11,000 metric tons of capacity, the report notes.

It concludes that although "Other new mining projects could easily take as long as 5-10 years to reach production, in the long run the US Geological Survey expects that global reserves and undiscovered resources are large enough to meet demand."

Some Say Situation hasn't Really Improved

While all that sounds good for manufacturers, the news is not as rosy as some are portraying it, according to James Kennedy, president of ThREE Consulting, who says the world's dependence on China for rare earth metals is still dangerously high.

That is in part because, Kennedy says, almost 100% of "high value" rare earth metals still pass through China. He claims, for example, that almost all of these high value rare earths produced by the Mountain Pass mine must to be sent to China for refining and value adding - we're suspecting for environmental reasons. Molycorp doesn't want to deal with protest and regulatory barriers setting up processing operations would entail.

So what to make of all this? Here is SCDigest's view:

In the short term, the situation has stabilized and is not a currently major concern for manufacturers and national security.

In the long term, new mining operations ramping up now across the globe should greatly mitigate China's ability to manipulate prices and supply.

The danger could come in the mid-term, over the next five years, before the new operations are largely on-line, while tempers flare with China over several territorial disputes with Japan, South Korea, the Philippines and more that threaten to escalate.

Is the situation going to continue to improve for manufactures relative to rare earth metals? Or is this just a temporary lull? Let us know your thoughts at the Feedback section below.

Recent Feedback

A few things. While well intentioned, this article ignores some of the primary value drivers affecting rare earth prices. The first and perhaps most important factor is that not all rare earth metals can be lumped into the same supply/demand categories. This is due to the overwhelming skew of rare earth supply toward “light rare earths” such as lanthanum and cerium (Molycorp’s primary assets are no different in skew). These metals are in relatively abundant supply and should be looked at in the context that your article suggests.

However, the particularly “rare”, heavy rare earths (HREE’s), account for a very small fraction of the total rare earths mined today. HREE’s such as Dysprosium and Terbium will continue to see increases in pricing, due to the lack of substitutes in defense and green technologies. As an investor, I would look more closely at the distinction between LREE’s & HREE’s and the value propositions of each. Furthermore I would look toward fact-based scientific studies that dictate trends in global supply vs. demand of the more strategic rare earth elements.

Ryan
Analyst
NA
Feb, 05 2014