Rare Earths: An overview of the challenges

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06/14/2019 | 12:59 pm
A cold snap on the world's stock markets. While operators were expecting, just a few weeks ago, the advent of a US-China deal on trade issues, speeches have since become much more tense between the main parties concerned and diplomatic ballets have given way to customs duties. In this perilous game of overbidding, each side shows its muscles and makes its arguments. While the American economy's strike force remains unparalleled, it is still vulnerable, particularly on issues of its rare earth supply.
What could be likened to the United States' Achilles heel is of course being used by the Chinese authorities, who threaten to use China's dominant position in this area to influence trade negotiations. It is easy to understand that this is a powerful lever in Beijing's hands, but what is actually behind this common term? Here are some of the answers:

In the family of strategic metals, I ask for rare earths

They are called cerium (Ce), dysprosium (Dy), terbium (Tb) or samarium (Sm). These little-known surnames are part of a group of seventeen metals with specific electromagnetic properties. To go a little further, rare earths include the fifteen elements of the lanthanide group and two elements with neighboring properties: yttrium (Y) and scandium (Sc). These mineral substances have in common, apart from their singular name, to be essential in high-tech manufacturing due to their magnetic and luminescence properties.
Land classification within the Mendeleïev table - source: Direction des géoressources

Contrary to what their name suggests, metals belonging to this family are not so rare. They are even more present on the earth's crust than gold and silver... and spread all over the globe. But there are only few producing countries, such as China, and they are in a situation of quasi-monopoly by ensuring 90% of the production of rare earths.

In this context, it seems legitimate to ask why the offer is so concentrated when the proven reserves are not? To disentangle this paradox, it is necessary to understand how a rare earth deposit is constituted and to distinguish between heavy and light rare earths.

First, unlike gold or silver, rare earths are never naturally found in metallic form. On the contrary, they are included in the atomic structure of various minerals. This constraint requires specific and... extremely polluting separation techniques. A large number of countries are abandoning mining projects because of these environmental issues. This is not the case in China, which has much more flexible standards in this area.

Then, the metals of this family are generally associated together in rare earth deposits, but in varying proportions from one deposit to another. This is where the notion of light and heavy rare earths comes into play. Although there are no international standards for establishing a real delimitation within rare earths, it is recognized that the higher the atomic number, the heavier the element in question. Light rare earths are abundant, so they are produced in greater quantities than heavy rare earths whose concentration is much lower in rare earth deposits. For information, producing one tonne of dysprosium (atomic number 66) is equivalent to producing 38 tonnes of cerium (atomic number 57) and 24 tonnes of lanthanum (atomic number 58). Let us add an ounce of economic logic to understand that some metals are overproduced while others are considered "critical" and highly sought after, especially those generating high added value in their field of application. More briefly, heavy rare earths, such as dysprosium or terbium, are the most sought-after. Without prolonging the suspense, the deposits offering the highest concentrations of heavy rare earths are located in China, which hosts deposits of ionic clays enriched with rare earths and representing not far from the bulk of the world supply of heavy rare earths.

Let's talk a little bit, let's talk about prices

Rare earth prices are set by direct negotiations between mining producers and processors or end users. Trade remains naturally relatively opaque in terms of volumes and prices. On this basis, there is no single market for rare earths, but rather markets specific to some of them. Examples include cerium, dysprosium, gadolinium, lanthanum, or terbium, which have a spot price, either as a metal or as an oxide. Not surprisingly, these metals are listed on the Shanghai Metals Market (SMM).

As seen above, rare earths suffer from unequal supply and demand, so that the price dispersion between the components of the same family is enormous. As such, some rare earths are quoted in metric tons while others are quoted in kilograms. According to MMS data, the price of cerium metal is CNY 34.5 per kilogram (or 5 USD/kg) while the price of terbium is CNY 4550 (or 336 USD/kg), more than 100 times higher.
Evolution of the price of rare earths, denominated in yuan by TM and by Kg - source: Bloomberg

A look back at the evolution of rare earth prices reveals the violence of the fall in prices since 2011 and the bursting of the rare earth bubble. As a reminder, prices had temporarily exploded after China's announcements to tighten its export quotas. Fears of shortages then intensified and storage races triggered a real price boom. However, rising prices have prompted many countries, as part of a diversification of supply, to finance mining exploration projects. Some deposits already known could also be profitable at these price levels, pushing the Chinese authorities to gradually reduce their protectionist claim.

Importantly, while the scale in the graph above attenuates the price recovery since the beginning of the month, the increases are very significant: over this period, neodymium and dysprosium appreciate by about 30% while terbium advances by 12%, while remaining very far from their 2011 level.

Various uses in many strategic markets...

The earth is omnipresent in our high-tech everyday objects, but not that, these metals are essential in many sectors. Many markets can be identified that affect a myriad of industries:
  • Permanent magnets are the largest market for rare earths. Smaller and more efficient than conventional magnets, they have become indispensable in many fields. The demand for permanent magnets comes from the automotive industry, the renewable energy sector (direct drive wind turbine generator) and consumer electronics (microphone, smartphone speakers, computers, hard disks, etc.). The so-called defense industries are also hungry for permanent magnets, since they are necessary for the proper functioning of radar systems, missile guidance systems and other sensors.
  • The catalysis market, whose main players remain the oil industry (cracking of heavy hydrocarbons) and the automotive industry (catalytic converters).
  • Energy storage, driven mainly by battery demand, also requires rare earths by requiring metallurgical alloys. However, the emergence of more efficient Li-ion batteries is impacting alloy demand by making NiMH batteries incorporating rare earths technologically obsolete.
  • Luminophore powders have historically been used in compact fluorescent bulbs. Demand in this market is declining due to the substitution of compact fluorescent bulbs by LED bulbs, which use less rare earths.

In light of these elements, rare earths are widespread in many fields of activity and particularly affect industries of the future. Among the markets mentioned above, it is easy to understand that the permanent magnet market crystallizes all the attention since, at the moment, it is impossible to substitute rare earths without losing performance.

... with preponderant geopolitical issues 

China's hold on these metals is not about to fade away, as evidenced by China's international expansion and the conquest of new sources of rare earths. While the majority of mining projects are dormant given the current price level, China is making some appearances, particularly in Greenland in the Kvanefjeld deposit and even in the Bokan Dotson Ridge deposit in the United States. As such, we can only envisage a continued dependence of high-tech industries on the Chinese ogre, transforming mining and economic problems into real geopolitical conflicts.

The following graph says a lot about the United States' dependence on China for its supply of rare earths, 80% of which comes from the Middle Kingdom.
Origins of rare earth imports into the United States - source: Bloomberg, US Geological Survey

Let us take the reasoning further: in a scenario of strong tensions on rare earth prices, although American and European players have feasibility studies to bring new fields into production, it should be borne in mind that there is a whole range of industry, currently non-existent, to be created. This is tantamount to saying that producing rare earths locally will necessarily be more expensive than continuing to import them from China, especially since it is the finished products that are imported. 

China can indeed count on a vertically integrated industrial sector, which extends from mining to products incorporating advanced technologies. In other words, composing entirely without China to source rare earths is more a misconception than an option as long as the financial, human and environmental barriers are considerable.

On this basis, Washington and Beijing must agree on the trade theme, at the risk of experiencing an episode worthy of 2011, harmful to all.

Specialized mining companies start to jump

The big winners of this unprecedented rise in tensions on the rare earths market obviously remain the specialized mining producers. Beyond the strategic dimension of processed minerals, the rise in rare earth prices means profitability. Producers have thus been the subject of intense speculation in recent sessions, particularly for the few elected officials operating in Australia and Canada.

These include the routes of Australian mining companies such as Lynas Corporation and Greenland Minerals and Energy, as well as those of Ucore Rare Metals and Avalon Advanced Materials for Canadian companies, whose stock prices have risen over the last five days from 30% to 60%. 
Jordan Dufee
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