Supply Situation Report: New players emerge to challenge China rare earth dominance

By Mark Watts
Published: Thursday, 26 January 2012

Lynas, Molycorp lead the pack; Chinese REO demand could top 130,000 tpa by 2015; Juniors hit by falling prices

SUPPLY SECURITY

The security of access to rare earth elements continues to be uncertain in 2012, as the vast majority of global supply remains under Chinese state control.

Chinese export quota restrictions were a key factor behind the surge in rare earth oxide (REO) prices in the 12 months up to July 2011.

However, the second half of 2011 brought with it lower demand from importers such as Japan and, by the end of the year, many Chinese exporters did not use up their allotted quotas.

The Chinese Ministry of Commerce’s (MOFCOM) rather ambiguous announcement on exports for 2012 still leaves a lot of confusion in the supply situation for this year.

MOFCOM reduced export limits by 27% year on year for the first half of 2012 to 10,546 tonnes, but said it expects the annual quota to be roughly the same as in 2011.

The ministry withheld quotas from over 20 companies, representing most of China’s production capacity, pending environmental reviews.

Regardless of the amount of material exiting China over the coming years, the unreliable nature of its exports will create a gap for secure supplies from elsewhere.

In its Critical Minerals Strategy, the US Department of Energy named five rare earths as the most critical supply risk minerals to the US economy between now and 2015: dysprosium, europium, neodymium, terbium and yttrium.

Rare earths cerium and lanthanum joined rare metals indium and tellurium among the minerals assessed as ‘near critical’.

Aside from China and some smaller amounts being produced in India and Brazil, it will be largely up to new projects to fill the supply deficit opened by growing global demand (see table).

The most prominent new projects fall into two categories: those which had existing infrastructure or exploration work in place before 2009 when the rush to develop rare earth mines gathered steam; and projects backed by companies with major financial clout - namely from Japanese keiretsu companies - that do not need the market to raise exploration and development financing.

New projects

In the first category, Lynas Corp. and Molycorp Inc. continue to lead the pack. The former has a development timeline spanning over a decade and the latter owns what used to be the world’s biggest rare earth source.

Lynas started its Mount Weld mine in Western Australia in 2011 but is yet to enter the market due to delays in commissioning its 11,000 tpa rare earth oxide processing plant in Malaysia.

The Lynas Advanced Material Plant (LAMP) became politically sensitive in Malaysia as local interest groups protested against the project on health and environmental grounds.

The Malaysian government requested a review of the project by the International Atomic Energy Agency (IAEA), which recommended improvements for Lynas to meet.

In its most recent release on 5 January, Lynas said it had completed all requirements made by the Malaysian Atomic Energy Licensing Board (AELB), and a decision on a temporary licence is expected to be made on 30 January.

Lynas plans to expand the capacity of LAMP to 22,000 tpa REO in 2013, which will require increased output from the Mount Weld mine.

Also expected to start up in 2012 is Molycorp’s Mountain Pass project in California, US. The company has already started mining ore at the site, which will be fed to an under-construction 19,050 tpa REO processing complex.

Mountain Pass dominated the global production of rare earths until the 1980-90s, when China’s burgeoning industry undercut Western producers, forcing much of the world’s capacity to close.

At the start of the year, Molycorp said it had secured customers for 78% of its rare earths production, including 20% for its own in-house production of XSORBX, a cerium-based water treatment product.

Dahlman Rose & Co. analyst Anthony Young believes Molycorp’s business model could herald a fundamental change in the way rare earths are traded.

“Historically, the overwhelming majority of rare earth sales were transacted on the spot market. With Molycorp entering into off-take agreements with its customers, Molycorp will only need to place approximately 4,200 tonnes of initial production on the spot market,” Young said.

“Given the relatively small size of the rare earth market... this will still likely have a dampening effect on prices, in our opinion, but should not have the crushing impact that the company’s full production... would have on the spot market,” he added.

After initial start-up, which is expected in the second quarter, Molycorp plans to expand capacity to 40,000 tpa, which could represent over a fifth of global REO production.

The vast majority of production from LAMP and Mountain Pass will be of the light rare earths lanthanum, cerium, praseodymium and neodymium.

Companies claiming the potential to produce significant heavy rare earth volumes include Great Western Minerals Group (GWMG) and Stans Energy Corp. Ð which both fall into the first category of having pre-existing infrastructure.

GWMG is refurbishing the former Steenkampskraal mine in South Africa and plans to build a 5,000 tpa REO processing plant with China’s Ganzhou Qiandong Rare Earth Group Ltd.

In a very different project, Stans Energy is restoring a former Soviet mine and processing complex in Kyrgyzstan, and aims to start processing heavy REO this year from outsourced feedstocks.

Japan, the world’s biggest importer of rare earths, has been actively funding the development of deposits overseas and has three advanced projects under development.

Expected to start up within the next two years are Toyota Tsusho-backed projects in Orissa, India, and Dong Pao, Vietnam.

At the same time Sumitomo has backed a project in Kazakhstan, which is expected to be a significant source of the heavy rare earth dysprosium.





MARKET DEMAND

Between now and 2015, the main demand driver for rare earths is expected to be in neodymium-iron-boron (NdFeB) magnets which use both neodymium and dysprosium.

According to a recent report by UK-based consultancy Roskill Information Services, production of NdFeB magnets is forecast to grow by 11-13% a year “as potential markets expand to include applications in permanent magnet motors for electric vehicles and wind turbines”.

Roskill believes magnets could account for nearly a third of total rare earths demand, with strong demand growth also coming from nickel-metal-hydride batteries, phosphors, optical glass and ceramics.

Due to the inconsistent makeup of deposits, there will be an imbalance between the demand growths for certain rare earths and the relative rate at which capacity is increased.

Rare earths expert Dudley Kingsnorth, executive director of Industrial Minerals Co. of Australia (IMCOA), has addressed this imbalance in a study showing that some rare earth elements will be more critical than others in terms of supply deficits.

By 2015, Kingsnorth has forecast supply deficits for rare earth elements including neodymium, europium, terbium, dysprosium and yttrium. At the same time, there is likely to be oversupply in lanthanum, cerium and samarium.

This is likely to have a strong bearing on prices as new supply comes on to the market and, as a consequence, impact the value of deposits based on the concentrations of ‘in-demand’ elements.

Roskill has forecast that Chinese REO demand will increase from about 90,000 tpa in 2011 to over 130,000 tpa by 2015, while demand in the rest of the will increase more marginally towards 50,000 tpa.

This is influenced by the migration of hi-tech rare-earth consuming industries to China from developed Asia and the US, and the relatively high economic growth of China.

PRICE TRENDS

Prices have retreated significantly for all rare earth elements since July 2011, but remain far above historical levels.

The price of cerium oxide (min. 99%, FOB China) increased by over 20-fold in the 12 months to July 2011, hitting $140-159/kg up from around $7/kg in the same month in 2010.

As of 17 January 2012, the material was trading at $45-50/kg - significantly above market expectations before the boom of 2010 and H1 2011.

The trend of rare earth prices will have its own impact on future supply, with exploration companies basing their investment pitches on future sales prospects.

The CEO of Molycorp believes the environment has become tougher for the dozens of companies trying to develop rare earth projects.

“The pricing environment today really is not going to help them utilise sales contracts as collateral for financing purposes,” Mark Smith said in an interview with Bloomberg in November.

“The debt market is going to be difficult because banks are not going to let companies use the higher prices we all saw in July and August,” he added.

Today’s investment climate could be the weakest the rare earths sector has seen since before the ‘gold rush’ of junior explorers emerged in 2009-10.

“The rare earths story is passing through a bad moment, indeed, a worse moment than the rest of the market for miners,” Hallgarten & Co. analyst Christopher Ecclestone told IM.

Ecclestone believes that rare earths share prices were in a ‘bubble’ even before the prices started to descend, saying there were already signs of a lack of confidence in the sector.

“What may happen is that the leaders of the pack may get into production and be rewarded therefore while everyone else - the good, bad and indifferent - die of slow starvation,” he said.

With over a hundred deposits now being marketed as potential new sources of rare earths, not all will make it into production, but with global demand expanding, there is still plenty of room for new players in the sector.