Market imbalances persist in rare earths sector

By Davide Ghilotti
Published: Tuesday, 15 March 2022

Supply problems and an over-reliance on China continue to challenge the rising demand for rising rare earths.

Market fundamentals have been bullish for critical minerals including rare earths, but the sector is expected to face continuing supply challenges to meet rising international consumption patterns.

Rare earth prices reached their highest point for a decade in February, according to the China Rare Earth Industry Association, owing to a combination of fast-growing demand and headwinds affecting availability from the main producing regions.

While downstream demand trends remain especially healthy for current and future consumption, supply has struggled to follow at the same pace, and the industry continues to show imbalances that concern market participants.

Rare earths are a group of 17 metals that are used in an array of applications, but the focus has only been on a handful of these, namely magnet metals neodymium and praseodymium (jointly referred to as NdPr), plus terbium and dysprosium.

Rare earth magnets are essential components employed by two of the fastest growing industries in today’s global economy – wind power and electric vehicles. Using a rare earth magnet in an electric motor makes for a lighter, cheaper, longer-range vehicle, and only rare earth magnets have the strength and heat resistance needed for application in wind power turbines.

As governments seek to reduce their carbon emissions in pursuit of a 2050 net-zero emission scenario, in line with the Paris agreement on climate change, decarbonizing both energy generation and transport are crucial steps in the transition.

These developments in consumption patterns are leading to uneven price progression for the rare earth complex, with magnet metals taking by far the largest share of the rise in value. Over the past year, the fastest price rises have been seen in the magnet metals.

Conversely, the prices of the most abundant elements, cerium and lanthanum (which account for well over half of total supply volume), have been at multi-year lows. In a 2021 webinar held by the global Rare Earth Industry Association (REIA), attendees heard that magnet applications alone accounted for more than 70% of rare earth demand value, but only 23% of volume.

This split between magnet minerals and the rest of the rare earth group is expected to intensify as magnet demand grows.

The light metals cerium and lanthanum (63% of total volume, but 6% of value) are the most abundant and the weakest links of the value chain, and are expected to remain oversupplied, at loss or near loss for producers, while mid- and heavy NdPr materials will constitute the leading profit-making product lines, REIA said.

China’s dominance

China retains its solid leadership in rare earth supply, with close to 80% of global market share (even higher if Myanmar material, which is almost entirely bought by China, is taken into account). There are only a handful of non-Chinese producers, although the share of rest-of-world output is expected to increase.

On the supply side, China has for some years been applying a quota system. This followed the boom-and-bust cycle the rare earth market went through in the early 2010s, which shook the foundations of the sector and caused the disappearance of almost all international companies.

In the subsequent years, China has sought to maintain a tighter grip on its output – and the global supply-demand balance – through rationalization of domestic companies (which went from several hundred down to four large conglomerates) and quotas for exports and production.

There have been pressures from the market to expand this year’s quota to meet the expected consumption growth in NdPr and magnet minerals. In January 2022, China’s Ministry of Natural Resources increased the 2022 quotas by some 20%, with 100,800 tonnes for mining and 97,200 tonnes for separation, against 84,000 tonnes and 81,000 tonnes respectively in 2021.

Additionally, China is home to almost 90% of rare earth permanent magnet manufacturing output globally.

Investment outside China

There is widespread agreement in the West that this near-total dependence on Chinese supply of rare earths and permanent magnets is a potential liability to the development of their own domestic clean energy industries. As a way to redress the current exposure, both Europe and the United States have been looking at ways to offer financial support to non-China producers.

In February, US lawmakers introduced a bill to the country’s Senate to limit the reliance on Chinese rare earths by US defense contractors. The Pentagon has already given grants and streamlined financial backing for domestic rare earth processing companies, including MP Materials – the sole domestic rare earth miner – and Australian producer Lynas.

The bill also introduces the potential for trade sanctions against China’s rare earth sector. Crucially, to meet short-term availability concerns while new, non-Chinese producers set up alternative supply channels, the bill pushes the Pentagon to ramp-up rare earth stockpiles and increase its domestic processing ability.

In this sense, inventories are likely to be of significance in the years it will take to bridge short-term demand needs with US (and European) interests in securing volumes outside of China. The issue of China dominance, and of Western production channels still being underdeveloped, taps into wider worries over global supply-demand balance and future prices as consumption increases at a fast pace.

Participants warned that further price increases in the medium term could ultimately lead to demand destruction – in other words, slow down the pace of expansion of EVs and wind power turbines because the cost increase deters purchasing and new installation contracts.