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.