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The West’s pursuit of Rare Earths hits resistance from China

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The paradoxical truth about rare earth elements is that they are not rare at all, yet existing supply chains mean they are, in fact, extremely vulnerable to sudden, acute scarcity.

China dominates the rare earth market: it’s responsible for 70% of global production and nearly 90% of processing of global output, as well as 90% of rare earth element permanent magnet production.

And this vulnerability is critical.

Not only is the market forecast to double in value from US$9bn in 2023 to US$21bn in 10 years, but rare earth elements and the magnets processed from them, are essential for many advanced technologies, from defense to renewable energy. For example:

Global Rare Earth production - The Oregon Group - Investment Insights

China fires a warning shot

In December 2023, China banned the export of rare earth magnet technologies, including the processing of rare earth elements and magnets. The ban follows a series of other export restrictions on critical minerals, including gallium and germanium, and graphite.

Then in January 2024, China’s chief intelligence agency shared on social media a cartoon warning of foreign-looking characters secretly extracting rare earth elements and threatening China’s rare earth reserves.

The West fears tighter export restrictions on rare earth elements by China. Just for the energy transition — primarily for electric vehicles (EVs) and wind turbines — demand for rare earths could increase x7 by 2040.

And it would not be the first time. China reportedly halted rare earth exports to Japan for two months in 2010 over a fishing dispute.

The US has started to expand its rare earth mining and refining capacity over national security concerns but it could take years, if not decades, to replace Chinese exports with domestic supply, especially as demand to meet net-zero goals is expected to increase.

Rare Earth demand by scenario - The Oregon Group - Investment Insights

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What are rare earth elements and why are they so important?

Rare earth elements (REEs) are a group of 17 metallic elements with unique electrical and magnetic properties that make them critical to most modern, advanced technology, from magnets in EVs to guidance systems in precision-guided missiles.

  1. Cerium (Ce) — catalysts for catalytic converters; glass production
  2. Dysprosium (Dy) — stabilizes neodymium-based magnets at high temperatures, crucial for applications such as EVs and wind turbines; used in nuclear control rods
  3. Erbium (Er) — fiber optic amplifiers; in nuclear reactors for controlling the neutron population; lasers
  4. Europium (Eu) — tv and computer displays; lasers; optical electronics
  5. Gadolinium (Gd) — cancer agent, MRI contrast agent; control rods in nuclear reactors
  6. Holmium (Ho) — high-powered magnets; lasers; solid oxide fuel cells
  7. Lanthanum (La) — electric and hybrid car batteries; oil refining; high-refractive-index lenses;  catalytic converters
  8. Lutetium (Lu) — LED lightbulbs; chemical processing
  9. Neodymium (Nd) — permanent magnets (EVs and wind turbines); high-strength alloys in aerospace and defense industries; lasers; glassmaking
  10. Promethium (Pm) — radioisotope batteries (research use); portable x-ray machines
  11. Praseodymium (Pr) — high-performance magnets; green phosphors; glass tinting; ceramics
  12. Scandium(Sc) — aerospace components; aluminium alloys
  13. Samarium (Sm) — cobalt-samarium magnets; nuclear reactors; glassmaking
  14. Terbium (Tb) — fluorescent lamps, including energy-efficient lighting; sonar systems; solid-state electronics
  15. Thulium (Tm) — lasers; x-ray machines; superconductors
  16. Yttrium (Y) — computer displays; lasers; microwave filters
  17. Ytterbium (Yb) — fiber lasers for materials processing and telecommunications; solid oxide fuel cells; nuclear medicine for cancer treatment

Four rare earths are of particular importance — neodymium, praseodymium, dysprosium, terbium — due to their use in permanent magnets, and are forecast to make up 98% of the rare earth market by 2030.

rare earths classifications - The Oregon Group - Investment Insights

Rare earth mining

Despite their abundance, rare earths are rarely found in significant quantities on their own, instead they are most often found mixed with other elements (often radioactive deposits), making extraction particularly difficult. 

The two main mining techniques both involve using chemicals, such as ammonium sulfate and ammonium chloride, to separate the elements in leeching ponds. Hence the extra difficulties and costs in environmental approval for mines in the West.

The value of a deposit is not determined so much by the total rare earth oxides it contains as the quantities of highly demanded rare earth oxides it has to offer. The challenge is knowing which deposits have these in-demand rare earths in abundance. For example, dysprosium and terbium are heavy rare earths, making them harder to source than light rare earths neodymium and praseodymium.

The world’s known reserves and mine production are scattered across the world, offering significant supply points and security in diversity:

Global reserves of Rare Earths - The Oregon Group - Investment Insights

The main problem is not finding new deposits.

For example, Europe’s largest deposits of rare earths (over 1 million tons) were found in the north of Sweden in January 2023; and, in the US, an estimated 2.34 billion metric tons of rare earth mineral have been found in Wyoming last year.

The problem is that the vast majority of any rare earth mined anywhere in the world, must go through China for processing, giving it significant influence over supply chains.

Top producing countries in processing of Rare Earth elements 2019 - The Oregon Group - Investment Insights

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Processing challenges for the West

There are only two significant, commercially-viable rare earth integrated mine and processing companies outside of China: 

  • Lynas Rare Earths, with a mine in Australia and processing plant in Malaysia
  • MP Materials, operating Mountain Pass, the only integrated rare earth mining and processing site in North America
  • the only other commercially-viable, but much smaller, rare earth processing facility is in Estonia, but currently produces less that 1% of global supply
  • there are also plans to develop processing capacity in Estonia, France, India, Japan, Kazakhstan, Myanmar, Thailand, and Vietnam

The US government is working to encourage and support investment to build out this rare earth processing capacity, including:

  • in 2021, MP Materials, given US$9.6 of defense funding, announced a rare earth metal, alloy and magnet manufacturing facility in Texas, with a long-term supply agreement with General Motors, at its magnetics facility in Fort Worth, Texas 
  • in 2022, President Biden announced US$35million to MP Materials to separate and process heavy rare earth elements at its facility in Mountain Pass, California, “establishing a full end-to-end domestic permanent magnet supply chain”.
  • in 2023, the US Department of Energy announced US$32 million for projects to help build facilities that produce rare earth elements and other critical minerals and another US$30 million to help lower the costs of the onshore production of rare earths and other critical minerals
  • the US Department of Defense signed an updated contract with Lynas Rare Earths, providing US$258 million from the US government, for the construction of the heavy rare earths component of its rare-earths processing facility in Texas

Efforts to diversify have seen China’s share of total rare earth exports fall from 90% a decade ago, to 70% in 2022.

However, significant challenges remain, including:

  • technical difficulties in developing more efficient processing techniques
  • environmental and pollution concerns over mining and processing in high-regulated Western jurisdictions
  • cost and attractiveness to investors, with some estimates at development of a new mine and processing pipeline requiring capital investments of over US$1 billion and up to 10 years to build
  • attracting talent and workforce proficient in advanced magnet technology

For example, MP Materials has begun to refine its own small amount rare earths in the US, but has not yet provided volumes, with more work needed to refine the chemistry behind the physical processing equipment.

Processing rare earths, in particular separation techniques, can also have toxic tailings.

“The rare earths refining process can be very finicky. There are just so many complex steps”

Kray Luxbacker, Mining and Geological Engineering Department Head, University of Arizona

There were reportedly talks of a merger between the MP Materials and Lynas to create a more coordinated challenge to China, but they are “not ongoing”.

Technological breakthroughs, such as artificial intelligence supported processing in Canada, are still years away from successful testing and implementation at scale. Alternative strategies, such as Tesla’s attempt to making motors without rare earths, are extremely limited. And less than 1% of rare earths are recycled due to the difficulty in separating the elements.

China

Rare earth prices surged in 2022, but then fell to some of their lowest levels for years after China ramped up production to 210,000 tonnes in 2022. Then in 2023, China issued — for the first time since it introduced a quota system in the 1990s — three quotas in one year, with the total a record high of 255,000 tons, a 21.4% year-on-year increase.

This oversupply has flooded the market and put significant downward pressure on prices, especially as demand contracts with high interest rates hitting the energy transition (see our analysis: The Energy Transition Disrupted).

For example, net profit at China Northern Rare Earth Group (one of the largest Rare Earth companies in China) is estimated to have fallen 60% from 2022-2023.

However, Chinese production is supported through a 13% value-added-tax on any rare earths exports — except for China-made rare earth magnets. 

But, the dramatic fall in price has particularly impacted Western ambitions to attract investment to support its plans for the sector. For example, average selling prices per kilogram of rare earth material fell 51% year-on-year at US company MP Materials in Q2 2023, while in 2023, Australia’s Lynas reported a 51% quarter-on-quarter dip in realised prices.

(note: the US Mountain Pass closed in 2002 due to low rare earth prices and only reopened in 2018)

“If you’ve got 90% market share of magnet processing capacity, there’s a goldilocks price where you earn a return but you don’t encourage anyone in the rest of the world to build capacity”

— Dan Morgan, Mining Equity Analyst, Barrenjoey

Chinese companies are also moving to dominate the international industry, for example, Shenghe Resources, the largest importer of rare earths in China, has moved aggressively in just the last few years to influence the international market:

  • acquired stakes in two Australian companies that own rare earth mines in Greenland and Tanzania, with exclusive rights to the minerals
  • acquired a 7.7% stake in MP Materials, the largest mine and processing plant in the US
  • acquired a 9.9% stake in Australia’s Vital Metals
  • acquired Canada’s rare earths stockpile

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Conclusion

China dominates the rare earth element supply chain, from mining to processing to magnet production for large-scale industries such as EVs and renewable energy.

And China is not sitting back idly against Western attempts to create alternative supply chains.

Even industry insiders expect it will take the West years, if not decades, to catch up with not just China’s capacity, but also technological head start.

“Until we get a critical mass operating outside of China, China will retain that ability to pull the strings on the market”

— Amanda Lacaze, managing director of Lynas, the world’s largest non-Chinese rare earths miner

And, while the West puts up tariffs and tax credits in an attempt to boost production, China has flooded the market and depressed prices — and investment.

It is a perfect encapsulation of what the West should be trying to achieve, as we outlined in our recent analysis: “America’s current critical mineral strategy threatens disaster”.

Instead, according to a recent report by the Financial Times, Europe has acknowledged its efforts are failing, with a senior EU diplomat saying what Europe is trying to achieve is “like trying to repair a car while it’s still in motion”.

“The idea is not to stop trading with China,” the diplomat says. “We need a healthy relationship and you have to be careful with the messaging. We don’t want to antagonize China but we don’t want to be dependent on them either.”

This is the difficult bit.

Is the West prepared to finance long-term, higher-priced investments to bypass cheap and efficient Chinese supply chains that are working to suppress prices and technological advancement, buy up stock and potentially introduce export restrictions to tighten supply.

The battle for control over rare earths is just getting started.

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about the author

Picture of Anthony Milewski

Anthony Milewski

Anthony Milewski has spent his entire career in the capital markets, including as company CEO, board director, advisor, founder and investor, with a focus on the energy transition and commodities.

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