Chinese monopoly triggers scramble for rare earth minerals

SUMMARY

• Rare earth minerals have become indispensable to the manufacture of everything from mobile phones and electric vehicles to fighter jets and wind turbines
• The market for them is growing at a CAGR of 10.8% and is forecast to reach nearly $20bn in five years’ time
• China currently accounts for up to 80% of all processing and production
• With tensions between US and China running high, governments and businesses across the Western world are increasingly anxious to develop new sources to protect their supply chains
• Right now, there appear to be two options – the development of more onshore processing facilities outside China and the mining of the ocean floor for its rare-earth nodules
• Despite the clean-energy sector’s reliance on rare-earth minerals, environmentalists don’t like either
• But there is a finite supply, so we have to find an alternative anyway ……

The New Oil?

In 1992 Deng Xiaoping  famously remarked that “the Middle East has oil and China has rare earths.” If he was still with us, he would surely be taken aback by the significance that that truth has come to assume on two counts. For one thing, China’s dominance of accessible global rare-earth minerals reserves well outstrips that of the oil-rich Gulf majority control over hydrocarbons. For another, Deng could not possibly have foreseen how integral and indispensable a group of 17 minerals with weird and wonderful names like yttrium and samarium would become in the manufacture of just about every high-tech product 21^st-century civilization now relies on, from electric cars and mobile phones to fighter jets and wind turbines.

For years, pundits have been fretting that population growth and scarcity of resources could make water as much the source of future conflict as oil became from the 1970s onward and they are probably right; but the growing stand-off between Washington and Beijing has recently set nerves jangling around the Western world about their rare-earth supply chains. Manufacturers of goods with magnetic, optical and electronic components – including the mighty US defense machine – are feeling increasingly twitchy.

And with good reason. As far back as 2010, China imposed an embargo on the export of rare-earth minerals to Japan after the captain of a Chinese fishing boat was detained when his ship collided with two Japanese coast guard vessels near the Senkaku Islands in the East China Sea. Soon afterwards, Beijing announced a sharp drop in export quotas and simultaneously raised tariffs from 15% to 25%. China, then, has form in using its dominance of the rare-earth minerals market for political leverage and the West knows it; and with the value of the market forecast to grow from $13.2bn in 2019 to $19.8bn by 2026, the stakes are getting higher.

Little wonder, then, that the race is on to establish secure alternative sources of the elements that make the modern world go round.

Not so Rare
‘Rare earth’ is, in fact, a misleading descriptor for a group of minerals that are relatively abundant within the earth’s crust, and the ‘rare’ refers to the cost of extracting them rather than their scarcity. Unlike gold, silver and other metals, they are not found in veins or large quantities, but need to be separated from each other using a variety of mining and processing techniques such as fractional crystallization, ion-exchange and solvent extraction.

These are expensive processes, and It is the cost of extraction that largely explains the disparity between reserves and production:

Source: US Geological Survey

Source: US Geological Survey

China’s current dominance of the rare-earth metals market is only partly due to its geological good fortune to be sitting on double the accessible reserves of either Vietnam or Brazil, its two nearest rivals. Other factors have helped it corner the market too – financial resources, a long-term continuity of purpose and the central political muscle to run roughshod over environmental concerns.

Several years before Deng made his prophetic comparison with oil, Beijing had launched the first of a series of evolving industrial policies aimed at cornering the RE market that included tax rebates and export restrictions. As a result, it now enjoys a stranglehold not just on the rare-earth mineral supply chain but on the experience and expertise to make it operate efficiently – and in all likelihood the commitment to R&D investment and  infrastructure to improve its productivity. Led by the US and Australia, the rest of the world is now struggling to catch up, and, in Washington’s case, to rue a very big and expensive missed opportunity.

Until the 1990s, the Open Pass Mine in California’s Mojave Desert was by far and away the world’s largest producers of rare-earth mineral, but by the turn of the century it was virtually defunct. The introduction of stringent environmental regulations had made extraction so troublesome that government and big business decided it was best outsourced to countries where green issues were not their problem. China was more than happy to fill the gap, although the environmental consequences of its early mining process are now coming home to roost (see below).

But so too has Washington’s short-sightedness. Private-sector attempts to restore the Open Pass Mine to its former glory through the launch of Molycorp not only resulted in bankruptcy, but even saw the majority of the company’s most profitable assets being transferred to a company with links to China; and by 2017, Mountain Pass was reduced to sending its rare earth minerals to China for processing. Even MP Holdings, the company that now owns the mine, is 7% owned by China’s Shenghe Resources.

MP Holdings is simultaneously n the vanguard of the movement to reduce the West’s dependence on China for its RE minerals. Last November, it raised $500m through a special-purpose acquisition company (SPAC) which, along with grants from the US defense department, will be used to process rare earths. Even so, its CEO James Litinsky recently predicted that the world will need three times the amount of neodymium-praseodymium – used as an alloy in the extra-strong magnets so prevalent in today’s manufacturing processes – that the Open Pass Mine will be capable of producing.

Across the Pacific, Japan and Australia are leading attempts to wean the world off its reliance on China. Following the East China Sea incident, the state-sponsored JOGMEC and the private-sector Sojitz sogo shosha (general trading company) joined forces to help address the problem. The following year they backed Australia’s Lynas Corporation (the world’s largest RE mining company outside China) with $250m in loans and equities to supply Japan with approximately 8,500 tonnes each year – about 30% of its annual requirements

Not so Green

The terms of the deal had to be revised several years later when an easing of Chinese export quotas sent RE mineral prices plummeting and nearly sent Lynas into bankruptcy, but it has helped bring Japan’s imports from China down to 58% from a peak of 82%. The rest of the world has taken note and in February, the US defense department awarded Lynas a $30m contract to set up an RE processing facility in Texas. If everything goes to plan, the facility will help Lynas raise its share of the RE processing market to 25%.

Brexit has also given the UK the opportunity to get in on the act. Peak Resources, another Australian mining firm, is now looking to capitalise on the UK’s new-found freedom from EU environmental regulations and hopes to begin extracting rare earths from a mine in Tanzania and then shipping it to Teesside in north-east England for processing.

While the Chinese manipulation of rare-earth mineral prices (malicious or not) that sent Lynas spiraling towards bankruptcy was a graphic demonstration of its hegemony over the market, it is not the only challenge facing RE miners around the world. Despite the growing part it is playing in the development of clean-energy technologies such as wind turbines, RE processing is a very environmentally unfriendly business.

The Lynas business model is a case in point. Set up 38 years by former Macquarie Group Executive Director Nicholas Curtis, the cornerstone of that model is the corporation’s ownership of  the Mt Weld mine in Western Australia, an ancient collapsed volcano which just happens to contain one of the largest and highest-grade rare earths deposits in the world. After being subjected to some initial on-site crushing, grinding and floating, the concentrate is shipped to the corporation’s processing plant in Malaysia where it is cracked in a hot kiln, leached with water to remove impurities and ultimately refined.

The model is now under pressure as local protests triggered by evidence that the cracking and leaching stages of the process creates low-level radioactive waste has  driven the Malaysian government to demand that Lynas find a new location by mid 2023. Plans are now under way to build a new plant at Kalgoorlie in Western Australia.

Environmental concerns have also played at least as large a part in China’s recent tightening of export quotas as its desire to control or disrupt the global supply chain. In 2019, the Xinhua state news agency reported a Ministry of Industry and Information Technology prediction that repairing the environmental damage around Ganzhou alone would cost $6bn. (Ganzhou is at the heart of rare-earth mining in southern China; elsewhere, activity is centered around Sichuan in the West and Inner Mongolia in the north). The crackdown on exports is part of an attempt to put an end to unregulated mining that has turned green hills into lunar landscapes, and blighted virgin forest areas with open-cast mines.

Not so Stupid
If a one-party state like China is having to bow to environmental pressures, then the chances getting the go-ahead for a rare-earth mine in semi-autonomous, democratic Greenland were, in hindsight, slim. In 2016 people laughed off President Donald Trump’s seemingly off-the-cuff suggestion that the US should consider buying the island from Denmark, but it was not such a stupid suggestion as it first seemed. At the time Trump suggested that he was interested in Greenland’s potential for real-estate development, but maybe his interest had actually been piqued by plans to develop the most significant RE mineral mine outside of China at Kvanefjel in the south of the island.

Proposals for the Greenland mining complex had been put forward by Greenland Minerals – yet another Australian mining company – but whose largest shareholder is Shenghe Resources (no surprises there). Greenlanders had been arguing the toss between its economic benefits and environmental impact for the best part of decade before the issue eventually triggered an election earlier this year – which the environmentalists won. Maybe Trump’s was a silly idea after all.

 Race to the Bottom
The environmental damage that on-land mining can cause is there for all to see, but the same cannot be said for rare-earth minerals’ new frontier – the ocean bed. The global market for all deep sea mining (not just for rare-earth minerals) is forecast to grow from $650m in 2020 to $15.3 billion by 2030 at a CAGR of more than 37% and there has been a recent flurry of activity in the RE-specific sub-sector.

The UK government has entered into partners with Lockheed Martin subsidiary UK Seabed Resources to explore a 133,000km² of the Pacific sea floor for mineral rich polymetallic nodules, while Canadian seafloor mining start-up Deep Green has announced plans to go public by merging with a SPAC called Sustainable Opportunities Acquisition Corp (SOAC). The new merger is to be renamed The Metals Company and expects to raise $550m.

Although sea-bed mining is still in its infancy it is already proving controversial, with BMW, Volvo, Google and Korean battery maker Samsung SDI putting their support behind a call from the World Wildlife Fund for a moratorium on mining the sea floor until more is known about its impact. Tests are already under way, although Belgium’s Global Sea Mineral Resources efforts hit a snag earlier this month when its 25-tonne mining robot prototype Patania II became detached from the 5km cable connecting it to the mother ship. (It has now been reconnected).

In the Long Run

All of which would imply that the world is going to remain largely dependent on China for its terbium, lanthanum and cerbium for the foreseeable future – unless somebody can come up with some radical alternatives. Recycling minerals from defunct products offers a partial solution, and research is already under way to come up with some new solutions.

Graphene could provide some of the answers. At one atom of thickness, graphene is the thinnest and one of the strongest materials known to man. It is also a highly efficient thermal and electrical conductor and has many of the same conducting properties as the indium used in the manufacture of flatscreen TVs and solar panels. A team of researchers from the University College of London and the Chinese Academy of Sciences have also successfully designed a supercapacitor using graphene laminate films to charge EVs and plans are being drawn up to pair such a supercapacitor with the lithium batteries used in EVs in order to store a large amount of energy in a compact system for a quick charge and controlled output. All that is missing is a sufficient quantity of graphene available at commercially sustainable prices.

Deng was right when he compared rare earth minerals to oil in one other very important way too; supplies of both will eventually run out. According to some calculations, we could have depleted our planet’s RE reserves within 100 years. Whoever can come up with some sustainable and commercially viable alternatives will be sitting on a goldmine. Metaphorically speaking, of course.

Investment Potential

The VanEck Vectors Rare Earth/Strategic Metals ETF (REMX) tracks 20 of the world’s leading rare-earth mining companies. These are: