Counterpoint: Supply and Demand in the Rare-Earths Market 2015–2020

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"In the rare-earth total supply chain, China is most of the global ball game."

rare earth element supply

At the Perth AusIMM Critical Minerals conference held in June this year, my esteemed colleague Dudley Kingsnorth presented updated forecasts for the near-term future of the global rare-earth market. Some of the details were recently reported by InvestorIntel. Prof. Kingsnorth's forecasts always command attention; I would like to offer my own perspective on what we might expect in the latter half of the present decade.

No nation has ever industrialized faster than the People's Republic of China is now in the process of doing. But even so, and even though we admire China's breathtaking industrial (re)evolution, common sense tells us that every so often, even the champion runner must take a breather to recover his equilibrium so he can continue, or realize that he cannot continue the pace (Note: I'm an old-timer, and I can't abide political correctness in the written word, so I won't alternate "he" and "she" or substitute some form of "person" in common phrases). This is finally what's happening in China. Optimists will say that China is taking a breather, to see just where the new base line of its GDP growth should reside. Pessimists will tell you that the game is over, and that China cannot keep expanding forever. As usual the reality lies somewhere in between.

I emphasize the state of China's economy, because in the case of the rare-earth total supply chain, China is most of the global ball game. Certainly for the rest of this decade, as China goes, so goes the rare-earth market. China, as of this writing still produces 95% of the world’s rare-earths supply and China, as of this writing, still consumes more than 75% of the world’s rare earth supply. Consumption here does NOT mean domestic internal use; it means that China adds the majority of the final value to its rare-earth supply and even that is usually in the form of components of more complex assemblies (vacuum cleaners, automobile components or wind turbine generators, for example).

It is becoming clear that China likely does NOT possess the world's largest resources and reserves of the rare earths. That title, so my colleague and TMR co-founder Gareth Hatch informs me, may well belong to Greenland or Canada. Let's call them together the North Atlantic Mineral Resource Zone (NAMRZ). That said, China certainly possesses the world's largest (by volume production capacity) rare-earths total supply chain, and its very large reserves of rare earths could supply the world’s demand for centuries. The rare earths in the NAMRZ are not only undeveloped, but they are in a zone that currently does not have enough access to capital or technology domestically to create a total rare-earths supply chain of the magnitude of the one in China.

The ideal solution for the NAMRZ would be to put in place as much value addition as possible, so as to capture the most benefit from its vast resources of ALL of the rare earths. The business model of Innovation Metals Corp. (IMC), co-founded by Gareth and to which I am a technical advisor, accomplishes just that. IMC would reduce the tens of thousands of tonnes of mixed rare-earth concentrates that could be produced in the zone from hundreds of thousands of tonnes of mineral concentrates, to a few thousand tons of rare-earth chemicals, and ultimately metallic forms, which are much more valuable and profitable.

But let us turn back to where the rare-earths market may be in the latter half of the decade. First of all, China is not reducing the production of rare earths and condensing the size and numbers of players in the rare-earth total supply chain, to single out the rare-earth industry only for environmental issues. China is modernizing. Credit is too easy; savings are too large; consumption is too low; and production capacity across the board is too large in China, for an economy that is slowing down its rate of growth to a new normal. Large operating companies in the rare-earth sector and beyond, would do well to notice this "new normal" in the American, Australian and other economies.

China, in other words, is trying to streamline its economy to become more responsive to the markets and to lower costs across the board, so as to remain competitive globally, even as its standard of living and labor costs increase rapidly. It is frequently pointed out that the world's second-largest economy, on a per-capita basis, is still only one quarter of the size of the U.S. economy, on a per-capita basis. What is not pointed out, however, is that China's middle class is growing, while America's is declining. This means that discretionary purchases of gadgets that depend on rare-earth enablers for some of their properties, such as all miniaturized personal entertainment, communication, data processing, appliances and the like will continue to increase in China, even as its economy slows to a new equilibrium of somewhere between two (the best case) and seven (the current case) times the rate of growth of the U.S. economy. You don't need to be a mathematician to understand that a Chinese economy that consistently grows at a rate of more than twice that of the U.S., will surpass the total GDP of the U.S. within just a few years (unless there is an American economic miracle).

I foresee that the Chinese domestic total supply chain for rare earths will become more competitive as it reduces the number of marginal and loss-making individual players. It is difficult to see China's production capacity for rare earths ever being less than the world demand. If, as Prof. Kingsnorth recently forecasted, we see 200–240,000 tonnes of rare-earth demand in 2020, that number is still less than China's current capacity for their production at the mine site, reflected perhaps in Prof. Kingsnorth's forecast of 240–280,000 tonnes of rare-earth SUPPLY in the same year.

The only impediments to continued Chinese dominance of the rare-earth total supply chain would be:

  1. Political insecurity of supply caused by Chinese actions;
  2. The creation and rise of efficient non-Chinese total supply chains, with cost structures less than those in China (note: if non-Chinese mines produce at lower cost than Chinese mines, then the buyers of this lower-cost feed stock will first of all be Chinese rare-earth processors and end users, unless the rest of the non-Chinese total supply chain is put in place and operates at an even lower cost!); and
  3. The rise of an outlier such as India or Brazil, as a lower cost actor in the total supply chain space. This would be, like Chinese dominance, an economic phenomenon that is very unlikely to occur in nations with less centrally managed economies than that of China.

China today produces all of the world’s heavy rare earths as well as the majority of the world's neodymium/praseodymium. Thus China has a virtual monopoly on critical rare earths as they can be defined by today's consumer demands. China does not seem to have, however, any hard-rock deposits with economically recoverable heavy rare earths. Therefore, the extremely inefficient and costly-to-process ion-adsorbed clays are the only resources available in the world today, for terbium, dysprosium, and yttrium, which together are three of the five or so "critical" rare earths as I define them (there is growing evidence that europium is not in short supply and will get less likely to be, even if its new production is limited to just China).

I agree that market forces drove the rare-earth exploration boomlet of the last few years, but that market was capitalized by the casino-like gamblers who create and bet upon commodities within the venture exchanges of Toronto, Vancouver, Perth, New York and London. The total supply chain issue was completely ignored by the hucksters and promoters in those markets, but its centralization in China and the dearth of the skills to create or expand it outside of China, kept genuine productive capital investment out of the non-Chinese market.

For the last six years, at least, I have heard over and over again the lament, "why don’t the big end users give us off takes that are either paid for, or that we can use as collateral to borrow to develop our mines?" The reason is that they had nothing to gain and a great deal to lose, by investing in the lowest value-adding part of a natural-resource supply chain—the development of the mineral ore body into a producing mine. None of the Global 1000 manufacturing companies buys directly from a mine. They buy from their tier-one suppliers who in the rare-earth supply chain are probably the last of 7–10 steps in the end-user directed total supply chain.

While the promoters owned the market, productive capital was as scarce as junior miners who understood their place in the rare-earth total supply chain.

The realization that there is a complex total rare-earth supply chain is a recent development. Those who have recognized it are now scrambling to either place themselves as far downstream in that chain as they can, or to partner with those who are freestanding members of the chain, downstream from them. As I see it, the only hope for non-Chinese juniors who are in the medium/ heavy rare-earth space, is to combine their efforts to support a central toll-separation facility such as the one being developed by IMC, so as to bring their costs of moving downstream under control. Most of the investment in the rare-earth junior mining space was speculative and wasted. The survivors will downsize their participation in the total supply chain, so as to have the lowest break-even possible, and they will combine their efforts into the least number of separation/purification and metal/alloy making plants possible in order to assure profitability.

I sincerely believe that if a group of juniors were to approach large end users with such a plan, and with the skill sets in place from existing qualified technology vendors, then the end users would buy in.

In the mean time, if you want to know what will be the supply and demand of the rare earths for the rest of this decade, I would ask the Chinese for details of their industry consolidation plan, their timetable for switching from an investment / export to a domestic-consumption economy, and their political plans to co-operate within the WTO rules. After that, I would ask the Japanese what they are going to do about their lack of the initial step in the rare-earth total supply chain. I’ve heard enough anecdotes to give me serious doubt that Viet Nam is going to be an easy partner; I don’t doubt that once India gets into the production of rare earths, it will expand into the total supply chain and become a competitor, not a partner, of both Japan and then of China.

I predict that only one of the two large-scale existing light rare-earth producers will survive. I don’t know yet which one I would pick between Molycorp and Lynas. I predict also that there will be several non-Chinese medium /heavy rare-earth producers that will survive and thrive, but only by moving down the supply chain, as far as they can, to reach a reproducible profitability at the lowest cost.

Rare-earth production could well reach 240–280,000 tonnes by 2020 but almost half of that would be cerium, most of which will have little in the way of unique use. Therefore the real supply of useful and valuable rare earths will be slightly more than half of those figures.

When I project a future basket price for a project, these days I only price the critical rare earths from a deposit. Try that for a dose of optimistic reality.

Jack Lifton
Technology Metals Research

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