Market imbalances for rare earths persist

Market fundamentals have been bullish for critical minerals including rare earths, but the sector is expected to face ongoing supply challenges to meet rising international consumption patterns. Rare earth prices hit their highest point in 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.

A group of 17 metals, rare earths are used in an array of different applications, but the focus has only been on a handful of these, namely magnet metals neodymium, praseodymium (also known as NdPr), terbium and dysprosium.

Rare earth magnets are essential components employed by two of the fastest growing industries of today’s global economy – wind power and electric vehicles. Using a rare earth magnet in an electric motor makes 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 energy generation and transport are crucial steps of the energy 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 value hike. Over the past year, the fastest price rises have been seen in the magnet metals.

Conversely, the price of the most abundant elements, cerium and lanthanum (which account for well over half of total supply volume), has been at multi-year lows. At a 2021 webinar held by the global Rare Earth Industry Association (REIA), attendees heard that magnet applications alone accounted for over 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.

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

China’s dominance

China retains its solid leadership role 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, 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 tons and 81,000 tons, 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 close to total dependence on China 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 US have been looking at ways to offer financial support to non-China producers.

In February, US lawmakers introduced a bill to the Senate to limit the reliance of Chinese rare earths by US defence 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 Europe’s) 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 as the costs increase deters purchasing or new installation contracts.

This article was originally published in the March 2022 issue of the Metal Market Magazine.