Rare earths: why and how to invest

Central to the growing demand for rare earths has been the development of the nickel metal hydride (NiMH) battery, which has exceptional cycle life, and which powers everything from iPods and mobile phones to hybrid electric cars.

Without rare earths your iPod would cease to function; the hard disk in your PC would be useless; offshore wind turbines would twirl away to no effect; you would be forced to screw in old filament bulbs in place of energy-saving fluorescent ones; and your car’s catalytic converter would fail to, well, convert. A typical NiMH battery for a hybrid car contains 10-12 kg of rare earths, plus further amounts in the autocatalyst, hybrid electric motor, glass and instrument screens. Rare earths are used in relatively small quantities, which means that the prices of rare earth elements have little impact on the pricing of the final product.

The term 'rare earth' is actually something of a misnomer. The metallic elements that make up this category within the periodic table are relatively abundant in the earth's crust. The problem from a mining perspective is that these elements need to occur in concentrations above a certain level before extracting them becomes commercially viable, which is the same problem faced in mining uranium and many other commodities.

The China syndrome

China dominates the rare earths market and accounts for around 97 per cent of global production. It's also the largest consumer, representing around 60 per cent of the market, and has leading-edge technology. China has reserves of over 25m tonnes of rare earth elements, access to cheap processing chemicals and excess secondary processing capacity.

China has been criticised for artificially driving prices down through a process of state-sponsored overproduction of the metals during the 1990s. The low prices effectively forced fledgling mining operations in both Canada and the US to shut down, thus ensuring China’s primacy in the market.

Regardless of whether this criticism is justified, the fact that China's supply and demand are about to coalesce would render any such market manipulation untenable. Prices, too, are reflecting the scarcity of supply: a kilogramme of neodymium now costs around $13.50 – a 300 per cent increase since 2000. Short of an extended slump in the global economy, the outlook for the prices of rare earth elements – particularly lanthanum, dysprosium and yttrium – looks bullish for the remainder of this decade.

There has been a degree of sensationalism in the media coverage of recent Sino-American trade spats, but if Chinese exports of rare earths were to suddenly cease – and they have already declined 40 per cent over the last seven years – the implications for the west's electronics, automotive and defence industries (to name but three) would be profound.

The potential for disruption to US military operations is a particular cause for concern. Reports indicate that there have been rumblings from within the Pentagon to the effect that the coming supply/demand bottleneck should be treated as a strategic issue given that it has the potential to undermine US national security.

Relations between the two countries have become strained over a range of trade issues, ranging from patent abuses to an undervalued yuan, so we shouldn’t be too surprised if the media overplays its hand on this one. But there are real issues driving this story. China’s commerce ministry was recently forced to deny reports that plans are afoot to cut overseas shipments by as much as 30 per cent next year.

China accounted for 93-95 per cent of the 111,000 tonnes of rare earth elements that were officially produced last year. Total demand is already outstripping supply, which is depleting inventories and leading to inevitable internal pressure for increased restrictions, or perhaps even a cessation, in Chinese exports, quotas of which have been falling annually.

Assuming a growth rate in global demand of 8 per cent a year, it is conceivable that by 2014, the industry could experience a shortfall of 30,000 tonnes unless major new sources can be developed. The elements likely to be in greatest deficit, as a percentage of demand, are praseodymium, terbium, dysprosium and neodymium, according to research by rare earths miner Lynas. The situation would probably already be acute if it were not for the estimated 21,000 tonnes of illegally exported rare earths that find their way onto world markets from unlicensed operations in China.

The accelerated take-up of the new technologies that depend on rare earths is driving demand to such an extent that it will have increased from 85,000 tonnes at the start of the new millennium to a forecast figure of 195,000 tonnes by 2014. Constraints on supply from China are creating opportunities for several non-Chinese miners (see below).

Rare earth elements and their applications