Rare earth metals future may hinge on China

On a single day last week shares in a Colorado-based mining company Molycorp rose dramatically by 12 percent on the stock exchange.

The sudden investment in Molycorp was surprising because it related to mining activities that had not even happened yet — the company’s $781 million expansion and modernization project at its flagship Mountain Pass rare earth facility in California will not come online until later this year.

Actually the sudden rise in share price had far less to do with Molycorp’s mining concerns than the policies of the Chinese government, and the knock-on effect those policies have on nervous investors. It was a reflection of market uncertainties concerning the Chinese government’s decision to impose quotas on the export of rare earth metals.

Rare earth metals comprise a list of 17 elements which occur naturally in mineral form in the ground. They are an essential component in renewable energy technology and currently China exports about 95 percent of the world’s supply.

Recently the Chinese monopoly on supply has led to problems. In March, the European Union, the U.S and Japan all complained to the World Trade Organization that China was illegally cutting off access to rare earth exports while holding down prices for its own manufacturers.

Mindful of the expected explosion in renewables in the coming years, this question mark over supply has got western countries seriously worried. The extent of that concern can be seen in the Molycorp share price hike.

Rare earths are the non-renewable part of renewable energy and their future availability is one of the biggest potential dark clouds threatening take-up of clean tech.

In wind power and in electric cars rare earths are essential.

A single large wind turbine, rated at about 3.5 megawatts (MW), will typically contain about 1,300 pounds of rare earth metals. Magnets in the turbine contain the rare earth element neodymium. According to research by MIT released earlier this year neodymium demand could increase by as much as 700 percent in the next quarter century.

In electric cars the dependence is even greater. A conventional car uses just over a pound of rare earth materials – mostly in small motors – but electric cars can use nearly 10 times as much in their lightweight batteries and motors.

Another rare earth, dysproprium, is a key component of the magnets in electric car engines. Magnets are necessary to make electric motors spin, and the strong and durable permanent magnets used in the cars need dysprosium to ensure performance at high temperatures.

The MIT report claimed demand for dysprosium could increase 2,600 times in the coming 25 years. Reflecting this demand, between 2010 and 2011 the price of dysprosium oxide rocketed from an average of $229 a kilo to $1,454.

The irony about rare earths is that contrary to the name they are quite an abundant resource — trace amounts can be found in almost all massive rock formations. Even though China claims that its own supplies of the metals have been over-estimated (China says it only accounts for 23 percent of global deposits, while the the rest of the world puts its share at about a third), until recently the metals were plentiful enough in the country to be used as clasps in women’s purses.

In the U.S. too rare earths, which are also needed in a wide range of consumer products such as cell phones, flat screen TVs and computers, are not that rare; the country is reckoned to have significant deposits lying dormant in the ground.

Until recently it hasn’t been economic to mine them, and with China flooding the market the last two decades nor has it been necessary. However, Beijing’s imposition of export quotas, which it claims are necessary to protect a finite supply and curb the environmental impact of the open cast mining needed to get at them, has changed the game.

As you might expect, some western analysts are skeptical about China’s explanation for the quotas.

“It’s remarkable how when they need additional supply, they suddenly find reserves, but when they don’t want there to be supply around and it supports their argument, then suddenly the reserves are shrinking,” Jon Hykawy, an analyst with Byron Capital Markets in Toronto told Reuters recently.

The uncertainty over long term supply of the metals has led to attempts to seek alternative solutions.

Last year, for example, Molycorp invested in Boulder Wind, a maker of turbines that use no dysprosium, though they use other, less-scarce rare earths.

Car makers, meanwhile, have been looking to wean themselves off their dependence on rare earths entirely.

General Motors is reportedly developing a replacement technology for permanent magnet motors, as are Toyota and Renault. Hitachi has already produced an electric motor that does not use rare earths, but the motor will not go into commercial production for two years.

Honda has gone another route. The car maker announced recently that it has begun extracting rare earths from its old car batteries. Honda said it planned to reuse the extracted metal in new batteries and for the construction of other car parts.

All these efforts may in the end prove unnecessary, however. According to the advisory firm Technology Metals Research, there are currently 35 rare earth projects at various stages in development outside of China.

The U.S. Defense Department, meanwhile, published a study in March which claimed that the opening of new production facilities in North America, including the Molycorp facility in California, should mean the current reliance on Chinese exports is brought to an end.

The Defense Department report asserted that by 2013 the U.S. military, which is almost completely dependent on China for its rare earths right now, will be able to meet a majority of its demand from North American sources.

Paul Willis, EarthTechling