How China gained control of the rare earths market.
Recently it has been interesting to see the heightened interest in rare earths and talks of rebuilding the supply chain outside China. Encouraging to see that governments are finally recognizing the strength that China has built up over the twenty plus years that have in my experience — been both strategic and deliberate.
I lived in Asia for 10 years and have dealt with China and Chinese plants as a rare earths’ expert since 1995 and spoken regularly on how this really happened. Asian companies and governments do not look 3 months down the road but look 10-20 years or longer into the future. Granted it is easier in an environment where the State is actively supporting certain sectors but let’s look at the results. China, Japan and SE Asia now dominate numerous industries, including rare earths; while the US manufacturing base has been replaced by service industries, and we are wondering how and why we got here?
Get our daily investorintel update
Flashback to 2 significant events in the late nineties, which speaks volumes as to the stepping back from rare earths in the USA.
The first example is Magnequench, who had a monopoly position in bonded rare earth magnet alloy. When it was spun out from GM a group purchased this dominant company in 1995. Two of the shareholders were Chinese companies and they held 62% of the new company. Interestingly, the heads of the two Chinese companies were sons-in-law of Deng Xiaopeng, the former leader of China. Why is this interesting? Deng Xaiopeng is known for his comment in the 1980’s “The Middle East has oil, China has rare earths.” This clearly raised the importance of rare earths in the Chinese psyche to a level well beyond the value of the industry. The US government body CFIUS, the Committee on Foreign Investment in the United States, allowed this acquisition to proceed with no limits on a company, that at the time, is reported to have been supplying 85% of the alloy for magnets being used in US precision guided missiles. Obviously, China viewed this as a strategic acquisition.
The next was the closure of Mountain Pass in 1998, for what was reportedly a failure to advise the EPA of an issue on site. At the time it was producing roughly 25% of the world’s rare earths. I remember sitting in an office in Toronto and speculating with others that prices should go up as a result. That did not happen as China stepped in and filled the gap in under six months. This also took away Magnaquench’s domestic source of Neodymium (Nd).
This was followed by Vacuumschmelze closing its magnet plant in Kentucky in 2003 and relocating to Germany and Slovakia. In 2004 Magnaquench closed its Indiana plant and relocates to China. This is followed by Hitachi closing its plant in Michigan in 2005. So, in a period of 3 years the major magnet producers left the USA. Electron Energy produces SmCo magnets in the USA, which are interesting to the military as they cannot be affected by Electro Magnetic Pulses (EMP). These magnets are not as strong as NdFeB but have a stable minor part of the magnet market. Overall the USA can use a percent of its defense budget to implement a strategy using existing assets in the USA and add some additional manufacturing to complete the magnet supply chain over 3 to 5 years.
But what about the future? An area that needs to be developed further for the future of rare earths outside China is expanded research and development of new applications utilizing some of the elements with excess supply. An article I read recently written by James Kennedy last year indicates that China filed its first rare earths patent in 1983. It passed the USA in rare earth patents filed by 1997. According to the report by August 2018 China had accumulated 23,000 more patent filings than the USA. A telling tale of focus and effort. Research labs like Oak Ridge are looking into rare earths, amongst other elements, but further emphasis is necessary.
So not only do we need to look at producing rare earths outside China, but more emphasis is needed in finding uses for them. Cerium (Ce) and Lanthanum (La) will remain, in my opinion, around $2/kg (< $0.90/lb.) for the foreseeable future and Yttrium (Y) along with Samarium (Sm) will also maintain a low price as production is driven by Neodymium (Nd) and Praseodymium (Pr) resulting in imbalances in Ce, La, Sm and Y supply versus demand. This should be an advantage for long term application development.
Alastair Neill is the President of Trinity Management, a consulting company specializing in business development activities in rare earths, specialty metals and start-up of technology-based ... <Read more about Alastair Neill>