EDITOR: | February 2nd, 2017 | 23 Comments

The US rare earth vulnerability and mammoth battery supply disconnect

| February 02, 2017 | 23 Comments
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The most startling act of cognitive dissonance in the mining space in this day and age is amongst those investors and analysts that enthuse about Lithium, Cobalt, Graphite and yet cannot raise an eyebrow for Rare Earths.

The thesis is rather simple. If you believe that we are on the cusp (or indeed already in) of a massive surge in adoption of EVs and HEVs and therefore the batteries for these vehicles (primarily the Li-Ion battery format) will rule the Earth then how can one not also posit that the type of engine that dominates the same vehicles will have a proportionate need for the Rare Earth magnets produced from Neodymium and Praseodymium.  If one is disturbed by potential shortages of Lithium and Cobalt, then why no sleepless nights about Rare Earths?

Alarm Bells?

It seems that concern is rising but not amongst investors. Then again how real is any professed concern if it doesn’t lead to action? Japanese and Korean companies have supposedly been concerned for a decade now about their dependence upon Chinese REE (rare earth element) sources but what has it actually prompted them to do? Sure we had some Japanese prominently and publicly support some of the most notorious fakers in the Canadian REE space during the last boom but they got burned when they discovered they had been snookered by the perennial promoters with zero intention of ever moving to production. On the rebound the Asian end-users retreated into their shells but that doesn’t put bread on the table when one is facing an imminent supply crunch.

The Europeans are just as vulnerable, if not more so. In a recent JRC study, presented at the 9th Conference of the European Strategic Energy Technology Plan, the following was noted:

The EU resilience to supply bottlenecks is currently low for several materials, such as the rare earths – neodymium (Nd), praseodymium (Pr) and dysprosium (Dy) – used in permanent magnets for wind and electric vehicles technologies, as well as for graphite (C) required in electric vehicles rechargeable batteries. Moderate supply issues are seen for indium (In), silver (Ag) and silicon (Si) required in the photovoltaic technology as well as cobalt (Co) and lithium (Li) requisite in electric vehicles.

Interesting to note that the hot metals du jour, Lithium and Cobalt come at the end of the list of problem metals. And well they might. At least Lithium has three large cartel members (plus Galaxy and Orocobre) churning out product, while REEs have no meaningful suppliers outside China beyond Lynas.

The JRC report produced this interesting diagram showing resilience currently and 15 years out. What they call (in EU-speak) conservative means pessimistic and then they have an optimistic scenario. Interestingly Neodymium and Praseodymium both remain mired in the Low Resilience (read “poor supply”) category even in the optimistic scenario.

The resilience to supply bottlenecks for carbon fibre composites (CFC) used in wind turbine blades is evaluated as high. The demand for Selenium (Se), Copper (Cu),Ggallium (Ga), Tellurium (Te) and Cadmium (Cd) in photovoltaic technology is very marginal compared to the global supply. Therefore, for these materials the estimated EU resilience is also high.

An Aside on Trumpism

Initial signals are that US relations with China have a potential to get rather hairy. As we well recall, half a decade ago, a scuffle between Chinese fishing boats and a Japanese Coast Guard vessel resulted in a shutdown of Chinese REE exports to Japan, with a cascade effect into global pricing. At least the Japanese had plants in China that could work around the problem. The US on the other hand has almost zero access to Rare Earths. First lesson when one starts rattling a sabre is make sure one has a sabre to rattle.

The US is especially vulnerable to a REE clampdown by China. With the Japanese having helped Lynas through its dark period, they are first in line for product from the source and as for other sources the US automobile industry might tap, there are pretty much none that come to mind. An incident (or incidents) of sharp elbows and jostling with China (over the South China Sea or even just imposition of tariffs or being labelled a currency manipulator with all the spill-over effects from such a designation) could see an official (or unofficial) clampdown on REE exports to the US. This is exactly what the Pentagon has feared for a long time now and which Congress, and successive Administrations, have ignored.

Nothing would focus attention back onto Rare Earths like such a moment. However if China wanted to get around WTO rules, it might just squeeze supply and implement an export (or re-export) ban to the US in a sotto voce manner so there is nothing officially that the US can lodge an appeal over. What more tangible response could the US make? Well, Molycorp’s Mountain Pass might have life breathed back into it, but with every day of inactivity the chances of reviving it and particularly of reviving it quickly becomes more distant. Nothing else is even remotely advanced in North America with the “nearest” projects that could be ramped up in Africa and Australia and even those are not something that would plug the hole made by a sudden escalation of hostilities (trade or otherwise) with China.

Beyond this there is the issue that even if things don’t get militarily heated the prospect of duties of 20% or more on REE magnets imported from China changes the equation for US production. While Mountain Pass had its own unique limitations it certainly would have been helped in its heyday by hefty duties on competing product.

If US automakers intend to address the issue of REE magnet supplies over the next ten years with any more intensity than their current lackadaisical approach then they will need to start backing some potential “winners”. That most North American REE wannabes have abandoned the fight doesn’t help but we certainly know where the “bodies are buried”. Many of those projects were not going to fly but a handful of them would be viable if reconfigured to size and throughput (and bite-sized capex) more fitting to the current straightened times. Jack Lifton said it seven years ago that projects had to be right-sized and he was paid scant heed. We are at the dawn of the age of the REE mammals now that the REE dinosaurs have gone to the boneyard of history.

Conclusion

The Chinese grip on Rare Earths is no less than it was in the days of Great Panic. Indeed in those days there was at least hope that several handfuls of projects were advancing and that the West would become self-sufficient. Those dreams were blown away in an ego rush by promoters and arguably more destruction of value was wreaked in the REE space than ever was done by Bre-X, for instance.

The clear inconsistency between thinking that EVs and HEVs are the way forward, and yet that REEs are “not important” or “crisis averted”, is the great fallacy of our times. If one feels that Lithium, Cobalt and other battery metals are in critical short supply then the situation is worse in REEs where future sources of production (even in China) are unclear to say the least.

The trigger for this “wake-up call” might be a Trump-induced trade tussle with China (or worse) but it might also be a creeping realization by automakers et al. that they have almost no guaranteed source of supply and that if the soaring production projections for EV/HEVs come to pass then they will need to be running without engines!

In conclusion we would note that last week, in what we might call the first swallow of the REE summer, we received a call from a private equity group asking us what might be available in REE projects left unloved after the boom. It did not take us long to name three at least that were lying fallow and still worthy of attention. We would humbly suggest that now is the time to get positioned because a hell of a problem is brewing in the area of REE magnet availability.


Christopher Ecclestone

Editor:

Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>


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  • Tracy Weslosky

    The “Trump-induced trade tussle with China” as you put it Christopher will impact the following battery metals — rare earths (focus on magnetic materials such as Neodymium), lithium, cobalt and I believe will also redirect a revived interest in graphite. I have never raced to watch the news with a glass of wine before every evening, but Trump’s policies are facilitating a “technology metal revival”….my phone is ringing off the hook. Mr. Ecclestone, you are indeed — right….again.

    February 2, 2017 - 3:56 AM

  • MSVCP140

    🙂 OK !

    February 2, 2017 - 4:07 AM

  • Jack Lifton

    Christopher, I have to agree with you, and I appreciate the footnote for my “right size” mantra. There is one further hope for rare earths. I have now (since 2014) seen new and newly applied (chemical) separation technologies for the rare earths that are ready for deployment. I have been saying for some time to those who ask that although it is uneconomical for those (Chinese) separation plants that use solvent extraction to be switched off and replaced it is eminently economical for a new or restarted (there are many more of these in the world than the late unlamented Molycorp) rare earth mine to utilize molecular recognition technology or continuous ion chromatography rather than traditional solvent extraction. Both have been shown to work in demonstration or pilot plants. There are other separation technologies also, but I don’t think they’re as far along as these two. Interestingly enough the new and newly applied technologies have been developed in the USA and Europe, which seems logical when you look at market dynamics. The chemical engineers recognized the problems of solvent extraction for separating the rare earths when the so-called junior “miners” had not yet finished figuring out what the issues were in “producing” rare earth products for the real market place rather than tastefully designed logos for their share certificates.
    While the West slept (to paraphrase Napoleon) China marched on to even further dominance of the are earth industry than it had before the rare earth promotion hit Bay Street, Howe Street, and the City of London. Ironically it is now the Chinese who must worry that the sleeping giants will wake. At the moment, however, although I suspect that China is not losing sleep over this issue I think they should be.
    Note there are other separation technologies than the two I highlighted, which are in development, and there are new rare earth metal making technologies also. The timing is now right for a rational re-start of the non-Chinese rare earths industry and the right technologies have made the economics attractive.
    Jack

    February 2, 2017 - 6:15 AM

  • Sam Amamoo

    Sharp and very useful article Christopher.

    Jack Lifton, as I remember it, went as far as prescientlynaming the group of metals you discussed as the GLARE metals. And here we are barely eighteen months on contemplating serious procurement difficulties staring non-China users of these metals in the face.

    Offtake contracts and MOUs between producers and buyers of GLARE materials are being agreed upon but the information and in particular their pricing numbers are not easy to come by. For the lithium market, beginnings of different contract prices indicating an approximate “market price” seem to be emerging in the spodumene space.

    It seems the GLARE sector would benefit enormously if there was an open exchange or brokerage where contract quantities and prices would be easily accessible. Such a facility would not be a good fit for LME for example because purchase and the sale volumes would initially be very small compared to what gets traded on the LME.

    However a fully online GLARE metals exchange could serve a very useful purpose for investors, producers and buyers and I suspect traded volumes would grow quickly over time. Reports about ”resilience” with regard to particular metals are very interesting but none such government documents can speak with anywhere near the power of the price trend for a particular GLARE metal.

    Crowdfunding for setting up for a GLARE exchange anyone?

    February 2, 2017 - 6:59 AM

    • Jack Lifton

      Sam,
      A GLARE exchange would be a good idea, but if it were for price discovery then buyers and selers would have to be certain of on-time delivery to spec at the agreed price, so the exchange would need core members willing to make good on such contracts. This would require an agreement on forms, qualities, and amounts of “standard trades, and this would give birth to a series of futures’ contracts. The devil is in the details, but I would sure like to see someone or some group try to set up a GLARE exchange. The relatively small volumes and absence today of dealers and traders has traditionally foreclosed setting up such an exchange or adding these materials to an existing exchange, but with today’s communications and ease of transactions perhaps the time has come for an entrepreneur.

      February 2, 2017 - 7:40 AM

  • tektok

    Japanese and S. Korean companies recognize the unhealthy dependence on China for REEs (and graphite) but they are conservative and their experience with mining juniors has been bad so they do nothing. Very frustrating for companies and investors looking for offtakes. We are getting closer and closer to the day when we wake up and REE and graphite prices have taken off again. Meanwhile China solidifies its position. The WTO makes it remove export duties on graphite and it announces a plan to create a stockpile equal to 80% of production by 2020. This effectively takes 15-20% of annual supply off the market. More actually as it will only stockpile the strategic grades, not the ones in oversupply.

    February 2, 2017 - 8:15 AM

  • Lara Smith

    The market is fickle. In 2012 lithium guys started to struggle as the cognoscenti enthused about rare earths. Now the table has turned. Goes in cycles but it’s never rational.

    February 2, 2017 - 8:43 AM

  • Christopher Ecclestone

    Re GLARE: And how soon before the Chinese move in and snap it up like they did with the LME? Their own effort (FANYA) came crashing down around them. Some exchanges operate on the “greater fool” theory and in this case they could not interest a “greater fool” than the Chinese middle class members disposed to gambling.

    Maybe some metals are destined to never have price discovery and instead operate on “nods and winks”.

    February 2, 2017 - 9:01 AM

  • Dr. Mike Hirschberger

    On Point again Chris.. Further to your concern is Trump’s Policy of tweet insults first, then act later. This style drains the oxygen from the room for serious trade issues such as REE and any battery related material. There exists no trade group that I am aware for REE’s that has enough steam in its kettle to percolate your concerns to a level of attention by the Trump administration. Granted a focus on strategic battery items may come with time, but meanwhile China smiles like a Cheshire cat sunning itself in the window of the noonday sun.

    February 2, 2017 - 10:59 AM

  • hackenzac

    I’m going to assume that there has been some stockpiling by western end users but it’s obvious that the bomb thrower in chief is going to tweet his way to a supply crisis of critical metals. Don’t expect the administration to be planning for such contingencies. He uses Chinese steel in his construction and is only interested in self-serving. Even his damn hats are made in China. Those of you who are relishing a boiling over that endangers world peace to boost your portfolio had better check your ethics. I’d rather lose money than witness WW3.

    February 2, 2017 - 3:39 PM

  • Kitjean

    Let’s don’t forget that EV’s only comprise 1% of total car sales. The motoring public just isn’t buying these overpriced vehicles especially with the current low gasoline prices.

    February 2, 2017 - 4:57 PM

    • Dr. Mike Hirschberger

      The EV and HEV trends in the US are not reflective of a wider acceptance in Asia and Europe–(EV sales in China ending in 2016 now exceed 3% and likely to double in the ensuing year). Much of the material and value chain is really a pan-Asian play as the US with its myopic addiction to Big Oil lags markedly behind the curve. Speaking of which–as you know once you pass 1-2% in the acceptance curve, there usually follows a rapid acceleration up the “S” portion to 20%, or so.. This is what the BIG 3 in Germany have responded to by separately by spending >$5 billion on introducing a robust portfolio of EV’s over the next 2-3 automotive years.

      So , is this breakout in Asia affecting feedstock prices in the short term-probably not as much as some enthusiast would hold, but certainly adding support to what must be described as ROBUST demand.

      Personally like you I was a skeptic until I finally collapsed to my grandchildren’s nagging, ‘Grandpa, why don’t you drive an EV and stop global warming?’-goodgodd-right there next to stop smoking a few years ago.

      Guess what? They were right and I was dead wrong.

      I rented a new Ford Fusion for the month of December. I drove nearly 400 miles in City Traffic and used only 8 gallons of gasoline. I am a convert..an EV enthusiast-a Greenie– a position as remote as turning lead into gold just a few short months ago. Maybe others are experiencing similar epiphanies.

      February 3, 2017 - 9:29 AM

  • Alex

    What have changed at HREE production compearing 2009-2010 ?
    Lynas, Vientnam, Molycorp-Silmet, Indian and Russian Works still are not produce HREE.
    If it will be Chinese ban on HREE – where it will be processed for high purity materials ?

    February 5, 2017 - 5:45 AM

  • Christopher Ecclestone

    You are right…. begs the question for regulators as to “which part of none don’t they understand?”

    The Chinese know they control the on/off switch for REEs in a way that the global supply of beach buckets or hair curlers cannot compare.. Then again it probably needs a good scare to straighten the West out.. The travails of the Japanese in 2010-11 were viewed as their problem. When it becomes the problem of the US (or ROW) then minds will be focussed.

    February 5, 2017 - 8:05 AM

  • Tim Ainsworth

    American Chemistry Council April 2014, incl Ford, GE, amongst others, stated:

    “The rare earth industry is supportive of $329.6 billion in economic output in “downstream”
    end-market products and technologies that employ 618,800 workers (with a combined payroll of
    $37.6 billion) in the United States and Canada.”

    http://www.rareearthtechalliance.com/Resources/The-Economic-Benefits-of-the-North-American-Rare-Earths-Industry.pdf

    All from 12ktpa primary imports, nearly 90% LaCe, I think not. Interesting to reflect their 2013 data Magnets & Magnetic Powders vs Metallurgical Additives.

    February 5, 2017 - 7:41 PM

    • Jack Lifton

      Tim,

      The 90% that is LaCe is for fluid cracking catalyst, FCC, to produce usable petroleum products from high viscosity crude (e.g., oil from the Athabasca tar sands or Venezualan crude). If EVs, HEVs, and PHEVs grow in use then FCC use, at least for gasoline and kerosene, will decline. But although the most efficient electric traction motors use rare earth permanent magnets, the energy storage batteries are now almost entirely lithium-ion. The major non FCC use of lanthanum is in nickel metal hydride batteries, which are today declining rapidly in vehicle power train use. Rare Earth permanent magnets use neither cerium or lanthanum. The important important rare earths are the magnet metals and the HREEs for magnets and alloys. But to produce more magnet and HREE metals we must produce many more times as much of Ce and La, which could become worthless. When the markets realize how important and how rare the magnet and alloy rare earths there will be another boom and or bubble. The total annual new production of all of the HREEs from Terbium through Lutetium inclusive is less than today’s production of gold. What does that tell you? Recycling anyone?

      February 5, 2017 - 8:19 PM

  • Thor Bendik Weider

    Please visit http://www.reeminerals.no for potential REE-mining opportunity in Norway

    February 6, 2017 - 2:52 AM

  • Christopher Ecclestone

    To paraphrase Marc Antony, “Supportive should be made of sterner stuff”. If that much economic activity is dependent upon REEs then why has no-one in the supply chain lifted a finger to expedite a North American project. Even in the glory days, the offtakers that were mooted were Asian.

    February 6, 2017 - 3:32 AM

    • Tim Ainsworth

      Particularly Christopher when the second largest producer on the planet is already largely committed to Asian & EU customers across the product suite. Interesting SP reaction today on news Nth RE’s third round of price rises appear to be sticking at market.
      When do you expect the first of your speculative stable to have something to sell?

      February 13, 2017 - 5:22 AM

  • Ennio D’Angela

    Hi Chris:
    Have you got a list of the recommended REE stocks?

    February 8, 2017 - 12:49 AM

  • Christopher Ecclestone

    Good question. Hallgarten & Company has the REE miners it covers.. Alkane, Peak Resources, Mkango and ones it has covered in the dim dark past (Northern Minerals). However I would say that (surprise!) Darwinian forces have made a qualified list of the most likely companies to get to production (though some may not be in the first flush) and that is essentially the two handfuls of REE developers that remain standing. If there is some Trumpian faux pas in relations with China then the tsunami of investor interest will lift all boats as there are scarcely more than ten boats for that tide to lift.

    February 8, 2017 - 3:45 AM

  • William Woo

    China stockpile will continue in 2017.

    Clarkson Rare Earths Co.,Ltd-A global manufacturer and distributor of rare earths and critical materials
    http://www.clarksonrareearth.com

    February 9, 2017 - 9:56 AM

  • Christopher Ecclestone

    Tim, With best will in the world I would venture that there won’t be production until 2020 from any of the (known) developers and even that would need the kicker of a rather immediate surge in prices to produce a panic which would in turn loosen purse strings at funders.

    So the way this plays out is a supply crisis (Trump-induced or maybe even a fear of a Trump-induced event?) and then a price surge. Inevitably this will get some of the cockroaches in Promoterville scurrying out from beneath the skirting boards but most of the old 2010 projects have lain dormant for so long that the TSX and regulators should rightly send them back to the drawing board as their PEAs and BFS’s are so old they might as well be written in ancient Greek. This means that a “new” (old?) generation of REE projects won’t add much to the mix.

    Many of the promoters of yore would also be greeted with a shower of rotten tomatoes from investors if they dared showed their faces in public. We could do a roaring trade in false moustaches!

    February 13, 2017 - 5:54 AM