EDITOR: | May 20th, 2015 | 21 Comments

Why the Siemens – Molycorp rare earths contract is a sector game-changer.

| May 20, 2015 | 21 Comments
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Siemens has recently signed a 10 year contract to Molycorp for the supply of rare earth magnet feed materials for their wind turbine machines. In the last 10 years of rare earth development, this is the most significant development in our space. I will try to explain why I feel this way. I need to state that the arguments presented are mine alone and that I am totally independent of any party or parties involved. I do not assert that the argument is necessarily correct or that any assumptions are supported by other facts available. I am simply presenting my thoughts to provoke consideration and discussion in the rare earths development space.

Why would Siemens sign a contract with Molycorp?

Because the price is cheaper than the price out of China? I don’ think so.

Because Siemens is concerned that they cannot guarantee medium to long term supply of magnet materials out of China (their major wind turbine competitor) and is looking for a non-China supply solution. This seems like a very logical response. It would be very interesting to see the details of the contract, particularly the long term pricing model. But I don’t think that will become public.

But why am I so overwhelmed by the contract? Easy. This is the first contract by an original equipment manufacture (OEM ), with a rare earths mining supply company. By that understand that the wind turbine manufacturer is actually contracting directly with the mining company for the sourcing of commodity magnet feed materials. Over the last ten years, this is exactly the solution to the developer rare earths space that we have all been aspiring towards! A solution where the long term technology provider ensures his future by being a major player in ensuring his supply chain. To date, the response of the hi-tech end user to this approach has been to distance itself from the mining process. They have seen the problem as that of their supplier; the magnet maker. They have not wished to be connected to the mining space. This move by Siemens is potentially a game changer.

DSC01409Again. So why would Siemens sign a contract with Molycorp?

Because they want to ensure their long term future in the wind turbine business by securing a long term supply of their magnet feed materials outside of China. But why Molycorp?

Because they are de-risking the decision by only choosing from existing, operating, non-Chinese production. But why not Lynas? This is a difficult question. Maybe it’s price, maybe it’s availability. Perhaps Lynas does not have the spare output out of contract. Maybe it’s a social licence issue. Allow me some slack here. There has been a lot of flak in the media of late about the poor environmental performance of Chinese rare earth producers (personally after many years inside China, I find these statements historically correct but not so correct today). I can understand why a hi-tech green energy business would want to distance itself from that. So if you want a non-Chinese (for supply guarantee and perceived environmental assurance), supply with no environmental issues, then maybe the local radiation-induced, social unrest around Lynas’ Malaysian operations could be enough to sway a decision towards Molycorp? Who knows? But it does flag any aspiring rare earth developer that their environmental, safety and social governance issues could be front and center in any possible deals going forward into the future.

What does the decision mean?

Details are sketchy at the moment. Is the arrangement in part due to the effectiveness of the German Resource Alliance (Rohstoff Allianz), processes in place in Europe? This would encourage similar approaches in North America. Does it mean that the top end OEM hi-tech companies have finally acknowledged that they must be part of the long term supply issue of non-Chinese rare earths? If so, then rare earths project developers can rekindle their dreams of arrangements, supply and maybe even financing as solutions. A few years ago I stated that if there are 20 significant OEM users of rare earth magnets (cars, trains and wind turbines) around the non-China world and there is no rare earths supply out of China, then at least a dozen new rare earths developments were needed to supply those OEMs.

Are better times just around the corner?


Steve Mackowski

Editor:

Mr Mackowski is a qualified engineer in mineral processing with over 30 years technical and operational experience in rare earths, uranium, industrial minerals, nickel, kaolin ... <Read more about Steve Mackowski>


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Comments

  • Fred

    I think of this as strategic. While most of the REE juniors have little in common with MCP, most on Wall Street don’t know the difference between REE companies. MCP is viewed as the big boy, going down for the count. With little more than the corporate equivalent of pocket change, Siemens props it up, helping to ensure that the REE juniors don’t get wiped out with it in a REE miner market collapse. Siemens doesn’t want to be overly reliant on the whims of the Chinese.

    May 20, 2015 - 10:47 AM

  • Tracy Weslosky

    Steve. I used a shot of me looking out at wind turbines in Spain a few years ago. Great piece — and your perspective: I share completely. This is a sign of heightened interest in the REE sector.

    Thank you.

    May 20, 2015 - 11:09 AM

  • JJBeswick

    “But why not Lynas?” is based on a false premise. The Molycorp announcement never suggested that the deal was exclusive.
    Moly generally prefer to trumpet their news while Lynas prefer to report as little as possible (a mistake IMO).
    I’d be surprised if both aren’t suppliers; after all, there were references to diversity of supply.
    The Malaysian anti-Lynas lobby was always a non-issue and is now completely irrelevant.

    May 20, 2015 - 12:13 PM

  • B

    Isn’t Molycorp on the verge of Bankruptcy? I am honestly surprised Siemens would want to be associated with such a poorly ran, money losing operation.

    May 20, 2015 - 4:45 PM

  • Investor

    Siemens is a big company and doing well in their chosen field of business. Not only is Molycorp part of this deal but also ShinEtsu. At least they will be able to get some decant advice from these guys. The truth is that Molycorp (NEO) has very capable end user or marketing know-how. This is IP one can not easily acquire. Molycopr did well in closing this deal. The game change it is!

    May 20, 2015 - 7:58 PM

  • Jeff Thompson

    Steve,
    Thank you for your article. Would Molycorp be able to supply the particular elements that Siemens would need? It’s my understanding that Molycorp primarily supplies the light rare earths, and that Siemens and other companies would need to look elsewhere for the scarcer heavy/critical rare earths.
    Thank you,
    Jeff Thompson

    May 20, 2015 - 8:24 PM

  • Alex

    Why Molicorp not Linas – good question.
    I guess because most part of Lynas didim already contracted for future by Japanese supply chain Buyers and Lynas can not garantee quantaties of supply. Otherwise Molycorp need big Buyer, and have possibility to supply from Estonia which is better for European.

    May 20, 2015 - 11:53 PM

  • Steve Mackowski

    Thanks Jeff. Both Lynas and Molycorp are light rare earth based producers. As such their product is ~20% Nd+Pr which is used primarily in magnets. The heavy REO, Dy and Tb, are additional to the Nd+Pr when used. Neither Lynas nor Molycorp have much Dy and Tb and at present this can only come from China.

    May 21, 2015 - 12:22 AM

  • Billy

    Siemens, ….. well I can’t understand why they would need to enter into a 10 years strategic supply contract with Molycorp or anyone else for that matter if their recent press releases are to be believed … you know the ones about eliminating certain rare earths from their permanent magnets.

    Perhaps that’s just the point … Siemens can’t be believed … and their history and list of former convictions would appear to support that proposition …. just stating the facts. Plenty available on the web for those that care to search for it.

    All that aside, an excellent article Steve … thank you.

    May 21, 2015 - 1:54 AM

  • Investor

    Siemens apparently still maintains the view of eliminating “certain” rare earths from magnets. Well I have two messages for them:

    1. Go for it and allow others to make better wind turbines
    2. One critical metal replaces the other so what is the point?

    Anyway the biggest problem is that Germans are natural followers, therefore one person has this view or idea and gives the order and the rest down the chain follows without questioning it. They are not questioning it because not only they are natural followers but because it means more work for R&D.

    May 21, 2015 - 2:11 AM

  • Fred

    For very many decades, Germany has produced the most sought after technology in the world. Germany consistently produces trade surpluses because of this. Europe’s economy would be a basket case if it were not for German technology. And Siemens has been one of its shining stars.

    May 21, 2015 - 2:27 AM

  • Tim Ainsworth

    VB,
    Magnequench produce only bonded magnetic powders, incidentally under some pricing pressure since the expiration of patents mid last year. Moly’s sintered JV: http://www.molycorp.com/molycorp-daido-steel-mitsubishi-corporation-announce-joint-venture-to-manufacture-sintered-ndfeb-rare-earth-magnets/ went the way of most Moly Ann’s: http://www.bloomberg.com/research/stocks/transactions/transactions.asp?ticker=5471:JP
    Interesting point re Moly’s unseparated LREC & Shin Etsu given that Shin Etsu’s 10ktpa RE separation & refinement facility in Hai Phong Vietnam, 200km south of the Chinese border, has no obvious source of feedstock.
    “Vietnam’s production of rare earths in 2013 stood at 220t” & no recent news of Dong Pao Rare Earth Development Company that I’ve noticed of late: http://www.mining-technology.com/features/featurescarce-supply—the-worlds-biggest-rare-earth-metal-producers-4298126/
    Regardless, the excitement whipped up by this Ann. seems a little out of proportion to the circa 200t NdPr sales by Moly last Q, presumably a mix of oxides & LREC, with total REO (equivalent) sales running $2.5M external vs $8.3M internal.
    As Siemens purchasing manager what proportion of the forward supply chain would you risk there?

    May 21, 2015 - 9:32 AM

  • Tim Ainsworth

    Steve,
    TMR quotes Lynas CLD at 23.3% NdPr vs Mt Pass 16.3%, a fairly important distinction re the relative economics.

    May 21, 2015 - 9:40 AM

  • Billy

    Fred, if Siemens has some of the most sought after technology in the world – why then did they pay bribes to win major contracts.

    May 21, 2015 - 7:24 PM

  • Fred

    I don’t think they invented bribery.

    Look at President Obama. His best friend and fund raiser, Tony Rezko, is in jail for corruption. That was for fund raising for Blago, the former Illinois Governor, also in jail. The US government ignored Rezko’s Obama dealings.

    A few decades ago Saddam Hussein promoted Nadhmi Auchi, after Saddam successfully assassinated his way into power. Auchi became a billionaire as weapons merchant for Saddam, funneling some of his money to Rezko, who used it to help fund Obama’s purchase of his Chicago mansion in a creative real estate deal. Obama’s excuse was that he was a “bonehead”. Well, he didn’t go to jail, and instead got elected twice as President. How many notches in Auchi’s belt? The worst he’s seen is a few million franc fine. But Auchi has received many international honors, and Obama got his Nobel peace price soon after buying his mansion with the help of the weapon merchant’s money.

    Siemens got caught for corruption? Good. I don’t like corruption. But they’re not alone, and still one of Germany’s leading technology companies.

    May 22, 2015 - 1:07 AM

  • Pennie

    My understanding is that Lynas continues to supply NdPr to Siemens. Not sure what the fuss is about, except that Molycorp got great pr, and a boost in share price shortly after the announcement.

    May 22, 2015 - 2:28 AM

  • Billy

    Fred, you miss the point. It appears to me Siemens technology is not “the most sort after in the world”, because if it was they wouldn’t need to pay bribes to win major contracts.

    May 22, 2015 - 8:08 AM

  • Fred

    Bribery has historically been commonplace with large contracts to sell airplanes. Does this mean that not many airplanes would sell without bribes? I think it’s more a reflection of ethics in the business community, rather than the technological savvy exhibited in the products themselves.

    May 22, 2015 - 11:32 AM

  • asrms

    So my question is why would Siemens have signed a 10 year contract so visibly with a company that weeks later now appears to be in its death throes? Does this mean that Siemens already knew that Moly’ would emerge from this situation a stronger functioning company? (Would they buy Moly’ – ridiculous???). Does this mean if Moly’ goes down that Lynas is the only LREE ‘game in town’ outside China?? – talk about first to the field!

    June 5, 2015 - 10:08 AM

  • Fred

    Bottom line is that Siemens had much to win (a source of supply in case things go crazy in the REE market) and little to lose (Molycorp won’t come after them if they cease to exist).

    June 5, 2015 - 10:43 PM

  • Chris

    Now this is a game changer!

    Molycorp to suspend production at Mountain Pass facility in California

    http://www.cnbc.com/2015/08/26/reuters-america-molycorp-to-suspend-production-at-mountain-pass-facility-in-california.html

    August 26, 2015 - 8:20 AM

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