Companies seek to reduce dependence on Chinese REEs

The Reasons for China’s Actions

In an effort to assert direct control over the supply and price of REEs,Chinahas been consolidating the REE industry into major mining groups and implementing stringent export quotas. By controlling the output of REEs,Chinahopes to prevent damage to its own environment, while ensuring an adequate reserve of REE to meet its own future needs. Through these actions, China not only aims to control the REE industry, but also the downstream industries that use REEs as key materials and allow China to move up the value chain and produce higher value-added products with a larger profit margin. China intends on attract foreign companies to move their production to China and bring in advanced technologies in exchange for access to a guaranteed supply of REEs and other cheap raw materials, as well as access to the growing Chinese market. If successful, the establishment of this supply chain would bring with thousands of jobs and provide this developing economy an opportunity to become a key innovation center for REEs and REE downstream products. According to the “(Temporary) Regulations of Foreign Investments in the Rare Earth Sector”, foreign companies are encouraged to invest in downstream REE industries inChinaand the development of new REE applications. Note that while the government applies quotas to limit the quantity of REEs that can be exported, it does not restrict exports on REE downstream products, such as rare earth permanent magnetic material.

In response toChina’s lucrative incentives, foreign companies such asToyotaand Hitachi Metals announced its plans to move some of its REE component production toChina. Korea Development Bank had also agreed to cooperate with Baotou Rare Earth High-Tech Zone to encourage Korean automobile and electronics companies to establish processing factories inChina.

The Results of China’s Actions

Although Chinaproduces over 95% of the world’s rare earth supply today, it only holds 50% of the total global reserves. Therefore, Chinadoes not have the necessary resources to exert monopolistic control over the long-term production and supply of these rare earth elements. As a result of the increased demand for REEs and tightening restrictions on exports of the metals from China, many countries are in the process of searching for alternative sources in the USA, Australia, Brazil, and Canada. The original REE mines in these countries were forced to close down when Chinahad undercut the world prices, and due to the complicated barriers to entry, it will take a few years for the other countries to restart production while Chinaretains its monopolistic hold over the world’s REE supply. However as additional sources of REE production begin again, it will slowly loosen China’s monopolist hold on this market and move towards a more equilibrium state. The recent announcement by Japanin the discovery of a vast REE deposit on the ocean floor further proves that Chinawill not have a long-term hold on the world’s supply of rare earth elements.

In addition to searching for new REE deposits, foreign companies are also actively engaged in R&D efforts to seek substitute materials and looking for ways to achieve higher usage efficiencies through better manufacturing processes. Furthermore they are also ramping-up recycling efforts to reprocess and reuse discarded components containing REE materials. Taking Honda for example; this Japanese auto maker recently announced that it has managed to form the world’s first process to recycle REEs (extracted from nickel-metal hydride batteries as negative-electrode materials) to make new hybrid vehicles. Honda stated that their goal is to extract REEs not only from nickel-metal hydride batteries, but also from other various auto parts. However, the access to a reliable supply of resources to meet their current and projected demands remains the top priority.

Most foreign companies are still reluctant to relocate their high value production activities toChinadue to the risk of intellectual property infringement. Even though some foreign companies may build their production facilities inChinafor a stable supply of REEs, it is highly unlikely that they will share the superior technology with their Chinese partners, thus inhibiting the government’s plan to expand the country’s REE industry into more advanced sector. For example, Intematix, a multinational based in America focusing on the production of rare earth-based phosphors, this company relocated a portion of its production to China but hired only a few Chinese scientists, in order to safeguard its technology.

In terms of future expected demand of REE, according to the Industrial Minerals Company of Australia (IMCOA), global demand for rare earth elements is expected to reach 160,000 tons per year by 2016. It is also estimated thatChina’s demand will reach 105,000 tons, whileChina’s export quota is expected to stabilize around 20,000 to 25,000 tons. Based on the above estimates, the non-China annual output would need to be between 30,000 to 35,000 tons to meet the global demand for REEs. If non-China demand of REEs is 55,000 tons in 2015 and the percentage share of each REE’s demand in 2015 is the same as that of supply estimated by IMCOA, foreign countries should have the necessary REE reserves and production capacity to be self-sufficient at least in 2015. The extent of self-sufficiency is dependent on success of REE exploration projects. In the long run however, with the increasing demand for HREEs, many of them such as europium, dysrosium and terbium are likely to be in short supply given its limited reserves. It has been noted that most of the REE deposits outside ofChina, even among REE giants such asMountainPassandMountWilddeposits are LREE enriched but severely deprived of HREEs. It is believed that total Chinese deposits contain approximately 80% of the worlds HREE resources.

Due to the nature of HREE materials, these materials are not always economical to separate and thus it is deemed to be in even shorter supply than the total existing deposits. Taking Cerium and Europium for example, they are generally separated by a process of selective oxidation while other REEs can be separated using a variety of methods such as fractional crystallization, fractional precipitation, solvent extraction and ion exchange methods. However HREEs are difficult to extract, therefore researching more efficient recycling processes for HREEs should be a top priority for foreign companies that want to reduce their dependence on Chinese REEs.

The good news forChinais that due to its extensive experience in this area, it has the technological superiority in separating and refining REE oxides into metals. Currently mining companies inChinasuch as Inner Mongolia Baotou Steel Rare Earth Hi-Tech Company and China Minmetals Corporation are dominant players in the REE supply chain, especially in the mining, processing and refining stages. The two players hold a majority share of this business, although there are also plenty of small companies such as Ganzhou Qiandong Rare Earth Group Company. While most of the world’s mines outsideChinawere closed by the early 2000s,Chinatook this opportunity to invest heavily in REE refining and production technologies, gaining further competitive advantage in the industry. One of the most important developments toChina’s REE success is the relatively cheap process that uses hydrochloric acid rather than nitric acid, coupled with other techniques many Chinese firms have managed to refine higher purity extractions with high quality. According to the GAO report,Chinaproduces about 97% of rare earth oxides and approximately 90% of the metal alloys; it also makes around 75% of the NeFeB magnets and 60% of the SmCo magnets. Thus even if foreign countries succeed in REE production, they would still rely on China for further processing and metal fabrication over the next few years in that it takes time to establish the appropriate infrastructure for processing REEs. To deal with this situation, many companies, such as Molycorp and Frontier Rare Earths, have already taken precautions to limit their chances of facing such a problem. It is still unknown how long foreign companies would take to develop the same level of skill set outsideChinafor downstream production activities, but there is clear evidence that companies are already taking their first steps in this direction.

Both global REE suppliers and users in the downstream value chains have responded actively in the face of potential threat from export restrictions levied on REE produced in China; exploring new reserves, looking for alternative or recycle methods. They must also develop the necessary capabilities to refine and process these rare earths into useable components and implement HREE recycling process on a commercial scale. While global suppliers will gain some hedge on Chinese REE in the coming years, it will take significant efforts in both mining and processing stages to fully alleviate dependence on Chinafor REE.