By: Emily HaggstromIssue: Resource Management Section: Business
Impacts, Implications and Rare Earth Oxides
Criticism is necessary and useful; it is often indispensable; but it can never take the place of action, or be even a poor substitute for it. The function of the mere critic is of very subordinate usefulness. It is the doer of deeds who actually counts in the battle for life, and not the man who looks on and says how the fight ought to be fought, without himself sharing the stress and the danger. - Theodore Roosevelt - 1894
In the last 20 years, some developed and emerging markets around the globe have taken to the environmental movement hatched from the Kyoto Protocol. These countries have increased money flow through a quasi-capitalistic growth spurt created under government command and are lavishing in the new luxuries of productivity formulated from modernization.
For example, the proclivity for advancement within the green movement helped to implement e-readers to stop deforestation, electric vehicles (EV) to slow dependence on foreign oil, and wind turbines to harness “clean” energy. The digital revolution spawned innovation and development of new technologies to increase efficiency through the use of smartphones, ultra-slim LED televisions and lightweight laptops. Similarly, governments from various nations have excelled using satellites in space, radar systems on the ground, and sonar transducers underwater.
Societies thrive off these advancements and continue to stock pile these products through profligate spending. Whether they make people feel connected or provide a sense of morality, societies have become dependent on them and the uses they provide. While we've limited the need for printed publications and oil where its deemed relevant and regulating the businesses that produce them; society has traded one perceived and quantified evil for another.
These vital technologies exist and function due in part to the rare earth elements (REE) that support their systems and infrastructure. The growing demand for these products and others like them, together with continuously imposed export quotas from China, has slowly decimated the rare earth mining industry, which in turn will create chronic shortages of minerals by 2014.
RARE EARTH ELEMENTS
While deposits of rare earth ore were originally believed to be a rarity—giving the elements their name—it is a historical misnomer, with persistence of the term reflecting unfamiliarity rather than true rarity.1 Rare earths elements and rare earth minerals (REM) are a combination of 17 elements found on the periodic table that are used in hundreds of applications around the world. China is known to have the largest reserves and also controls the lion’s share of the market with between 95-97% of production. Other significant mines exist across the globe to extract these abundant elements from the earth’s crust, but finding them in “concentrated mineable ore deposits is rare.” Geologists are constantly searching and sampling the earth’s core to find new locations to mine for these elements. However, once these reserves are found, it is typical for a site not to start production for five to 10 years as a company establishes infrastructure and receives proper permitting or subsidies dependent upon the location and the regulatory environment.
MINING RARE EARTH ELEMENTS
Beginning in the early 1950’s, Molycorp began business as the sole rare earth oxide producer in the Western hemisphere, extracting and producing rare earths in its Mountain Pass, California facility as the Molybdenum Corporation of America. The company remained a leader in the industry, through various corporate acquisitions, supplying the majority of the world’s rare earth elements until the mid-1990s. During this time, the lucrative commodity industry was turned upside down with the emergence of the Chinese trading their rare earth elements in the export markets. “From 1990 to 2004, there was a systematic underinvestment across the commodity spectrum,” said Anthony Young, an analyst for Dahlman Rose & Co. Investment banks and other financiers were focused on the upward trend of oil and gas exploration and development. Mining companies, especially Molycorp, couldn’t find the funding to update their aging facilities. Between high costs of maintenance, labor, manufacturing and other business expenditures like insurance and excise taxes, the cost to run the Mountain Pass facility became overwhelming, leaving them unable to compete with the cheap labor market and subsidized manufacturing costs in China.
Prices for rare earth elements surged again in 2011 after the Chinese nearly doubled its export quota from what it was a year ago.2 In addition to manufacturing, mining in China has exploded, using coal as a cheap source of energy. Because China produces roughly 97 percent of rare earth elements, these export quotas will prove to be severely detrimental to the United States and others who rely almost exclusively on the communist nation for their mineral export.
SPIKE IN DEMAND
Whether through systematic avoidance or by slow integration of environmental controls, China’s economy sustained steady growth across every industry. The lack of labor laws, along with a market flooded with devalued currency, allowed the Chinese to compete at an advantage over other markets.
This market advantage has also led to sustained growth domestically for the Chinese, only fueling the burden of internal demand, with Chinese citizens amassing more familial wealth and spending it more freely on consumer products. “Consumers have no direct need for the commodity itself as a consumer good. As a result, the demand for rare earth elements depends on the strength of the demand for the final product for which they are inputs,” said energy policy specialist, Marc Humphries in a September 2011 report to Congress.
Government commodities include aircraft components, guns, missiles, helicopter blades and satellite systems, much of which is used by the Department of Defense. Business applications include medical x-ray units, cancer treatments, magnets, wind turbines and batteries; they are even used to reduce carbon emissions from exhaust gas.3 Plus, final consumer products include: hard drives, televisions, headphones, hybrid engines for cars, iPods, cellphones, and more. Some families don’t just have one product; they may have a collection of these things. As innovation and demand continue to update these products, the desire for the latest and greatest will continue to support the need of mining globally.
It is because of the growing need for these products and their applications that industry insiders like Mark Smith, President and CEO of Molycorp, believe that greater domestic production will be needed to sustain worldwide demand. “China has no intention of remaining the world’s major supplier of rare earths and will gradually shift focus to domestic demand,” said Smith in submitted testimony to the U.S. House of Representatives Committee on Foreign Affairs, Subcommittee on Asia and the Pacific, “We should focus on moving as rapidly as possible to a position where our economy and security interests are no longer tied to declining Chinese rare earth exports.”
The need has been recognized by hundreds of geophysicists, scientists, commodities insiders, government officials and businesses. While the near-term trends indicate a strained market, the long-term trends look favorable. However, Mike O'Driscoll, editor of Industrial Minerals, said in an interview with the UK Guardian’s Tom Bawden, "Most experts in the industry think we are going to reach a crisis point in 2014 and 2015. There are 200 to 300 developers trying to bring new projects on-stream to increase supply, but many of these are in the early stages."4
IMPACTS AND IMPLICATIONS
The countries growing unrest concerning environmental regulations accompanied by the lack of understanding about the mining industry and its processes have only added pressure to the current situation. U.S. businesses are facing enough restrictions and financial limitations as it is without having to be a mining company on top of it. As it stands, some American businesses are already outsourcing jobs or relocating to countries with less stringent Federal policies.
Currently, the Chinese are offering their own domestic manufacturing incentives while systematically cutting back on exports to remain the dominant source of rare earth oxides and metals. Between increasing tax burdens, insurance requirements and regulations, the cost to do business in the United States is much different than in China. These expenses have led these same businesses to cut costs in foreign markets as corporations recognize the need to produce returns for their shareholders while adversely bruising the already tarnished U.S. job market. Because the cost of labor is much lower in many foreign markets, the domestic economy risks losing highly needed jobs and domestic investment.
Regardless of business practices and policies, it is the American market that stresses the need for increased efficiency and advanced energy sustaining products, which require many rare earth oxides. Currently, China’s ban is said to last into 2015, intensifying near-term global prices of rare earths, which will concurrently affect bottom-line consumer pricing. Whether skyrocketing prices lead to a decrease in the number of products made or the manufacturer's suggested retail price increases, nobody can be quite sure what the consequences will be. One thing is for sure—consumers, governments and business from North America to Europe will ultimately feel the end result.
Although the situation seems bleak, it is not insurmountable. Worldwide exploration continues to reinforce the world’s need for alternate production sources outside of China. There have been two recent geological discoveries in Greenland and in the Pacific seabed, roughly 1.5 to 2.5 miles down. However, while the discovery in the Pacific is interesting, the extraction technology, cost implications and the certainty of the deposits are not feasible at this time.
Weighing in on the possibilities of production in Greenland, Young said, “I think that there are some interesting targets in Greenland, but it will take a long-time for this production to commence. Climate conditions aren’t impossible. But it will require a higher long-term price before a company will be willing to make the capital investments that are necessary to bring on production in this jurisdiction. I don’t think the prospective deposits in Greenland change the medium-term supply and demand fundamentals for rare earths.”
In the interim, investment strategy lies mostly with near-term producers, particularly as new mining projects like Molycorp’s Project Phoenix and Lynas Corp’s Mt. Weld are set to start production in 2012. Molycorp is positioned to do well when mining commences at its new facility, with expected annual production to reach roughly 20,000 metric tons by the end of the year. If Australian producer, Lynas, meets the Malaysian’s industry regulation demands, the company, whose advanced materials plant is undergoing inspection, should open in early 2012 with much anticipation.
Nobody, however, is anticipating the commercial production more than the Japanese, who are asserting external pressure within the industry in an effort to eliminate its dependence on Chinese supply following a trade embargo imposed on the nation after it detained a Chinese fishing boat captain. Currently Japanese companies such as Sumitomo and Siemens are lining up to sign joint venture agreements for manufacturing to maintain corporate production schedules of new hybrid technologies in addition to current high-tech devices. Japanese investments to secure supply will surely help companies like Lynas and Molycorp establish themselves as stronger worldwide players within the rare earth industry, providing for more competitive advantage, market stability and jobs in the places where they do business.