Searching For Rare Earths Again

Rare earths are back in the spotlight again.

Rare earths are chemical elements found in the Earth’s crust. They are used in cars, consumer electronics, computers, communications, clean energy and defense systems. The big market for rare earths is magnets. In semiconductor production, rare earths are used in high-k dielectrics, CMP slurries and other applications.

Last year, the World Trade Organization (WTO) issued a ruling, saying that China’s export quotas and tariffs on two forms of rare earth elements–tungsten and molybdenum–violated the General Agreement on Tariffs and Trade (GATT), and China’s accession agreement to the WTO.

China disputed the ruling, saying the nation is being unfairly treated. China has a monopoly in rare earths, accounting for 85% of the world’s total production of these elements.

Then, at the end of 2014, China abolished its quota system for rare earths. Export quotas for tungsten and molybdenum were also abolished. On the surface, this appears to be a positive development. Or does it? Many experts say there are still some issues brewing despite China’s move to scrap its quota system.

“Most observers were worried that the abolition of the export quotas would result in further price decreases,” said Jon Hykawy, president and director of Stormcrow Capital, a research firm. “That doesn’t seem to be as much of an issue now, and it shouldn’t really have been considered an issue in the first place.”

In fact, prices for rare earths have been down since 2011. So what are the real issues? “First, there is still a limited overall supply (of rare earths), given that the Chinese have not abolished production quotas, which are perfectly permissible under WTO rules,” Hykawy said. “Second, the consolidation of the Chinese industry into a smaller number of state-owned or state-controlled companies means that no published quota system is necessary for the relevant Chinese ministries to control exports. What this all means is that the transparency of the system is likely worse now than it was last year.”

The bottom line? “To me at least, this means that there is still a need for non-Chinese rare earth production,” he said. “If you have not analyzed your own supply chain for exposure to critical materials that are produced in large quantities in China, and are not mitigating any potential impact that changes in supply from China might cause, then as management of an electronics or any other company you are not doing your job. And that applies to 2015 and all years beyond.”

One of the first steps for supply chain managers who are somewhat unfamiliar with rare earths is to get one’s arms around the sector. First, supply chain managers should keep close tabs on the supply base and for good reason. For example, non-Chinese suppliers like Lynas, Molycorp and others have been struggling for various reasons.

Technically, molybdenum and tungsten are rare or associated metals. There are 17 elements that are considered to be rare earth elements. Fifteen of those elements are in the lanthanide series and two additional elements share similar chemical properties. They include scandium, yttrium, lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium and lutetium.

The big driver for rare earths is magnets, which are used in disk drives, electric motors in cars, wind turbines and other products. Magnets represent one-fifth of the world’s consumption of rare earths. Other end products include alloys and petroleum.

In total, the estimated market for the rare earths sector is $10 billion to $15 billion, with 100,000 to 110,000 tons of rare earth elements currently produced annually around the world, according to the Rare Earth Technology Alliance (RETA).

So what’s next for rare earths? “From the middle of 2011, the trend was down for all rare earth prices. That was unsurprising and warranted. Rare earths are an industrial commodity, which means the market for them is limited and dependent on substitution costs; if the price of the rare earths rises high enough, a buyer can either make a material or technological substitution to get around their use,” Hykawy said.

“Our models show that the rare earths as currently priced are economically acceptable, and some users view their access to rare earths as reliable enough, so we projected demand to increase. In fact, demand should increase most strongly in the magnet materials. Over the last few months, in fact, we’ve seen prices for rare earths used in high-strength magnets, like the oxides of neodymium, dysprosium and terbium, move higher for the first time in a very long time. As said, our models suggest that, perhaps except for lanthanum and cerium, this year should see stabilization and even increases in most of the rare earth oxide prices,” he added.