Still Searching For Rare Earths

There is both good and bad news for buyers of rare earths.

The good news: It’s a buyers’ market. Prices for rare earths remain depressed amid a glut in the marketplace.

The bad news: The supplier base is shaky. China still accounts for 85% of the world’s total production of rare earths, but most Chinese suppliers are operating at a loss. And two of the main non-Chinese suppliers, Molycorp and Lynas, are struggling.

Summarizing the current state of the rare earths market, Jon Hykawy, president and director of Stormcrow Capital, said: “Things look to be mired right now.”

And so, the ongoing saga of rare earths continues to unfold. 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.

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.

Prices for rare earths peaked in 2011. At the time, China dominated what was considered a relatively quiet market. Then, the relatively obscure subject of rare earths entered the limelight in 2012, when the European Union, Japan and the United States filed a complaint against China. Filed in the World Trade Organization (WTO), the complaint alleged that China applied restrictions and export duties on two forms of rare earth elements–molybdenum and tungsten. The complaint argued that the duties were inconsistent with China’s WTO obligations.

China disputed the claims. The U.S., Europe and Japan disagreed, arguing that the restrictions were designed to favor Chinese companies.

Last year, the WTO issued a ruling, saying that China’s export quotas and tariffs on 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 was being unfairly treated.

Then, at the end of 2014, China abolished its quota system for rare earths. Export quotas for tungsten and molybdenum were also abolished.

Since the ruling, the market for rare earths has gone from bad to worse. Prices continue to fall off a cliff. “When the Chinese clamped down on exports in 2010, and prices moved up, buyers were stuck,” Hykawy said. “Now, with the removal of some tariffs/taxes, it was inevitable that prices would fall. But if prices are falling, you don’t need to restock and there is no incentive to buy today. So prices have dropped even further.”

As a result, the supplier base is reeling and the non-Chinese vendors are finding it difficult to compete. In June, for example, Molycorp, one of the major suppliers of rare earths in the U.S., filed a voluntary petition under Chapter 11 of the Bankruptcy Code in U.S. Bankruptcy Court for the District of Delaware. Molycorp is currently restructuring its operations. It also continues to operate its rare earths production facility in Mountain Pass, Calif.

Then, in August, Lynas, the other major non-Chinese supplier of rare earths, said it is entertaining takeover offers amid an effort to restructure its debt.

What does this all mean for rare earths? “I can’t honestly say that things are worse right now than they were earlier in the year, but they certainly aren’t better,” Hykawy said. “China is now being viewed by many as the most stable supply option, because prices are low enough now that producers outside China can’t make it. And the consolidated, state-owned companies in China will continue to produce, no matter what.”

Still, buyers for rare earths must keep their options open. “I expect buying back in the market by the end of the year. Prices will start to move back up, even if the Chinese are having serious trouble making money,” he said. “There is no indication or reason to believe that everyone will suddenly stop needing rare earths, any more than everyone suddenly stops needing any other commodity. But a thin market always makes for a potentially more volatile market.”

Not all is lost, however. The United States is still exploring the development of rare earths. In the R&D arena, for example, the Advanced Research Projects Agency-Energy (ARPA-E) has a program, dubbed Rare Earth Alternatives in Critical Technologies (REACT).

Part of the U.S. Department of Energy, ARPA-E focuses on early-stage technologies. Working with various universities and others, REACT hopes to identify low-cost and abundant replacement materials for rare earths, while encouraging existing technologies to use them more efficiently. “The REACT program addressed several difficult technical challenges and continues to explore paths to commercialization,” said Eric Rohlfing, ARPA-E’s deputy director for technology.

Time will tell if the United States and other nations can find other sources of supply besides China.