July 1, 2014

The New Gold Rush

The world’s mad scramble for rare earth minerals

Take superpower rivalries, national defense concerns and the insatiable consumer demand for electronics like cellphones, headphones, flat-screen TVs and even electric cars. Throw in energy conservation and green technologies. Add a healthy dose of free and not-so-free market economics.

The result is the utterly mad scramble around the world to find and extract rare earth elements, which, with their amazing physical properties, are fashioned into rare earth metals, oxides and alloys. Collectively, they are often simply called rare earths. The global efforts to control their supply is shaping up as a historic search for valuable stuff in the ground on a par with the legendary California Gold Rush of 1849.

The implications are profound for the metals service industry, particularly the portion that focuses on defense. Rare earths are needed to build all kinds of high-tech products, including a new generation of fighter jets. Cost-wise, rare earths are a very small portion of the total metals content of those weapons systems, let alone the total bill. But with efforts to develop substitute materials so far underwhelming, rare earths are vital for growth in this industry sector.

Operations are underway in more than a dozen countries to extract rare earths, with new endeavors regularly announced. A flock of new public mining companies has emerged, so far a lot longer on press releases than they have been on production. 

Probably no nation is more interested in this issue than the United States. Decades ago, the United States produced nearly all the rare earths in the world. But that dwindled to near nothing because of the difficult extraction process and increasing costs. There is now only one operating rare earths mine in the United States, in Mountain Pass, California, near the Nevada border and not far from Las Vegas. It is owned by publicly traded Molycorp, whose mining history goes back 60 years but has only been producing rare earths since 2010. Last year, according to government figures, it dug up not quite 4% of the world’s production.

What They Are

Rare earths are a group of 17 elements listed on the periodic table of chemical elements—compounds that, due to their atomic structure and physical properties, have almost magical uses as catalysts, metallurgical applications and magnets. They have confusing-to-the-layperson, tongue-twisting names such as lanthanum, praseodymium, yttrium, ytterbium and neodymium.

The 17 are further subdivided into “light” rare earths and “heavy” rare earths depending on their atomic number. Heavy rare earths generally are harder to obtain than light rare earths. They all are a far cry, in ease of extraction, from base metals like iron, copper, nickel, zinc and lead—the process is abnormally tedious because it takes huge amounts of surrounding earth to yield a pound of rare earth.

Actually, the word “rare” is a bit misleading. Most rare earths are considered abundant in the earth’s crust and often are found in close proximity to one another. Cerium, for instance, is about as common as copper, and rare earths generally are more common than gold. Where rare earths are rare is in warehouses awaiting shipment for use in manufacturing because they are difficult to fashion in an economically viable manner.

The process involves mining, separation, refining, alloying and manufacturing. Each step requires significant expense, and the procedure varies for different rare earths.

According to the U.S. Geological Survey (USGS),  consumption within the United States of rare earths almost doubled from 5,770 tons in 2012 to 10,500 tons last year. Worldwide production of rare earths was put at roughly 110,000 tons—100,000 of them in China. Only 4,000 tons came out of the United States, but that was still enough to put America in second place. No. 3 was India, with 2,900 tons, followed by Russia with 2,400 tons and Australia with 2,000 tons. Worldwide reserves—material identified in the ground but not yet mined—is estimated at 140 million tons.

The China Monopoly

Over the past several decades, China has focused on rare earths as a matter of government policy for both national security and economic gain. It now produces an overwhelming amount of the world’s supply. The latest estimate from the USGS was 90%, giving China a near-monopoly.

That has led to trade complaints from manufacturers that need the materials not only for cellphones and TVs but other consumer electrical components like energy-efficient light bulbs, batteries and self-cleaning ovens, as well as industrial uses like wind turbines, oil refineries and lasers. The World Trade Organization just upheld one grievance by the United States, Japan and the European Union over export quotas that China put on all rare earths—the West had claimed the levies were discriminatory. The Chinese are appealing the ruling, which is likely to delay any final action perhaps for years.

There also have been official expressions of concern from the U.S. government, which buys defense equipment that requires rare earths to operate, like fighter jets, smart bombs and night-vision goggles (used, for instance, in the raid that killed Osama bin Laden). A string of reports dating back a half-decade from congressional agencies, executive-branch units, think tanks and private interest groups has warned about the danger of relying upon a potential adversary for key ingredients to make the military systems which might be needed to wage that conflict.

“Rare earths is one of the supply chains that affects the vast majority of products that the defense industry depends upon,” says John Adams, a retired brigadier general. Last year, he wrote a 335-page report about defense supply chain vulnerabilities for the trade group Alliance for American Manufacturing, whose members include major defense contractors. The report sounded an alarm about the lack of a rare earths inventory. “The U.S. government and industry must stockpile these vital raw materials,” he wrote. 

Congress has appropriated $120 million over five years to start the Critical Materials Institute, a part of the Ames Laboratory, a U.S. Department of Energy research facility on the campus of Iowa State University. The CMI opened for business last year. A main focus is on rare earths. The mission, says CMI director Alex King, is to find more efficient ways of processing rare earths and to seek substitutes.

Right now, King says, the United States has “no control over the supply chain.” Indeed, so much drama surrounds rare earths that they have become part of popular culture. They were a persistent plot point in the hit Netflix series House of Cards. Frank Underwood, the ruthless politician played by Kevin Spacey, triggers a trade war with China after using his influence to help a billionaire political supporter get samarium, an actual rare earth. In the video game “Call of Duty: Black Ops II,” a shooting war starts after China cuts off rare earths. Literature has joined in, too: The 2011 novel The Bourne Dominion, by Eric Van Lustbader, centers around a planned terrorist attack on a rare earths mine.

But for Now, More Supply Than Demand          

For now, there’s far more supply than demand, which means prices are down. To cite one example from the USGS report, the per-kilogram price for neodymium oxide, derived from neodymium and used to produce high-end magnets, fell 6.4% during 2013 from $78 to $73.

Estimates of non-defense uses of rare earths are between 95% and 98% of total U.S. consumption. And unless Apple and Samsung stop making mobile phones—or green technologies, which make great use of rare earths, lose their allure—demand likely will continue to rise.

The bigger fears surrounding rare earths come from what the future might hold, along with perpetual threats to the supply chain, which involves a lot more than mining. Call it an all-roads-lead-to-China near-panic. For instance, much of the material mined at the Mountain Pass operation in California has to be sent to China for further processing.

The history of the production of rare earths, which began to be discovered in the 19th century, mirrors world superpower history. For most of the 20th century, the United States was in the lead. But decades ago, China realized its Inner Mongolia region afforded relatively easy access to the coveted elements. “The Middle East has oil, China has rare earth,” Chinese leader Deng Xiaoping once declared in a comment inscribed on the lobby wall of one of China’s biggest rare earths producers.

Unless Apple and Samsung stop making mobile phones—or green technologies, which make great use of rare earths, lose their allure—demand likely will continue to rise

The China Pricing Syndrome

By stepping up its efforts and keeping prices low, China eventually developed world dominance in rare earths at the expense of the United States and everyone else. But in 2009, with an estimated 97% command of world supply, China cut back on exports. Prices suddenly rose as much as tenfold—possibly due more to speculation and the relatively small size of the markets for rare earths than any evil design on the part of Chinese policy-makers. Still, that triggered a panic in the West that hasn’t abated, even though prices have fallen 75% from their peak.

Suddenly, everyone seemed to be looking for rare earths. The CMI’s King says he saw one report of 350 mining companies “trying to start up.”

Nevertheless, “it’s still an immature sector,” says Ryan Castilloux, founding director of Adamas Intelligence, a Sudbury, Ontario, market research firm that follows rare earths and other critical minerals. He tracks 52 extraction projects in various stages of development around the world. “None are producing,” he says. “Twenty-five percent are dead in the water, and 50% are walking on thin ice.” Subscribers to his newsletter, “Rare Earth Project Profiles,” pay as much as nearly $5,000 a year for his assessments.

Besides China, the USGS says foreign rare earths exploration efforts are taking place in countries on six continents. These include Australia, Brazil, Canada, Finland, Greenland, India, Kyrgyzstan, Madagascar, Malawi, Mozambique, South Africa, Sweden, Tanzania, Turkey and Vietnam. Media reports have suggested Russia is ready to get into the act with as much as a $1 billion investment.

Castilloux rates the three most promising plays outside the United States as the Norra Karr mine in Sweden, operated by Tasman Metals Ltd., and two projects in Canada: Nechalacho, in the Northwest Territories, run by Avalon Rare Metals, and Grande-Vallée, in Quebec, owned by Orbite Aluminae.

In the United States, in addition to Mountain Pass, exploration or development assessments are taking place in nine locations: Bear Lodge, Wyoming; Bokan Mountain, Alaska; Diamond Creek, Idaho; Elk Creek, Nebraska; La Paz, Arizona; Lemhi Pass, on the Idaho-Montana line; Pea Ridge, Missouri; Round Top, Texas; and Thor, Nevada. Castilloux rates the three most promising as Round Top, run by Texas Rare Earth Resources; Bear Lodge, owned by Rare Element Resources; and Bokan Mountain, run by Ucore Rare Metals.

A major part of the United States’ problem is playing catch-up. Even if a promising field can be located, Castilloux says, it can take as long as 15 years—and tens of millions of dollars—for the infrastructure to be built out for one play. For the time being, the supply of rare earths for the military seems sufficient. But in times of crises, the situation can change quickly. The USGS study notes, as did retired Brig. Gen. Adams, that the United States has no strategic stockpile.

Adams sees no evil in the Chinese dominance of rare earths. “You can’t blame China,” he says. “We know where the deposits are. What we can’t do is be status quo and allow China the monopoly. We’re behind the curve.”

Still, the solution to the United States’ rare earths problem is likely to be found as much in economics as in geology. Market forces are already stimulating efforts to address the supply-and-demand issues that China has long controlled. As the CMI’s King says, “It’s hard to manage a monopoly.”

William P. Barrett is a veteran business journalist. He can be reached at wmpb@aol.com.