09 Nov 2010

Business of Rare Earth Elements

S.Ananth
Rare earth elements (or rare earth minerals) have been in the news over the past few months for a
variety of reasons, the most important being the fear that China (the largest producer and
exporter in the world) is curtailing the supply of these minerals for geopolitical reasons. This
reason has led to a big rise in the stock prices of these resource producers in the global equity
markets. The controversy surrounding the Chinese has also led to growing attention being
focussed on a segment which hitherto was part of the debate of only those in the mining sector
and the investment community attached to it. The spill over of the debate into the public domain
seems to have created an unnecessary hysteria about the non-availability of the resource for
posterity. A natural corollary of this has been that the stock prices of these companies have
jumped manifold, mostly in a matter of four months.

What are Rare Earth Elements?

Rare earth elements (henceforth REE) or rare earth metals are a collection of 17 chemical
elements in the periodic that comprise of Scandium, Yttrium and 15 other lanthanides. Most of
them have similar chemical properties and are mostly found in similar deposits. Rare earths were
first found in 1787 with the discovery of Ytterbite (since renamed to Gadolinite in 1800) by Carl
Axel Arrhenius in the village of Ytterby, Sweden. REE have gained an increased importance due
to technological change has meant that there is now an ever growing need for Rare Earth
Elements (henceforth REE) in different spheres.

Their importance stems from the fact they are compulsory ingredient in the manufacture of most
high-technology products, nuclear industry, petroleum sector and other sectors so vital to the
economy. They cannot be easily substituted. Their magnetic and other important properties
means that they find application in electric motors, mobile phones, laptops, automobiles, electric
and hybrid vehicles, batteries, missile systems, satellites and communications systems among
others.
Given below is a periodic table and classification of each element.

Source: http://www.lynascorp.com/page.asp?category_id=1&page_id=1

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“Rare” earth elements are in actuality not as rare as their classification seems to imply. The
reason for the name has more to do with the unfamiliarity rather than actual rarity. They are
considered to rare largely because they are not found in similar concentrations or individual
abundance as those other industrial metals like copper, tin or lead. Some of them (Thulium and
Lutetium) are nearly 200 times more common than gold.

Given below is a table that lists the 17 rare earth elements with a brief mention about some of the
more important usage. It is important to note that some of the elements draw their name from
either the scientists or their geographic area of discovery.
Name Atomic Symbol Symbol Importance/Usage
Scandium 21 Sc Aluminum Scandium Alloy

Yttrium 39 Y High Temp super conductors, Garnet. Low heat

sensitivity
Lanthanum 57 La High refractive index glass, oil industry, battery
electrodes
Cerium 58 Ce Chemical Oxidizing agent

Praseodymium 59 Pr RE magnets, lasers, glass and ceramics among

others
Neodymium 60 Nd RE magnets and lasers among others

Promethium 61 Pm Nuclear Batteries

Samarium 62 Sm RE magnets, lasers neutron capture & devices

producing coherent electromagnetic waves
Europium 63 Eu Lasers, mercury vapour lamps, etc

Gadolinium 64 Gd RE magnets, garnets, lasers, X-ray tubes,

computer memory, etc.
Terbium 65 Tb Lasers, fluorescent lamps, etc

Dysprosium 66 Dy RE Magnets and Lasers

Holmium 67 Ho Lasers
Erbium 68 Er Lasers & vanadium steel

Thulium 69 Tm X-ray machines

Ytterbium 70 Yb Infrared lasers, chemical reducing agent, etc
Lutetium 71 Lu Very rare. Because of rarity and high price stable
Lu used in Nuclear technology and petroleum
Complied from different sources

Some of the common properties of rare earth elements include:

• The rare earths are silver, silvery-white, or gray metals.

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• The metals have a high luster, but tarnish readily in air.

• The metals have high electrical conductivity.
• The rare earths share many common properties. This makes them difficult to separate or
even distinguish from each other.
• There are very small differences in solubility and complex formation between the rare
earths.
• Rare earths are found together, often in combination with other rare earth elements.
• Rare earths are found with non-metals, usually in the 3+ oxidation state.

The significance of REE is that they are not found in significant concentrations and their
geochemical properties make them difficult to find in economically exploitable ore deposits that
would make them viable to be commercially exploited. They are often found in concentrations
that are mostly in combination in other elements thereby making their isolation difficult and
costly. The case of Lutetium is illustrative of the nature of REE: it is considered to be one of the
rarest of the rare earth elements. It is never found by itself but is found with almost all of the
other REE. However, since it is very difficult to separate from others, it is very expensive. Only
about 10 tonnes of Lutetium are stated to be produced annually and the cost of the metal exceeds
US$10,000 per kilogramme 1.

Economic Importance of Rare Earths

The importance of the REE stems from nature of the technological advancement of the human
race and the growing importance that is currently attached to miniaturisation of electronic times
and the need for devices to fulfil an ever growing need array of functions. Their added
importance stems from the fact that REEs have widespread application in highly advanced
military and telecommunication systems. The usage of REE has been increasing in different
applications over the years. Hybrid car, Prius contains about 10 kilograms of rare earth, while a
typical 3 megawatt wind turbine requires nearly one tonne of Neodymium Iron Boron Magnets 2.
On the other hand a MRI machine requires the use of about 185 kilogrammes of different rare
earth elements. The US uses nearly 75 kilogrammes of Rare Earth elements daily in their
petroleum refining process.

This has led to an added urgency for various national governments to an active interest in
maintaining a stead supply of the minerals.

The availability of rare earth minerals is concentrated in only a few geographies. The reserves
are mainly concentrated in China (36% of the total known reserves), USA (13% of known
reserves), Russia (19%), Australia (5.4%), India (3.1%) and many other countries including
Brazil, Malaysia and Sri Lanka 3. The major suppliers of REE to the world economy are China
(120,000 metric tonnes or 97%), India (2700 tonnes or 2%) which are followed by the rest of the

1
The main mining regions are China, USA, Brazil, India and Australia.
2
http://noir.bloomberg.com/apps/news?pid=20601087&sid=a2JemyIZWSjg&pos=7
3
Rare Earth Elements: The Global Supply Chain, Congressional Research Service, p.6.
http://www.fas.org/sgp/crs/natsec/R41347.pdf

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countries. The total supply of REE in 2009 amounted to about 124,000 tonnes 4. Till the
beginning of the 1990s, USA was one of the largest suppliers of REE, but it has since been
overtaken by China, which now accounts for nearly 97% of the current world production and
supply. Japan consumes nearly 20% of the REEs exported by China with Europe and USA
accounting for the balance consumption. China’s reserves and production are largely
concentrated in the Tibet, Inner Mongolia region and Southern China. The Chart below provides
an overview of the global production of Rare Earth Oxides from 1950-2000.

Source: http://pubs.usgs.gov/fs/2002/fs087-02/fs087-02.pdf

The Demand for Rare Earth Elements outstrips supply by a substantial margin. This is expected
to increase over the next few years. The present World Demand for REE is estimated at 134,000
tonnes per year and is projected to rise to about 180,000 annually by 2012. By 2014, global
demand for REE may exceed 200,000 tonnes per annum with China supplying 160,000 tonnes 5.

Issues in Rare Earth Elements Supply:

Despite the availability of REE in nature, their supply has declined substantially over the past
two decades. The causes for this decline are largely due to the confluence of three reasons: (1)
China’s attempt to gain market leadership in REE supply by driving down prices, (2) Increased
environmental awareness and (3) a General Commodity decline that lasted from the mid 1980s to
2001. The most important factor was China’s attempt to gain market dominance, where it
directly subsidised producers and turned a blind eye to the environmental impact. Till about the
mid 1980s, USA was the largest supplier of REE. By the mid 1990s massive state subsidies led
to Chinese producers under-cutting the price vis-a-vis other producers. This combined with lax
environmental regulations and enforcement in China enabled it to emerge as the largest supplier

4
http://www.fas.org/sgp/crs/natsec/R41347.pdf
5
http://www.fas.org/sgp/crs/natsec/R41347.pdf

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of REEs while most of the other companies/countries either went bankrupt or decided to
discontinue production. India was one of those countries that discontinued most of its production
in 2004 due to the uneconomic prices in the global market 6.

The market dynamics have undergone a change since 2008, when China started imposing export
quotes on REE supplies. China has also set a production cap of 89,200 metric tonnes in 2010. It
has determined export quotas in 2010 at 30,000 metric tonnes, about 18,000 tonnes less than
2009. The supply of rare earth elements became an issue after Japanese and other Western media
claimed that China had halted supply of rare earth elements after geopolitical tensions in the
South China Seas. China however, denies that there are political motives involved in the issue. It
claims that it is interested in not only preserving the cost of the rare earth resources but more
importantly, it wants to curb the disastrous consequences of the environmental impact of decades
of rare earth mining. There is undoubtedly a semblance of truth in this with nearly half of the
global supply of rare earths coming from a single iron ore mine in north of Baotou. However, the
nature of the Chinese state and China’s politics means that one is never sure whether a particular
decision has a pure economic rationale or whether the political motive is part of the package.

The interesting aspect of China’s policy towards rare earths has been that it is aimed largely at
the supply of rare earth material in its unprocessed form. There are no curbs for those exporting
value added items. This raises serious questions about China’s policy, which seems to be a clear
policy aimed at supporting its exports move up the value chain. China also seems to be more
interested in laying its hands on high technology that may go with the export of items in its value
chain. By reducing the supply of unprocessed REE China seems be intent on forcing
manufacturers to relocate their high technology manufacturing into China. The Japanese are the
largest importers of China’s REE. Most of Japan’s high technology items are manufactured in
Japan, which they are not keen at present. Manufactures like TDK believe that their closely
guarded high technology techniques should remain a closely guarded secret. Most of the
advanced stage manufacturing continues to be based in Japan. China hopes that if the Japanese
high technology manufactures are forced to relocate their units, it would be beneficial to their
country in the long-run – a process that has already begun in the case of some industries.

China’s strategy of forcing the issue could backfire over the long-run. The Most important
reason why REE are critical is not because of the lack of their availability. Instead it has more to
do with the fact that because of their similar chemical properties, rare earths tend to be available
in different blocks and it is a costly process to extract, separate and refine them. They require
exponentially large quantities of water, acid and electricity. The residual waste that is often toxic
and radioactive, thereby increasing the cost of production. It has been pointed out that the
production of one tone of some REEs requires nearly 850 gallons of water and often produces in
excess of nearly 2000 tonnes of waste that is generally difficult to dispose.

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http://in.reuters.com/article/idINIndia-52482120101027

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The growing environmental awareness in most of the countries was instrumental in forcing the
closure of various production units in USA and Europe. It has been pointed out by the Head of
German Commodity agency that alternative supplies of Rare Earth would take ten years to reach
the market in sufficiently large quantities 7.

As the demand for REE and the prices increase (much of it due to Chinese policy and a general
rising demand for commodities), a large number of producers which had to shut down capacities
will find it more economical to reopen their facilities – a trend that is already underway. India is
one such example, which has decided to not only reopen and reinvest in existing capacities but
has also started to call for expression of interest to start new ventures. The Indian state of
Karnataka is stated to have evinced interest in granting mining permits for those interested in
REE. As the clamour for REE increases, national governments are bound to relax the stringent
environmental norms – after all there is nothing provides a more compulsive logic than national
security.

However, investing in companies/businesses/ETFs that are enable investors to gain an exposure

in Rare Earth Elements may prove to be compulsive business logic over the next four to seven
years. The investment logic arises due to a number of reasons. The commodity boom is expected
to continue for a few more years due to the debasement of the fiat currencies the world over. The
companies that produce REE will continue to have excellent pricing power over most of the next
decade (unless there is another repeat of late 2008 conditions) largely due to the growing demand
for a growing array of smart devices/instruments/applications.

Investors (not entrepreneurs) may be well advised to maintain caution over the short term (6-12
months perspective) due to the exponential jump stock prices in most of the companies (at a
global level) that produce REE. Most of the companies have seen prices jump between 100-500
percent since July 2010. Investors desirous of an exposure, albeit more risky structural bet, may
consider an exposure to Rare Earth Elements Market Vectors Rare Earth Exchange Traded fund
in USA (Symbol: REMX) on declines. There are no listed REE companies, and the first off the
block always has a unique advantage. The largest producer of Rare Earth Elements in India is the
public sector Indian Rare Earths Limited (http://www.irel.gov.in/), it remains to be seen if the
government will list the company over the next three years.

7
http://noir.bloomberg.com/apps/news?pid=20601110&sid=aVT2nS6fvnuo