very so often, seventeen elements sitting on the bottom of the periodic table land on the front pages of newspapers where the paradox of their demand and supply are re-examined but never resolved. Rare earths, as these elements are collectively known, have magnetic, catalytic, and luminescent properties essential to everything from motors and missiles to smart phones and planes. As critical inputs for clean energy technology, electronics, and advanced weaponry, demand is rising faster than supply.
Even though these minerals are, contrary to their name, found everywhere, they are seldom concentrated in quantities that make it profitable to mine. This paradox—the high demand for naturally abundant minerals confronting their scarcity in mineable quantities—is known to the mining industry as the “balance problem.” Another facet to the balance problem is that the market for rare earths—around $5.5 billion—is quite small relative to the value added to industries dependent on them, collectively worth trillions. To further complicate things, China controls as much as 90% of the global output and currently determines this precise balance.
Seeking a new source for rare earths, the Biden Administration developed a plan in June, but progress has been slow for the same reasons the paradox has not been solved previously. Building a resilient supply chain requires solving the balance problem with equally paradoxical solutions: reviving industrial policy while simultaneously minimizing market distortions, launching dirty mines in pursuit of clean energy technology, and establishing and maintaining both domestic and international closed-loop supply chains.
Each of these efforts will be challenged by the economics of rare earth mining. Because concentrated deposits of rare earths are scarce, the time and capital expended in sourcing and testing sites must be paid for by a rich deposit. Once found, a typical mine takes five to ten years to come online, during which capital planning is complicated by volatile commodity prices. Unsurprisingly then, 400 rare earth-focused startups in the U.S. have failed since 2010, while the nation’s only active mine—at Mountain Pass, California—has struggled to remain solvent.
China’s miners avoided these hard economics with state support for mines and domestic processing. Sitting atop two-fifths of the world’s reserves, China is responsible for most of the products refined from those rare earths. After extraction, the minerals are concentrated, separated, and processed before turned into products—a supply chain that China had mastered by the 2000s as it began processing nearly all of the world’s rare earths.
Until 1980, it was the U.S. that controlled the world’s rare earth production and processing. Then a simple change in the list of “source materials” for nuclear development imposed tighter regulation on producers, making mining uneconomical and shifting production to less-regulated miners in China. Now the U.S. and the rest of the OECD are defining rare earths as “critical minerals” and the EU is offering subsidies and sales quotas.
This comes at a time when hawkishness toward China has inspired even small-government politicians to float market-support schemes, in a welcome revival of U.S. industrial policy. Senator Ted Cruz of Texas offered tax breaks, but his plan would have left miners and refiners exposed to China’s pricing power. Improving upon this is another Republican senator, Marco Rubio of Florida, who suggested a cooperative of miners exempt from antitrust policy.
China would likely approve of Senator Rubio’s plan: to secure pricing power, it plans to consolidate mining operations into two state-sponsored megaliths. As other states slowly come online, China will retain the power to influence markets as it did when it curbed exports in 2010 after a spat with Japan over the Senkaku Islands, and again in 2019 during its trade war with the U.S.
Besides the expense and uncertainty of exploration and mining, private investors are wary of a market heavily influenced by governments competing for international deposits and artificially constraining global supply with industrial policy, export quotas, or stockpiling. When China curbed exports in 2019, the price of lithium doubled. In 2010, China’s export restrictions caused a 10-fold increase in the price of neodymium.
Because they are distributed globally, rare earths will continue trading on global markets. To minimize distortions to those markets from the dominant suppliers, such as China, the U.S. can take a more market-based approach by improving price transparency and reducing volatility.
Traditional commodities, such as oil and coffee, benefit from a robust market for futures contracts, enabling buyers to hedge uncertainty by purchasing a given quantity for a fixed price in the future. Pricing rare earths is more difficult because many are consumed in several forms that would be priced differently. Nevertheless, a futures contract for lithium was recently launched by the Chicago Mercantile Exchange, the primary commodities exchange in the U.S. As mines come online in market-based economies such as the U.S., market solutions can aid in price discovery, making the rare earths market more transparent and less volatile.
For private investors seeking transparency, perhaps more important than state subsidies or hedging instruments is the need for governments to communicate the long-term plans for their net-zero emissions pledges, which would provide the confidence needed for miners and processors to invest and expand production.
Climate goals are a primary driver of demand for rare earths. An electric vehicle motor requires approximately 22 pounds of permanent magnets, accounting for half the motor’s cost. Wind turbines, meanwhile, can require about 900 pounds of praseodymium and neodymium. Together, motors and turbines account for an estimated 33% of global demand for rare earths, and rising. The transition from fossil fuels to renewables will require a reliable supply of rare earths, yet, paradoxically, their extraction can potentially wreak havoc on the environment.
Because rare-earth minerals are often nestled beside radioactive minerals, such as uranium and thorium, extraction often produces a radioactive dust that settles nearby. Extracting rare earths from the ore requires chemicals which, once spent, are collected in a toxic “lake of waste.”
In pursuit of market control, China ignored the thousand square feet of topsoil removed to recover one ton of rare earths in Southern China, as well as the 90 square miles of forest destroyed in pursuit of Ganzhou’s clay deposits, rich in heavy rare earths. Now, to avoid degrading its own environment, China is shopping for alternative sources along its Belt and Road, throughout Africa and Latin America, while pivoting to more profitable domestic production of downstream products, such as rare earth magnets and alloys.
Other states cannot or will not ignore the environmental consequences—two out of three have pledged net-zero emissions. One solution is to outsource the dirty mining, as China is doing, or other parts of the supply chain.
Diverse supplies are necessary. Currently, 80% of U.S. supply is sourced from China, with the remainder indirectly tied to China. Beyond just flexing its market power with export quotas, China, the world’s top producer of electric cars, is also consuming more of its own domestic production.
With deposits throughout Africa, Asia, and Latin America, a partnership between the Quad—Japan, Australia, the U.S., and India—is already agreed upon. This past summer, the first shipment of rare earths left Utah for processing in Estonia as part of a new EU-US rare earth channel.
However, before launching new mines in faraway places, the high startup cost and environmental damage raises the question of whether efficiency can be wrung out of existing operations.
Before its industrial policy change in 1980, the U.S. produced 99% of the world’s rare earths as a byproduct of titanium and phosphate mining. China adopted this so-called “byproduct model” to reduce its startup cost, then integrated the entire supply chain, from extraction to concentration and production. While China improved upon the US model, the U.S. can improve upon the Chinese model by investing in research and development. The U.S. can close the loop, collecting materials—batteries, lightbulbs, and motors—at the end of their lifecycle, and recycling their contents.
The processes of shredding and separating typically applied to electronic waste complicate the recovery of their rare earth contents. Magnets made of rare-earths are brittle and easily oxidize in the air. Recently, though, UK-based Hypromag developed a way to recycle neodymium to produce magnets using 88% less energy than equivalents produced from scratch. Even so, primary production will be necessary. By 2050, output of cobalt, graphite, and lithium must be 450% higher than in 2018 to meet rising battery demand.
The biggest barrier to recycling has a simple solution. Currently, products containing rare earths are hardly ever collected at the end of their lifecycle. Keeping more downstream production within the U.S. would mean not only a more resilient domestic supply chain but easier collection of magnets, florescent lights, and batteries to recycle into rare earth products.
A resilient supply chain also calls for “economic stockpiling,” as China does, not just the “strategic stockpiling” the U.S. currently uses to secure the defense industry. Before the fall of the Soviet Union, the U.S. maintained substantial reserves of rare earths. The 1980s brought “just-in-time” supply chains which shifted the focus from inventory management to logistics. The stock of rare earths was sold off to pay for a war memorial in Washington, DC. Now, as the pandemic has hobbled logistics-dependent supply chains, dragging on production and leaving warehouses empty, a “just-in-case” inventory is seen as not only prudent but necessary.
A perfect equilibrium of dependable, resilient, and sustainable supply to match the rising demand for rare earths will be impossible, stymied by the many paradoxes of rare earth policy. But by innovating in the markets for rare earths, subsidizing mining, onshoring production, and investing in supply chain enhancements, the U.S. can achieve greater price stability, encourage private investment, and secure the supply of rare earths.
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The Paradox of Rare Earth Policy
Image via Adobe Stock.
December 15, 2021
Rare earth elements are increasingly in demand as a core component of numerous industries collectively worth trillions. However, problematic economics and supply chains around the extraction of these elements make formulating policy for domestic extraction difficult, writes YPFP Fellow Carey K Mott.
E
very so often, seventeen elements sitting on the bottom of the periodic table land on the front pages of newspapers where the paradox of their demand and supply are re-examined but never resolved. Rare earths, as these elements are collectively known, have magnetic, catalytic, and luminescent properties essential to everything from motors and missiles to smart phones and planes. As critical inputs for clean energy technology, electronics, and advanced weaponry, demand is rising faster than supply.
Even though these minerals are, contrary to their name, found everywhere, they are seldom concentrated in quantities that make it profitable to mine. This paradox—the high demand for naturally abundant minerals confronting their scarcity in mineable quantities—is known to the mining industry as the “balance problem.” Another facet to the balance problem is that the market for rare earths—around $5.5 billion—is quite small relative to the value added to industries dependent on them, collectively worth trillions. To further complicate things, China controls as much as 90% of the global output and currently determines this precise balance.
Seeking a new source for rare earths, the Biden Administration developed a plan in June, but progress has been slow for the same reasons the paradox has not been solved previously. Building a resilient supply chain requires solving the balance problem with equally paradoxical solutions: reviving industrial policy while simultaneously minimizing market distortions, launching dirty mines in pursuit of clean energy technology, and establishing and maintaining both domestic and international closed-loop supply chains.
Each of these efforts will be challenged by the economics of rare earth mining. Because concentrated deposits of rare earths are scarce, the time and capital expended in sourcing and testing sites must be paid for by a rich deposit. Once found, a typical mine takes five to ten years to come online, during which capital planning is complicated by volatile commodity prices. Unsurprisingly then, 400 rare earth-focused startups in the U.S. have failed since 2010, while the nation’s only active mine—at Mountain Pass, California—has struggled to remain solvent.
China’s miners avoided these hard economics with state support for mines and domestic processing. Sitting atop two-fifths of the world’s reserves, China is responsible for most of the products refined from those rare earths. After extraction, the minerals are concentrated, separated, and processed before turned into products—a supply chain that China had mastered by the 2000s as it began processing nearly all of the world’s rare earths.
Until 1980, it was the U.S. that controlled the world’s rare earth production and processing. Then a simple change in the list of “source materials” for nuclear development imposed tighter regulation on producers, making mining uneconomical and shifting production to less-regulated miners in China. Now the U.S. and the rest of the OECD are defining rare earths as “critical minerals” and the EU is offering subsidies and sales quotas.
This comes at a time when hawkishness toward China has inspired even small-government politicians to float market-support schemes, in a welcome revival of U.S. industrial policy. Senator Ted Cruz of Texas offered tax breaks, but his plan would have left miners and refiners exposed to China’s pricing power. Improving upon this is another Republican senator, Marco Rubio of Florida, who suggested a cooperative of miners exempt from antitrust policy.
China would likely approve of Senator Rubio’s plan: to secure pricing power, it plans to consolidate mining operations into two state-sponsored megaliths. As other states slowly come online, China will retain the power to influence markets as it did when it curbed exports in 2010 after a spat with Japan over the Senkaku Islands, and again in 2019 during its trade war with the U.S.
Besides the expense and uncertainty of exploration and mining, private investors are wary of a market heavily influenced by governments competing for international deposits and artificially constraining global supply with industrial policy, export quotas, or stockpiling. When China curbed exports in 2019, the price of lithium doubled. In 2010, China’s export restrictions caused a 10-fold increase in the price of neodymium.
Because they are distributed globally, rare earths will continue trading on global markets. To minimize distortions to those markets from the dominant suppliers, such as China, the U.S. can take a more market-based approach by improving price transparency and reducing volatility.
Traditional commodities, such as oil and coffee, benefit from a robust market for futures contracts, enabling buyers to hedge uncertainty by purchasing a given quantity for a fixed price in the future. Pricing rare earths is more difficult because many are consumed in several forms that would be priced differently. Nevertheless, a futures contract for lithium was recently launched by the Chicago Mercantile Exchange, the primary commodities exchange in the U.S. As mines come online in market-based economies such as the U.S., market solutions can aid in price discovery, making the rare earths market more transparent and less volatile.
For private investors seeking transparency, perhaps more important than state subsidies or hedging instruments is the need for governments to communicate the long-term plans for their net-zero emissions pledges, which would provide the confidence needed for miners and processors to invest and expand production.
Climate goals are a primary driver of demand for rare earths. An electric vehicle motor requires approximately 22 pounds of permanent magnets, accounting for half the motor’s cost. Wind turbines, meanwhile, can require about 900 pounds of praseodymium and neodymium. Together, motors and turbines account for an estimated 33% of global demand for rare earths, and rising. The transition from fossil fuels to renewables will require a reliable supply of rare earths, yet, paradoxically, their extraction can potentially wreak havoc on the environment.
Because rare-earth minerals are often nestled beside radioactive minerals, such as uranium and thorium, extraction often produces a radioactive dust that settles nearby. Extracting rare earths from the ore requires chemicals which, once spent, are collected in a toxic “lake of waste.”
In pursuit of market control, China ignored the thousand square feet of topsoil removed to recover one ton of rare earths in Southern China, as well as the 90 square miles of forest destroyed in pursuit of Ganzhou’s clay deposits, rich in heavy rare earths. Now, to avoid degrading its own environment, China is shopping for alternative sources along its Belt and Road, throughout Africa and Latin America, while pivoting to more profitable domestic production of downstream products, such as rare earth magnets and alloys.
Other states cannot or will not ignore the environmental consequences—two out of three have pledged net-zero emissions. One solution is to outsource the dirty mining, as China is doing, or other parts of the supply chain.
Diverse supplies are necessary. Currently, 80% of U.S. supply is sourced from China, with the remainder indirectly tied to China. Beyond just flexing its market power with export quotas, China, the world’s top producer of electric cars, is also consuming more of its own domestic production.
With deposits throughout Africa, Asia, and Latin America, a partnership between the Quad—Japan, Australia, the U.S., and India—is already agreed upon. This past summer, the first shipment of rare earths left Utah for processing in Estonia as part of a new EU-US rare earth channel.
However, before launching new mines in faraway places, the high startup cost and environmental damage raises the question of whether efficiency can be wrung out of existing operations.
Before its industrial policy change in 1980, the U.S. produced 99% of the world’s rare earths as a byproduct of titanium and phosphate mining. China adopted this so-called “byproduct model” to reduce its startup cost, then integrated the entire supply chain, from extraction to concentration and production. While China improved upon the US model, the U.S. can improve upon the Chinese model by investing in research and development. The U.S. can close the loop, collecting materials—batteries, lightbulbs, and motors—at the end of their lifecycle, and recycling their contents.
The processes of shredding and separating typically applied to electronic waste complicate the recovery of their rare earth contents. Magnets made of rare-earths are brittle and easily oxidize in the air. Recently, though, UK-based Hypromag developed a way to recycle neodymium to produce magnets using 88% less energy than equivalents produced from scratch. Even so, primary production will be necessary. By 2050, output of cobalt, graphite, and lithium must be 450% higher than in 2018 to meet rising battery demand.
The biggest barrier to recycling has a simple solution. Currently, products containing rare earths are hardly ever collected at the end of their lifecycle. Keeping more downstream production within the U.S. would mean not only a more resilient domestic supply chain but easier collection of magnets, florescent lights, and batteries to recycle into rare earth products.
A resilient supply chain also calls for “economic stockpiling,” as China does, not just the “strategic stockpiling” the U.S. currently uses to secure the defense industry. Before the fall of the Soviet Union, the U.S. maintained substantial reserves of rare earths. The 1980s brought “just-in-time” supply chains which shifted the focus from inventory management to logistics. The stock of rare earths was sold off to pay for a war memorial in Washington, DC. Now, as the pandemic has hobbled logistics-dependent supply chains, dragging on production and leaving warehouses empty, a “just-in-case” inventory is seen as not only prudent but necessary.
A perfect equilibrium of dependable, resilient, and sustainable supply to match the rising demand for rare earths will be impossible, stymied by the many paradoxes of rare earth policy. But by innovating in the markets for rare earths, subsidizing mining, onshoring production, and investing in supply chain enhancements, the U.S. can achieve greater price stability, encourage private investment, and secure the supply of rare earths.
