Apr 13, 2013 - European Union and Japan are going to economic war ... Tyrer and John P. Sykes; but it does need statistics to understand the likely outcome ...
The statistics of the rare earths industry Rare earths are essential to green technologies, but China supplies 98% of them. Some have risen in price 200-fold – by 20 000% – in a year. Is China holding the world to ransom? A World Trade Organisation case is brewing. Rare earths are not rare, say Mark Tyrer and John P. Sykes; but it does need statistics to understand the likely outcome of the WTO case – and why the industry is important.
Rare earths are common, so why does only one country mine them? Statistics reveal the uncertainties of a vital industry 12
It is rare for a US president to address an issue as grubby and abstract as a minor metals market, but Barack Obama did just that. In March 2012 he announced that the USA would be joining a WTO complaint about China’s apparent abuse of the rare earth market. So what are these things? They are metals, not earths, and there are 17 of them. One might as well list them. They are lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium and lutetium, better known as the “lanthanides” (or the top line of the fold-out bit at the bottom of the periodic table); their cousins scandium and yttrium get included as well. It is certainly not the size of the rare earths industry that matters. Crude estimates suggest the whole industry to be worth no more than around US$20 billion annually. That is tiny in comparison to the world’s major commodity markets such as iron ore, worth nearer $350 billion, or copper, worth around $160 billion. Twenty billion dollars is nearer in size to the lead or silver industries, not commodities that usually attract politicians’ attention. In fact $20 billion is the combined size of the market for all 17 rare earth elements; individually they vary from about $5 billion to virtually negligible, which brings the rare earths more into line with commodities that few will care much about such as cobalt and rhenium. Why, then, are they so important? Rare earth industry boosters point to the metals’ “strategic” uses in april2013
the green, high-tech and defence industries; and indeed the metals do have uses here. However, if the USA, European Union and Japan are going to economic war with China over these metals then it is definitely worth considering just how “strategic” they are and whether the fight is worthwhile. The rare earths themselves have three main end uses. The glass industry uses them in polishing and as colourants. Another use is as catalysts, in oil refining and automobile catalytic converters. So far nothing to get excited about; both these traditional uses have a number of substitutes available. But the third of these large end uses capitalises on one of the rare earths’ several unique physical properties – their ability to form very powerful, and therefore very small, permanent magnets. Increasingly small permanent magnets have helped drive the electronics and communications revolution of the last 20 years or so, helping move us, for example, “from iMac to iPod to iPhone to iPad”. This is the sector that has got politicians and industry moguls excited about rare earths. According to the United States Geological Survey (USGS) the magnet sector is currently about 40% of total rare earth consumption; the authors believe this could easily become half of demand in the future. Permanent magnets are not only key components in electronics but also crucial in wind turbines. Clearly great magnetic power compared to weight is important for generators that will sit atop a long pole in (by definition) windy areas! Another important “green technology” use in is hybrid cars, where again they are found in the electric © 2013 The Royal Statistical Society
In mining, economies of scale are huge
motor. There are currently no competing elements that can be substituted into permanent magnets and deliver the same properties – and this is critical. These are not the only green uses for rare earths. Some rare earths fluoresce; they provided the colour in the first cathode ray tube TVs and nowadays do the same in LCD and plasma TVs. Again there is no substitute. Phosphorescent rare earths provide the white light now familiar in energy-efficient light bulbs. The battery alloy industry (about 10% by value and volume) further demonstrates the rare earths’ green credentials. Nickel metal hydride batteries will be familiar to gadget aficionados as the rechargeable batteries found in most modern portable technology. The “metal” in the batteries is in fact lanthanum. As well as in portable gizmos, nickel metal hydride batteries are usually found in hybrid cars, demonstrating further importance in this technology. In fact rare earth miner Molycorp points to ten different uses of rare earths in hybrid cars. The US Department for Energy and rare earth expert Gareth Hatch classified five “critical” rare earths which are most exposed to these high-value magnet and phosphor sectors: neodymium and dysprosium, for their use in magnets; and europium, terbium and yttrium, for their use as phosphors. It is
these non-substitutable rare earths that have military strategists worried. The Rare Earths Industry & Technology Association (REITA) points out that permanent magnets are used in guidance, controls and electric drives for weapons such as the Predator unmanned drones (being used in Afghanistan and Pakistan), Tomahawk missiles and smart bombs. They are in vision technologies used by the military, especially avionic displays and night vision equipment. Exact figures for the US military’s use of rare earths are obviously difficult to come by; however, overall consumption is thought to be very small. This forms part of a wider argument that while rare earths are critical for the fast-growing and important electronic and green technology sectors, they are not “strategic” and critical for defence. Their wide use in modern technologies suggests they are more a “lifestyle” metal, used by the middle classes. Which again would mean it is not an issue that would typically bother politicians; the reasons behind the WTO case must therefore lie elsewhere. Indeed, the critical side of the story does lie elsewhere. In commodity market analysis, along with any other type of market analysis, one must discuss supply and demand. With our analysis of rare earths so far suggesting that demand is exciting but hardly “strategic”,
it must be supply that is causing the problem. The fact that the USA, EU and Japan’s case is against China suggests where the critical supply issue is. Statistics from the USGS suggest China mined around 97% of the world’s rare earths, about 130 000 tonnes, in 2010. Of these China set an export quota of just 30 000 tonnes in 2010, down 40% from 50 000 in 2009 and 65 000 in 2005, implying around 100 000 tonnes of apparent domestic consumption (though this doesn’t factor in stockpiling and smuggling – both of which are rampant). This has created a supply shortage for the world’s major rare earth importers: Japan, which imports about 35% of rare earths by value according to the USGS; the USA, which imports about 25%; and the EU, which imports another third or so. This is the crux of the WTO case; however, it is not as simple as that. USGS data shows that China dominates the production of many other commodities such as antimony (89%), beryllium (88%), tungsten (83%), gallium (75%) and molybdenum (38%). Of these only tungsten and molybdenum have been added to the WTO case. Clearly there is more to the rare earths issue than the import–export balance. The issue is in fact “value”, or more exactly “value-added”. It is a common misconception that mining is about extracting minerals; it april2013
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is actually about extracting value. The aim is to extract as much of the final value of the commodity for as little cost as possible. Where value is accrued during the production, transformation and manufacture of rare earth element products is different from many other mined commodities. Only about 50% of the final metal value of rare earths is accrued in the mining stage; the other 50% accrues in the downstream separation and refining stages. This is in comparison to commodities such as copper, where around 75% of the final metal value reports back to the miner, and metals such as tin, silver and gold, where it is over 90%. It is therefore important from both a company and government perspective to host as much of the value chain as possible, thus capturing more “value”. It is this fight over the supply chain, combined with the rare earths’ uses in high-tech and green-tech sectors, which sees the USA, EU and Japan battling with China. The USA, EU and Japan argue that China is deliberately restricting rare earth exports in order to force the supply chain into China and to gain an advantage for its renewable energy
© iStockphoto.com/David Freund
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and other green industry sectors. This would be illegal under WTO rules. However, China argues that it has a right to restrict rare earth exports to limit resource depletion and environmental damage, which would be allowed under WTO rules. Clearly the WTO will be interrogating the numbers in this case, so let us preview what they might discover – a subject in which rare earths expert Gareth Hatch has proved very enlightening Firstly, the claim by the USA, EU and Japan that exports are being restricted. Rare earth prices can be analysed for evidence of market distortion. During 2010 and 2011 there was a phenomenal rise in rare earth prices. From minimum to maximum some rare earths rose in price nearly 20 000% (or 200fold) in about a year. Cerium rose 13 060% to its peak, lanthanum 16 390% and dysprosium 19 690%. It is rare in the commodities industry that prices are more appropriately plotted on a logarithmic scale! To provide some context over the same 10-year period, other famously well-performing commodity prices (that readers may actually have heard of or even
invested in) have minimum to maximum rises of “just” 120% (copper), 260% (gold), 300% (nickel) and 440% (silver). The cornering of the silver market by the Hunt Brothers in the early 1980s produced a 12-fold (1100%) spike. Since peaking around mid-2011, prices for all rare earth metals have fallen off dramatically, with many more than halving, though this still leaves most 1000% or more higher than 10-year lows. Clearly there is something going on in the market. The spike in prices clearly shows that there was excess demand (from the USA, EU and Japan) for exports of Chinese rare earths, but was this due to “too much” demand or unfair restrictions on supply? As with many issues in statistics, the source and type of data are key, as is the actual numerical analysis. The prices quoted above are for rare earths exported from China (priced in US dollars), provided by the commodities pricing company Metal Pages. Metal Pages also provides prices for rare earths within China (priced in renminbi) – these are the rare earths traded on China’s domestic market. An analysis of internal versus export prices shows that, on a monthly average price basis, exported lanthanum oxide increased in price by 3550%, but domestic lanthanum oxide increased less, by 890%. Similarly, exported dysprosium oxide increased 2950%, while the domestic product increased 2120%. In essence. rare earths were provided more cheaply to internal Chinese customers than for export. This is an unfair market and would seem to support the case of the USA, EU and Japan. So what of China’s case? The country argues that it should not be forced to deplete its national resources to feed everyone else’s industries and consumer appetites. While China supplies 95% of the world’s rare earths, it hosts only about 35% of the world’s resources. However, once you factor in that China consumes three-quarters of its own production, exporting the other quarter, you realise that while China hosts 35% it supplies the rest of the world with only 28% of the global rare earth mine supply. It is indeed depleting its own resources – but to feed its own industries, not the world’s. Examining the situation a little more closely, however, shows that China may still have a case. Observant readers will have noted earlier during the price discussion that the dysprosium market seemed more distressed than the lanthanum market. Thus, finally, we reach
the major complication in rare earths. We have discussed them mainly as a “group”. They are indeed all usually found together – but they are not all used together. There are in effect 17 different rare earth markets, with different consumption patterns and growth potential. Further, even though rare earths are found together, they are found in different ratios of abundance to each other. Some discussion of which rare earths are coming out of the ground and which ones are being consumed and where is clearly now required. Fifteen rare earth elements occur together in nature. Chemists divide them into “light” and “heavy”, based on their ascending atomic weights. Most of China’s light rare earths come from Inner Mongolia, and the majority of the heavy rare earths come from southern China. The vast majority of the reserves are light rare earth elements, so China (and indeed the rest of the world) does not have a shortage of these. China may, however, have a shortage of the heavy rare earth elements (and thus so may the whole world). Similarly, on the environmental front the problems are not in Inner Mongolia (where mining practices are essentially at their normal level of destructiveness) but in southern China, where the mining practice is to pour acid over a hill and catch the subsequent rare earth rich leachate at the bottom! Worse, the situation is compounded by illegal mining, bonded labour and smuggling. As a result China is trying to consolidate, regulate and minimise rare earths mining in southern China for both environmental and social reasons. This would be allowed under WTO rules and thus it is possible there could be a “split decision” where China loses the case for light rare earth elements and wins the case for heavy rare earth elements. If China does win its case, in whole or in part, would it be possible to build a rare earth supply chain outside China? Hundreds of new small, exploration-focused mining companies have started up, mainly in the USA, Canada and Australia. What are the chances that they will succeed? Indian rare earth academics Chiranjib Kumar Gupta and Nagaiyar Krishnamurthy highlight four factors that facilitate mining: (1) crustal abundance; (2) the tendency to form exploitable resources; (3) ease of mining; (4) ease of extracting metal from ore. For the West to develop its own supply chain all these will need to be satisfied. Let us examine each in turn.
1. Crustal abundance. Despite the name, “rare earths” are not actually that rare. Data from Jefferson Labs shows that the most common, cerium (66.50 parts per million), is about as abundant in the crust as copper (60.00 ppm). Even the rarest, lutetium (0.50 ppm), is much more common than silver (0.075 ppm). They are by no means “rare” and “precious” metals. 2. Tendency to form exploitable resources. The recent spike in rare earth prices has meant that a lot of exploration for rare earths has occurred. Following recent discoveries, compliant resources (those which pass the tests of the Australian and Canadian stock exchanges) now stand at over 40 million tonnes of rare earths. This is somewhere between 300 and 400 years’ supply. This is much more than comparable metals such as copper (34 years), gold (20 years), tin (20 years) or even oil (44 years). There is clearly no shortage of rare earth resources. 3. Ease of mining. The “ease of mining” essentially comes down to the cost of extracting the ore compared to what it is worth. Mount Weld, a world-class rare earth resource in Australia, has a grade of 9.8% total rare earth oxide (the 15 naturally occurring ones, excluding scandium); thus, based on five-year averages, the oxides in this ore would be worth about US$5000 per tonne of ore. This is more than enough to mine and leave scope for profit. By comparison, nowadays copper is mined at a grade of 0.5% and gold at a grade of 1.2 grams per tonne. These ores are worth just $34.50 and $45.50 per tonne respectively, yet they can be mined profitability. The problem is therefore not in the cost of mining. 4. Ease of extracting metal from ore. The problem with rare earth production must therefore lie with the ease (the cost) of extracting the metal from these abundant, easily mineable ores. Indeed it does! Rare earths are very compatible elements, thus they easily form chemical bonds, particularly with oxygen (to form oxides). Great energy (and cost) must be expended to separate out the rare earths from their ores. Furthermore, the 15 naturally occurring rare earths all form together in mineral deposits, so in order
to be useful industrially have to be separated from each other. The elements all occur next to each other on the periodic table and, as far as different elements go, are as similar as can be. Separating them is therefore another processing problem (and cost). Finally, rare earth ores are often rich in uranium and thorium, radioactive elements, so these have to be extracted, monitored and carefully managed, adding further cost. In total, rare earths are among the most challenging and costly elements to separate from their ore. Indeed, a look at the Mount Weld project again shows that just 4% of operating costs occur in the mining stage. The rest occurs in the mineral concentration, concentrate processing and associated transportation costs. So will new rare earth mining projects come on-stream outside of China? This essentially comes down to whether any of the hundreds of projects have sufficiently compelling economics to attract the money required to research and engineer one of these very complicated processing facilities. Fortunately, there are a number of standard statistics in mining that can be used to assess the economics of a mine project – though, as might be expected,
Standard statistics assess the economics of mine projects, but are more complex for rare earths in the rare earths industry these are somewhat more complicated to analyse than other mined commodities such as copper and gold. In the mining industry “grade is king”. Grade refers to how much of the desired element is in the rock, and since mining is essentially just the process of moving rock around, the less rock you have to move, the cheaper and more profitable your mining operation. Thus high-grade operations are more desirable than low-grade operations. This, however, is complicated by the fact that in rare earth deposits you are measuring the total grade of 15 different elements in different ratios. The fact that these elements all have very different prices (as little as US$30 per kilogram for cerium and in april2013
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excess of $2000/kg for thulium and lutetium) means that the ratio of these elements in the grade is also critical. It therefore becomes a trade-off between total grade and the ratio of different rare earths. The best way to assess this is by calculating the value of one tonne of ore at a deposit. For leading rare earth projects this can vary from $30 per tonne up to $5000 – a large variation. However, it is not as simple as this. If “grade is king” in mining, then “scale is queen”. Mining benefits greatly from the efficiencies of economies of scale, and again the size of proposed operations in the rare earths can vary enormously. The scale of an operation is roughly dictated by the amount of ore available to mine: larger resources create bigger operations with longer mine lives. Again the total ore held in the group of advanced rare earth deposits varies from 250 000 tonnes to 860 million tonnes. Obviously the value of the ore in each of these operations then has to be factored in and we find that the “in-ground value” of these rare earth projects can vary from $2.5 billion up to $540 billion! The in-ground value is, however, the mining industry’s biggest falsehood. Ore has no value until it is in the market as some kind of commodity. Due to the expense of mining, it could be argued that the value of ore in the ground is effectively zero. Three factors are at work that reduce apparently high values to something a little less exciting. The first is recovery rates. No process is 100% efficient, so every time ore goes through a “process” some of it is lost as waste. This happens at the very beginning when “geological resources” are converted to “economic reserves”; not all resources are economic and some are excluded. This conversion factor can be as great as 90% or as low as 25%. Next, no mining process is 100% efficient and some ore is always left behind or lost – up to 30% in some underground operations. At the processing stage, again more material is lost. Recovery rates there can vary from 10% to 95%. To make matters worse, though, to produce an individual rare earth oxide (for which we have been quoting prices throughout this article) ore must be concentrated physically into a mineral concentrate, then chemically “cracked” into a higher-grade, chemically reactive concentrate, before finally being separated in a plant into the separate rare earth oxides. These three extra processes mean a further three recovery rate losses on top of the two we have already; this means overall recovery will be low, no matter
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how efficient the processes. Even a good effort of 75% across all five stages creates an overall resource to product recovery of 23.7%, but, as we have seen, these recoveries can be much lower for individual processes. Big deposits are turned into small amounts of production. The second factor reducing the initial in-ground value of all these operations is the cost of all these processes, both up-front capital costs to build the mine and plant and the ongoing operating costs. For rare earths, the cracking plant and the separation plants are far more expensive that the other processing equipment; both cost several hundreds of millions of dollars to build. The final factor acting on the value of these deposits is time. Economic statisticians will know that money now is better than mon-
Some rare earth deposits have been valued at $50 billion; but some argue that the expense of mining makes their value in the ground close to zero
ey later: a dollar now is certainly not the same as a dollar in 30 years. Not all of the deposit will be extracted in one year; many of the rare earth mines plan to operate for several decades. This effect can be factored for by discounting the value of future profits by a certain percentage each year. This percentage is known as the discount rate and is usually varied based on the perceived risk of an operation (to factor in the chance that the cash flow might not occur at all if it is so risky). In mining, which has a variety of technical challenges and interesting frontier locations, this rate can vary from 5% to 40%. Analysts in the rare earths industry still seem be to sticking with the standard 10%, though, despite the technical risk of these operations. But even a 10% discount rate means that $1 in 10 years is only worth 42¢. Analysts add all these future discounted cash flows up to create a “net present value” to get an idea of what the whole deposit is worth once all the above is factored in. We find that for our advanced rare earth deposits this can vary from virtually nothing to nearly $50 billion. But even this is not the only major source of uncertainty! Throughout this
article prices have been quoted, but in the rare earths even commodity prices are not simple. There are 15 different rare earth elements, and a host of different purities and blends. Metal Pages quotes 52 different types of rare earth price, while there are thought to be literally thousands of different rare earth products around the world. Rare earths are not really a commodity; they have more in common with consumer products, where a specific product matching a customer’s criteria is produced. The problems with prices do not stop there. The extreme price distortions we discussed earlier may be repeated, so forecasting forward what they may be in a mine’s tenth year is tricky, if not impossible. While many analysts work very hard trying to forecast these prices, it is really no better than guesswork. With all this technical and economic uncertainty, it is perhaps no surprise that rare earth mine projects are among the most difficult to develop and thus developers have to be patient and well resourced. An analysis by the author ( JS) of three advanced Australian rare earth mine projects showed that all had been under development for between 10 and 15 years, yet none of them was as of yet onstream. Only one looked likely to be starting up in the immediate future. This suggests that the recent entrants to the game have a long way to go before they are in production and for the USA, EU and Japan a long time before they have secure non-Chinese rare earth production. In conclusion therefore and from a mining industry perspective, the rare earths industry is one of the most difficult to crack; and with no viable alternatives available soon, and with recycling as hard a technical nut to crack as production, the USA, EU and Japan may have to wait for abundant supplies of cheap rare earths to become available again. In the meantime they will have to practise the “three Rs” mantra of “reduce, reuse, recycle” pushed by the sustainability industry. The long-term availability of rare earths is, however, important for these countries’ high-tech and sustainable futures, so the rare earths problem will eventually have to be solved if we are to build the economies of the future. Mark Tyrer is a geochemist and Project Manager with the Mineral Industry Research Organisation. John P. Sykes of Greenfields Research Ltd and the Centre for Exploration Targeting is an independent mining economist.
