Roskill View: Rare Earth Market Pressures Revving Into Gear

LONDON, September 25, 2017 /PRNewswire/ --

Rare earth elements (REEs) have found themselves back on the list of materials to follow this year. Amongst many others, rare earth end-use applications range from polishing powders, phosphors, glass additives and lasers, to the automotive industry, new energy technologies, defence technologies and also space materials, with each end-use typically requiring different groups of individual REEs.

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The attention this year is focussed on two elements neodymium and praseodymium, collectively also known as NdPr, which have risen sharply in price since the beginning of July to gain over 60% in just 2 months. The main use of NdPr is in permanent magnets, or neodymium-iron-boron (NdFeB) magnets, which are fundamental to the powertrain of electric vehicle (EV) motors already in use in major EV models such as the Nissan LEAF, Chevrolet Bolt and BMW i3.

Interest in NdPr has been charged by Tesla's decision to move from their patented AC induction motors used in all previous models to a 3-phase NdPr permanent magnet motor in the Model 3 RWD Long Range model. This is expected to create further demand for NdPr permanent magnets moving forward.

EVs are headlining the news on multiple fronts, as vehicle manufacturers worldwide join the race in EV performance technologies and government policies on emission controls grow stricter. Following the move towards greener cities around the world, EV sales are rising fast, increasing by 6% in China during H1 2017.

Roskill forecast around 4 million EV sales worldwide in 2017, which are expected to continue to rise to nearly 50 million annual sales by 2030. Consuming 1-2kg of permanent magnets per vehicle motor, Roskill expects the demand for NdPr to continue on an upward trend following the advances of the EV market and joining the trend of battery materials such as lithium and cobalt.

The rare earth package 

The complication with the rare earth market is that the supply and demand balance is not based purely on one element, but the full suite of 15 lanthanide elements and yttrium. The entire rare earth suite occurs mixed together in mineral deposits, at specific proportions and the separation process is not a simple one. In general, every tonne of neodymium will come with over 3t of lanthanum, cerium and praseodymium, and less than 0.5t total of ten different heavy rare earth elements (samarium through lutetium).

Demand on the other hand depends highly on changing markets of end-use applications and can be more variable than supply. For example, the largest market for cerium and lanthanum are catalysts. Around 50% of global lanthanum consumption is in fluid catalytic cracking (FCC) catalysts used to break down crude oils into lighter more valuable petroleum products. Cerium applications are more diversified than lanthanum, but still 25% of its annual consumption is in catalyst washcoats applied to emission control catalysts in vehicle exhausts. Both elements are to some extent tied into the demand of petroleum-fuelled transport and Goldman Sachs has forecast that only a 1.5% reduction in crude oil demand will follow every 5% market penetration EVs make into automotive sales.

Heavy rare earth elements (HREE) are used in a variety of speciality applications, often also to improve performance of light rare earth elements (LREE) lanthanum, cerium and/or neodymium-praseodymium products. However, due to their natural lower abundance and complex chemical separation process, HREEs are unable to act as effective replacements for the higher volume LREEs. Therefore, niche markets are key factors in determining the supply-demand pressures on the full suite of rare earths.

Roskill forecasts the supply of neodymium to move into deficit in 2017, while the demand for cerium and lanthanum already accounts for over 90% of their annual supply. Because rare earths occur together, the elements leading in proportional consumption will be the main drivers of the total supply and demand balance. This figure shows that neodymium has already been the most influential rare earth since 2014. The proportional consumption of HREEs is significantly lower; however, the inherited lower abundance means that smaller changes in end-use markets will have larger effects. For example, erbium is seeing higher proportional consumption because of growing demand in fibre optics, even though the volume growth does not compare to that of permanent magnets in EVs.

Supply from China and critical illegal volumes 

Rare earth supply has become synonymous with China, which accounted for over 80% of global production in 2016. Rare earths have historically been in significant oversupply with Roskill estimating that over 80% of annual supply has been accounted for by consumption since 2014.

Illegal production is a major contributor to Chinese REE production and is estimated to have accounted for 30-35% of Chinese total output in 2016. Therefore, the illegal supply has been critical in keeping rare earths out of a supply deficit and will continue to be unless new or expanded official production facilities enter production.

The 13th 5-year Industry Development Plan for 2016-2020 released by China's Ministry of Industry and Information Technology (MIIT) outlined the reductions in illegal mining activities from the previous 5-year plan, but emphasised the need to further curtail illegal mining. There are however conflicting sentiments in China regarding the crack-down on illegal rare earth production. On the state level illegal mining is supporting job markets and companies benefit from lower-cost rare earth concentrates to maintain the value chain of downstream products. However, the Chinese government is looking to stabilise the rare earth market at more sustainable price levels that won't be undercut by illegal supply.

Environmental reforms for legal operations in China are also causing producers to conform to more stringent environmental policies, while sacrificing production capacity. This has caused an overall decrease in the average monthly production by 10% from H2 2016 to H1 2017. More recently, production of rare earths out of Sichuan had dropped by a staggering 83% in July, as processing plants were suspended or shut down during environmental inspections.

With the reduction of available supply in China, the Association of China Rare Earth Industry (ACREI) has proposed selling off some of the government rare earth stockpiles to support raw material supply and contain rapidly rising rare earths prices avoiding the creation of another price spike.

Securing a vertically integrated supply chain 

Since the rare earth price spike in 2011/12, consumers of rare earths both inside and outside of China have been wary about the concentrated supply availability of rare earths from state-owned enterprises in China. At the same time, the low price of rare earths and the fear of unstable prices have not encouraged venture capital investments to help develop new projects.

As Chinese production has been progressively integrated into domestic downstream applications, international rare earth processing facilities have looked to secure feedstock outside of China. In 2013, Japanese based Sojitz Corp signed an agreement with Lynas to source rare earths out of Australia via a processing plant in Malaysia. This agreement includes the refining of lanthanum and cerium products by Solvay-Rhodia in France, which end up in Japan. Lynas has since become the largest rare earth producer outside of China and the agreement decreased Japan's reliance on Chinese rare earth production to less than 50% of their total rare earth imports in 2016.

As the supply reform continues in China, agreements are also being struck between Chinese operators and the rest of the world, which is opening up the Chinese market. One example includes Hastings Technology Metals Ltd signing its third memorandum of understanding for an off-take agreement with Qiandong Rare Earth Group for 1.5 ktpy of mixed rare earth carbonate to be sourced from the Yangibana project in Western Australia.

Market pressures taking effect on the rare earth prices 

By mid- to late-2016, most of the rare earth price declines had bottomed out and started a steady rise in H1 2017. Some of the heavier rare earth prices accelerated earlier in the year, while the more abundant LREEs joined in after June. Neodymium and praseodymium rose by an average 1.6% per day during the second half of July and first half of August. By the first week of September, neodymium had doubled its year-to-date price with praseodymium close behind at a 94% increase.

The growing interest in NdPr permanent magnets naturally filtered across the group of rare earths, not only to dysprosium and gadolinium also used in magnets, but also non-magnet rare earths such as cerium and lanthanum. The cerium price accelerated to the same 1.6% average daily rate for the second half of August to overtake the price of lanthanum for the first time since 2013. The price of lanthanum remained relatively flat, but joined cerium in a boost in price for the second half of August.

Together with growing demand driving up prices, the supply pressures out of China have lowered the availability of rare earths on the spot market. In addition, speculative trading taking advantage of the surging rare earth prices, particularly in Q2 of this year, will have exacerbated the tight supply of rare earths, NdPr in particular.

The second week of September saw the price of LREEs decline by an average 0.4% over the week. This follows recent developments in the rare earth market taking effect. The potential implications of releasing stockpiled material from the Chinese government to manage rare earth price movements may be unsettling some investors with memories of the 2011/12 scenario. Similarly, a slow-down in purchases by traders becoming cautious of the advancing prices will also have opened up more material availablity on the spot market.

Looking forward, China's National Rare Earth Office (NREO) is urging producers to keep up production capacity as demand for rare earths continues to grow and drive up prices, especially for LREE. Monthly production disruptions/suspensions in Q2 to early Q3 with enforced environmental policies have been largely completed and more typical production levels can return, which would consequently improve supply availability.

The over-riding theme for rare earths however, remains NdPr permanent magnets in EVs. Consequently, under stable supply-demand conditions the market pressures for all other rare earths will be weighted to the supply and demand balance of neodymium. Although some similarities to the 2011/12 spike have been speculated, the current movement in the rare earth prices is under significantly different circumstances as rare earth supply and demand looks to find a new sustainable balance.

Roskill's 2017 Rare Earths Global Industry, Markets and Outlook Report 

Roskill Information Services has published 16 editions of its multi-client report on the global rare earths industry over the last 40 years. Roskill has produced its 17^th edition of the Rare Earths Global Industry, Markets and Outlook Report, which is due to be published during October 2017. The report outlines the supply and demand markets, market balances, prices, trades and forecasts to 2027. The insight is built on in-depth research of end-use applications and supply to the market.