I’ve been watching the current stock market small investor interest boomlet in the rare earth elements, REEs, since it began late this last summer (2009). For small investors I think that the first wave of the “rare earth publicly traded share price rush” was triggered by an article by James Dines in his popular subscription newsletter. There he predicted that due to rapidly rising public awareness of their strategic and critical nature, a rare earth investing rush, mimicking the one he correctly predicted many years ago for uranium mining under similar circumstances of rising public awareness, was about to get underway.
It didn’t hurt the octogenarian Dines’ prediction thesis at all when the news media, shortly thereafter, caught wind of a supposed Chinese pronouncement that would impact the future security of the supply of rare earths. This pronouncement, said to be an internal memo solicited by China’s Ruling State Council on the future supply and demand of rare earths in and by Chinese industry during the next “five year plan” cycle, 2010-2015, had first actually been noted in April, 2009. The Chinese, it was said, in a press release by the listed Australian miner, Arafura Resources, [ASX:ARU], were officially considering a continuation of the reduction in their export allocations of rare earths (the reduction of which they have been carrying out for the last 5 years), and (drumroll, please) it was said that they were contemplating an “immediate” cessation of the export of the so-called heavy rare earths (first four notes of Beethoven’s Fifth Symphony, please).
Although there are no “official” comparative production statistics for the rare earths, which are not traded on any exchange, it is believed by everyone who comments on this topic that the People’s Republic of China (PRC) today produces more than 95% of the entire world’s annual new supply of the rare earths. It is certain that the PRC today produces 100% of the world’s annual production of the very rare so-called “heavy” rare earths, dysprosium, terbium, and europium. These high atomic numbered rare earth elements - referred to as the “heavies”- are critical either for raising the operating temperature at which rare earth based magnets can perform efficiently, or for producing a red cathodolumenescent phosphors for color displays. “Critical” here means that without these rarest of the rare earths the functions they create cannot be performed. There are no substitutes for them.
There is, and has been continuously, since the mid-twentieth century some mining of rare earths in Russia, India, and, perhaps, Maylaysia, and there has been since 2007 a small amount of large scale processing of previously produced REE concentrates (70%) in Mountain Pass, California by MolyCorp. The Mountain Pass production is as of this writing 6 tons a day, apportioned between lanthanum [oxide], 4 tons a day, and didymium [80% neodymium mixed with 20% praseodymium] oxide, 2 tons a day. MolyCorp, at Mountain Pass, although it is a producer of rare earth oxides [REOs] is not currently mining or concentrating ore; it is working off concentrates last produced in 2002. I am using the convoluted term “small amount of large scale processing,” because I am certain that no one else outside of China is producing anywhere near the volume of REOs, daily, that Mountain Pass is.
MolyCorp is most likely producing between 40% and 67% of all of the REOs produced outside of China in a vertically integrated operation. It is important here to note that the Mountain Pass ore body was the site during the 1980s of the largest individual rare earth production level ever achieved in one mine. The open pit operation reached a level of 20,000 tons a year of REEs. The ore body that was mined at Mountain Pass is immense; it is an indicated (verified) resource of at least 30,000,000 tons of 9.6% average grade, with a cutoff grade of 7.6%, bastnaesite.
The reason that Mountain Pass was put on care and maintenance (i.e., shut down) in 2002 was not due to the exhaustion of high grade ore or the loss of access to such ore. The reason was simply that Chinese production out of the Bayanobo region of Inner Mongolia had by 2002 become priced so much lower than that at Mountain Pass that MolyCorp could only continue mining by subsidizing the cost, which it chose not to do since the trend was clearly for even higher Chinese production and lower pricing. It was not then and it is not now clear whether or not Chinese production costs could justify the selling prices of Chinese REEs. But there may well be subsidies available to Chinese miners from the state in order to maintain employment in Inner Mongolia that are not solely based on the world market prices for the products of the mines as they would be in the free market oriented West.
Whether the current Chinese monopoly in rare earth production was planned as a strategy fueled by predatory (lowball) pricing or simply happened as a consequence of adhering to a larger national plan to create employment and drive manufacturing dependent on a secure supply of the rare earths to China is only an important consideration outside of China. Because as of this moment China is still exporting enough refined rare earths such as metals, alloys, and fabricated products to keep the world market for these products going.
The problem that has been exposed by the “discovery” of the memorandum on rare earth export allocations is that it proves the conjecture highlighted by well-known Australian rare earth specialist, Dudley Kingsnorth, that Chinese domestic demand for rare earths is rapidly catching up to Chinese supply output. Mr. Kingsnorth has predicted that before the expiration of China’s next five year plan in 2015 Chinese domestic demand will exceed its domestic production.
Assuming Mr. Kingsnorth’s prediction to be correct, and I do, this means that at some point in the next five years it will not be possible to manufacture rare earth based products outside of China unless and until 1. There are rare earths produced outside of China; 2. Those rare earths can be refined and processed into useful forms outside of China, and 3. Chinese domestic consumers have not preemptively gained control over the non-Chinese production of the rare earths in order to secure their own supplies for domestic manufacturing and marketing within China.
What the recent hubbub over Chinese rare earth export allocations has exposed is that a deadline is rapidly approaching after which the production and use of the rare earths will pass by default to the absolute control of the PRC.