China's Ministry of Commerce announced second-half export quotas for rare earth materials this week. The annual quota for all of 2011 that will be available for export, when expressed in terms of tonnage, appears to be the same as 2010. But in reality, it is not. Just two months ago, on May 16, 2011, China announced that ferroalloys containing 10% or more rare earth minerals by weight would be added to the quota computation for the first time. This means that fewer rare earth oxides are available for export from China than before. This is not good news for manufacturers of clean technology products outside of China who purchase rare earth oxides — for products such as electric vehicles, wind turbines, energy efficient lighting — as well as a number of other products that contain components incorporating rare earth minerals such as jet aircraft, military equipment, pollution control equipment, medical imaging equipment, radiation therapy equipment, other electrical and electronic equipment such as ceramic capacitors, superconductors, computers, smartphones, and a variety of other products.
Why is this significant? Because it is impacting the price we pay for some products, and it is imposing a cost disadvantage on products made outside of China.
China currently produces about 97% of the world's output of rare earth minerals. Until the late 1980s, the United States was the largest producer and now it produces nothing. China's growing exports of rare earth minerals subsequently drove the price of the oxides dramatically downward so that mines in the United States and Australia were no longer economically viable and closed, in part because environmental compliance costs were higher than in China. Simultaneously, the demand for rare earth oxides has been growing as product manufacturers have discovered that product performance is enhanced by incorporating these materials in components and products. As a recent issue of National Geographic described, "Malleable, reactive, magnetic, refractive, they're small ingredients in many big things." Just as the world's manufacturing community has come to depend on rare earth elements for a variety of industrial and consumer products, so has China's growing manufacturing community, and to assure that China's manufacturing community is assured of its supply of rare earth minerals, China has been gradually reducing the quantity of rare earth minerals it makes available to the rest of the world by setting quotas on what it will export. From 2005 – 2008, China reduced exports of rare earth minerals at the rate of about 4-6% per year. In 2009, it reduced its export quota by 12% over 2008, and in 2010 the export quota was reduced by a staggering 40% over 2009. China's announcement that the 2011 quotas are even more restricted than 2010 means a greater tightening of supply availability for manufacturers outside of China. China has also announced that a portion of its internal not-for-export production would be stockpiled.
The 2010 quota sent prices of rare earth oxides soaring, it sent non-Chinese manufacturers who use rare earth minerals scrambling for supplies, and it has incentivized second-tier mining companies to start exploratory activities to identify new sources of supply outside of China. It has also made the financial prospects for certain mines in the United States and Australia that were shuttered during the 1990s and have been looking to re-open look a whole lot better. Some of these mines — Mountain Pass in the Mojave Desert of California, Mt. Weld in Australia, and Dubbo Zirconia in Australia — will likely be opening later this year or next and expanding through 2014 reducing the world's dependence on China as a source of these minerals.
The last statement sounds like great news, and it is certainly significant. But before we say problem solved, the fact is that not all mines are alike, and there may be bottlenecks in terms of processing rare earths from re-opened mines. There are 17 rare earth elements, each of which have slightly different characteristics, properties, and ultimately different uses based on their properties. For example, fluorescent lighting uses five of the 17 rare earth elements: lanthanum, cerium, europium, terbium, and yttrium. By volume, yttrium is the most significant — 70% of the total used in fluorescent lighting. Europium and terbium account for nearly another 10%, and lanthanum and cerium the remaining 20+ percent. Yttrium, terbium, and europium are among the class of what are called "heavy" rare earths, and they are in shorter supply than the so-called "light" rare earths, which include lanthanum and cerium. Mountain Pass and Mt. Weld are abundant in light rare earths. When Mountain Pass and Mt. Weld re-open, there will be virtually no significant contribution to the global supply of yttrium, terbium and europium. Mountain Pass will contribute some incremental supply of europium. Supplies of yttrium — the element that is heavily consumed in fluorescent lighting — and terbium are expected to remain tight after these mines reopen. Dubbo Zirconia may contribute to the supply of yttrium when it opens. Yttrium is also used in superconductors, LED lighting, oxygen sensors to improve fuel economy in autos, it's a catalyst in petroleum refining, it is a stabilizer in lightweight aircraft parts, it is used in night vision goggles, and radar and other telecommunications equipment. There are many competing uses for yttrium. There are competing uses for terbium as well.
Prices have been climbing. Prices of rare earth oxides have increased from an average of $14,400/ton in July 2010 to $109,000/ton in February 2011. From the beginning of 2011 through June of 2011, the prices have tripled. While the price of rare earth oxides has been rising inside and outside China, there is a disparity between the price of rare earth oxides inside China and FOB for export. This disparity provides a cost advantage to finished products made in China. As these higher costs are absorbed, it is going to put pressure on finished product prices. This cost pressure will vary from product to product depending on how significant the rare earth minerals are as a percentage of the total cost of the product. It is already beginning to impact the cost of permanent magnets, which are used in MRI machines and in motors. It is also impacting the cost of fluorescent lighting. Other industries are feeling the cost impact as well.
The rare earth story will continue to garner business media attention in the coming months and probably years. The European Union's reaction to China's announcement of second half quotas for rare earths also signals that these restrictions will be the subject of international trade discussions in the coming weeks and months.