By Steve Gozdecki
Although they have grown in importance to become part of our everyday lives, the term “rare earth element” rarely comes up in our daily conversations. Yet rare earth elements — the 17 chemical elements that include scandium, yttrium and the 15 lanthanides — are a crucial component in such things as high-tech electronic gadgets, hybrid automobiles, wind turbines and the catalysts used in oil refining. They also have a wide range of military applications.

While worldwide demand for rare earth elements has risen steadily in recent years with the increase in mobile phone and digital music player sales as well as alternative energy projects, production has not kept pace with this increase. In large part, this stems from the fact that rare earth mining gradually shut down in most parts of the world over the past few decades because China was able to sell these elements so cheaply. Today, that nation produces more than 97 percent of the world’s rare earth elements, with India and South Africa conducting the remainder of rare earth mining operations at present.

A monopolistic situation like this would be undesirable even under the best of conditions — but the need for alternate supply sources has become even more stark recently with the announcement from China’s Ministry of Commerce that it will significantly reduce exports of raw rare earth elements and set pricing on a monthly basis.

While the popular belief that the Chinese word for crisis combines “danger” and “opportunity” is in fact linguistically incorrect, there is little doubt that this near-crisis around the rare earth supply does indeed pose both dangers and opportunities. Because they are so vital to American interests and security, a domestic or near-shore source of rare earth elements would seem a must in any business environment if only for supply continuity and quality control purposes. These new export quotas hasten the need to develop mining and processing capabilities in other locations — and places like the United States, Canada and Australia have known reserves waiting to be tapped.

In sum, the global supply of rare earth elements is constrained at present, while demand is rising rapidly in sectors like transportation, power and consumer electronics. New producers hope to bring projects online, but need to raise capital in order to do so. This situation makes for a golden investment opportunity!

Short supply
In July, China announced that it would once more curtail exports of raw rare earth elements. Total exports for 2010 have been capped at just over 30,000 tons — 40 percent less than the 50,000 tons it exported in 2009, and a continuation of the export reductions that it began to enact in 2006.

A variety of explanations have been given regarding the motivations behind this export reduction. Some speculate that China wishes to slow the pace of mining in order to reduce the environmental impact associated with this activity. Others believe that China needs its rare earths to manufacture goods for its own population, as it is estimated that close to two-thirds of China’s rare earth elements are being used domestically.

A third school of thought is that China wishes to reduce these raw material exports in order to ensure that its own plants and factories can continue to refine, manufacture and export finished goods that require rare earth elements as inputs well into the future. More than likely all of these as well as additional considerations, such as the need to eliminate renegade mining and smuggling activity, lie at the root of China’s decision.

Signs also point to the possibility that China is running out of the heavy rare earth elements, which are scarcer and more valuable than the more abundant light rare earths. China will need vast quantities of two heavy rare earths, terbium and dysprosium, to reach its goal of building enough wind turbines to generate more than 300 gigawatts of electricity. These two heavy rare earths are also required to build electric and hybrid automobiles. So while China is currently the world’s greatest producer of rare earths, in a few short years it may well be looking to import them.

The rare earth elements market has already seen significant price increases since China’s recent announcement. Indeed, for all but one of the 17 rare earths, late August 2010 prices were at their highest point in a decade! From the beginning of 2010 to August 5, Terbium prices rose 65 percent. Yttrium prices more than doubled over that same span — while gadolinium rose 490 percent, and samarium increased more than sevenfold!

Continued strong demand
Because of their unique properties, there are no substitutes for rare earth elements. The high-technology consumer products, transportation, energy, medical device and defense industries all rely on rare earth elements — and almost all project increased demand moving forward.

Each hybrid vehicle manufactured requires both a substantial amount of rare earth elements — around 25 pounds — and a wide range of them. The hybrid electric motor and generator contain neodymium, praseodymium, dysprosium and terbium, while the nickel-hybrid battery contains lanthanum and cerium. While Japanese companies have been stockpiling rare earths, imagine what would happen to ever-busier Toyota Prius assembly lines were there to be a cessation or even just a disruption in the rare earth element supply!

Traditional gasoline- and diesel-powered vehicles typically require around 10 pounds of rare earths — including cerium, zirconium, lanthanum, neodymium, yttrium and europium — for components like catalytic converters, LCD screens and headlight glass as well as glass and mirror finishing. The anticipated growth in hybrid, plug-in hybrid and electric vehicles will fuel rapid and substantial increases in rare earth element demand.

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