Analysis: Rare-earth surge is wake-up call for industrials

BOSTON Thu Nov 18, 2010 9:52am EST

A monument, which reads: ''Home of rare earths welcomes you'', stands in a field of wind turbines near the town of Damao in China's Inner Mongolia Autonomous Region in this October 31, 2010 file photo. REUTERS/David Gray

A monument, which reads: ''Home of rare earths welcomes you'', stands in a field of wind turbines near the town of Damao in China's Inner Mongolia Autonomous Region in this October 31, 2010 file photo.

Credit: Reuters/David Gray

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BOSTON (Reuters) - As China clamps down on its exports of rare earth, makers of batteries, wind turbines and other products are looking for ways to redesign them to use less of the increasingly costly materials.

Prices have surged for these minerals, used in everything from iPods to fluorescent light bulbs, since authorities in Beijing slashed their rare earth exports by 40 percent this summer, saying China needed them for its own economic development.

Miners outside China, including Molycorp Inc in the United States and Lynas Corp in Australia, are scrambling to increase production of the elements.

But big U.S. users of rare earth said the surge in price serves as an important wake-up call on the importance of efficient use of raw materials. Any number of resources, from oil to copper, could get scarcer in coming decades as the rapidly developing economies of China and India require more.

"The fact is a lot of (products) have been designed and the manufacturing processes have been designed at times when the material was not at risk," said Steven Duclos, chief scientist at General Electric Co's global research center.

The largest U.S. conglomerate, for instance, is working on a project partly funded by the U.S. Department of Energy that aims to reduce the amount of rare earths in its electricity-generating wind turbines by up to 80 percent.

That's a significant number, given that a commercial wind turbine contains about a ton of rare earth.

"An 80 percent reduction goes a long way to solving the problems," Duclos said.

CHINA HOLDS BACK

Although rare earth minerals are quite common, they are expensive to produce in a form that industry can use.

China, which currently produces about 97 percent of the world's supply, began cornering that market a decade ago, when low prices made mining for these minerals unappealing financially for Western companies.

That was the reason behind the 2002 closure of the Mountain Pass, California-based mine that Molycorp is spending a half-billion dollars to restart, for example.

The situation has changed dramatically since China's crackdown on exports. Molycorp, which went public in the summer, said earlier this week that its average selling prices had tripled in the past year.

"Global supply and demand will remain out of balance for the foreseeable future," said Chief Executive Officer Mark Smith.

Metals experts say there's little reason to expect that China will ease its restrictions on rare earths.

"The Chinese are hungry in many other commodities, and I can promise you they have looked after their own supply and security of supply in many other commodities first and foremost," said analyst Charl Mahan of Van Eck Associates Corp, which last month launched the Van Eck Rare Earth/Strategic Metals exchange-traded fund.

"Why would it be any different in this event?" Mahan asked. "Why would they not ensure that they have the sufficient supply of processed material for their own use before they send it out to the U.S.?"

Through the export limits, China apparently intends to encourage its industry to sell higher-value products made from the elements, rather than exporting the raw materials, which is a less profitable business. As a result, some U.S. companies that rely on rare earths are looking at shifting their purchasing to components rather than raw materials from China.

Johnson Controls Inc, for instance, is considering using permanent magnet motors made in China in its large air conditioning systems, rather than trying to buy the magnets.

"We have many suppliers that are evaluating competing or alternative technologies," said Dave Myers, president of the Milwaukee-based company's building efficiency unit.

WARNING SIGN

Besides developing more sources of rare earths outside China, corporate users need to think of ways of recycling them, GE's Duclos said.

Today, about one-third of fluorescent tubes are recycled at the end of their life span. The glass, metal ends and mercury are all captured and reused, but the rare earths used in the bulbs end up in landfills.

"We have to stop using these elements and then, at the end of their first life, burying them," Duclos said. "Obviously, as the price goes up, the recycling does begin to make economic sense."

The silver lining in the run-up in rare earth prices may be that corporate America will learn to deal with future raw material shortages.

"A lot of time, what you see in these run-ups is a short-term issue where the needs outstrip the supply chains that have been in place and there is an overreaction from the financial markets," said Johnson's Myers.

"Every few years there will be a set of supply shortage that take place, but I think innovation will occur," he said. "I think long-term supply and demand generally meet."

(Reporting by Scott Malone; Editing by Lisa Von Ahn)

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Comments (2)
kc10man wrote:
Nice entrapment move by the Chinese Gov. Subsidize development, lower prices, shut down competitors and then block exports. Nice, real nice. Like any manufacturer really needed another reason to move to China already.

On the down side, they did have to contribute a large volume of radioactive sludge to their water system. But hey, money is everything here, people and environment is unimportant.

Nov 18, 2010 7:37pm EST  --  Report as abuse
Mycroft wrote:
There is a very good op-ed piece on strategic materials in this week’s Defense News pointing out that the whole issue goes far beyond just the rare earths. It’s something whole countries and alliances must wake up to!

Nov 19, 2010 2:08pm EST  --  Report as abuse
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