Is Rare Earth a Real Chokepoint? — Trade War’s Energy Impact

Energy Iceberg - Rare Earth and the Trade War

Energy Applications of Rare Earth

Rare earth is a group of 17 minerals that critical to multiple high-tech areas. It is highly relevant in several energy sectors:

  • in wind: the Neodymium magnet (made by neodymium and, some added with dysprosium) is commonly used in permanent magnets found in various industry applications—especially the permanent magnet synchronous generators (PMSGs) used in some wind turbines
  • in electric vehicle: the Neodymium magnet (NdFeB) is critical to the electric power steering system (EPS), generators and engine embarked in EVs, whereas other materials such as Cerium and Lanthanum are used in catalytic converters, LCDs…
  • in nuclear, the control rod of nuclear fuel deploys Europium; and Gadolinium is currently used to make the neutron poison for spent fuel reprocessing
  • in battery, nickel NiMH battery uses Cerium and Lanthanum, too; lithium-ion battery could use a pinch of Yttrium (though lithium and cobalt are, in fact, not among the rare earth group )
  • rare earth also serve as the catalysts in the oil refinery

Besides the obvious roles, rare earth is also key to the development of frontier superconductive materials that is of game-changing potential for the electricity industry.

It is well known that China is the world’s largest processor and producer of the minerals. At its peak around 2010, China accounts for over 97% of global production. And despite over time its share gradually declining, it still contributes more than 80%, according to a Reuter report.

Rare earth mining - Energy Iceberg
Rare earth mining in Inner Mongolia

Months ago, Beijing’s official media threatened to cap the mineral’s export to the US. (People’s Daily article titled Don’t underestimate China’s Counter Measures warning “Don’t say that I did not warn you.“)

The wide-range application of the rare earth in high-tech sectors, plus the highly centralized global supply structure, underpins a perhaps critical role of the minerals in the heating trade war.

Read More on Trade War’s Impact on LNG

Impact on Wind Turbine

There is an apparent concern in the wind and EV industry regarding the scenario of China curbing rate earth export. Following 2010 China banning export to Japan, global rare earth price spiked, resulting in unexpected cost consequence for some turbine manufactures. 

“PMSG can be used in both geared and direct drive drivetrain,” but the NdFeB consumption in latter is significantly higher, this article said.

This is not so much an issue in the onshore wind though, as major OEMs have voted for double-fed technology with Goldwind the notable exception.

But in offshore wind, it is evident that PMSG has been the dominant choice. The three largest international OEMs’ forward-looking products—SGRE’s 10GW, MHI Vestas’s 10MW, and GE’s 12MW—all deploy PMGs.

And the Chinese OEMs with offshore ambitious—including Goldwind, Dongfang Electric, Shanghai Electric, XEMC, and others— appear to opt for PMGs collectively. Even Mingyang—traditionally a supporter of DFIG—unleashed a “hybrid” 7.25MW that deploy PMGs. Dongfang Electric has just unleashed the largest 10MW PMG last month, which is a clear indication where the Chinese market is heading.

As offshore wind has gradually become a global (instead of European) energy game, and as 10MW plus turbine is key for the market to bring down LCOE, the heavy deployment of the Neodymium magnet in PMSGs is thus a major concern—especially for the international players.

Recharge’s recent interview with IntelStor, for instance, warned the trade war “could impact the bankability of the three largest offshore wind OEMs’ marquee 10MW-plus models,” and caution that “China’s supply constrictions in response to the trade disputes with the US” could result in “potential shortage in the availability of rare earth elements”. Hence the conclusion “any wind turbines which can minimize rare-earth material usage will be preferred looking ahead into the future.”

Read More on China Welcoming Foreign Investment in Areas including Rare Earth Separation

Not a Trump Card for China

Is rare earth, or China’s potential export ban of rare earth, a likely scenario? And how effective could China utilize its rare earth “card” in the trade war?

Firstly of all, rare earth is not “that rare.” It is known that China achieves its dominant role in the international rare earth market due to the poor regulation system in the country to address the major environmental pollution. That allows the price competitiveness of Chinese rare earth production but in the price of massive environmental cost.

Then, China’s rare earth reserve has been in steep decline, due to decades of mining (especially the rampant illegal mining). Hastings estimated that China owned just 36m tonnes or 35% of the global reserve whereas 35% of the world’s reserve is beneath US, Australia, Canada, Sweden, and Greenland (US/Australia/Canada alone taking 20%).

US and Australia both have the capability to produce and process rare minerals—though it will take time. Due to the environmental cost and tighten regulation, both suspended the domestic operation and relocated the processing operation elsewhere—besides China, there is Malaysia and others.

  • Australia’s Lynas, the world’s largest miner, and processor outside of China, has built a processing facility in Malaysia, in which Siemens holds a 55% stake. The plant faced a legal battle in the past, but recently won finally support from Malaysian politician to continue operation. This is pivotal for the global supply—the plant is of roughly 20,000 tonnes/y production now, already more than US’ total rare import in 2017.
  • Meanwhile, Lynas looks set to build two new plants in its home country and Texas—it would take some four years to ramp up though, according to Reuters’ recent report.
  • California-based Molycorp owns the country’s Mountain Pass mine which is in the maintenance stage. Molycorp does not own a domestic processing facility. However, it has acquired the former New Materials Technology of Canada (now Molycorp Canada). The Canadian firms, in fact, owns 95% of two processing plants in China’s Zibo and Jiangyin. The two Chinese facilities, as well as an Estonia-based plant, have been the key processing capacity for the firm. Molycorp now hopes to put a processing plant online as soon as next year, too.
  • As a major rare earth buyer, Japan has been well prepared for the supply chain risk. It has allegedly built up decades of reserved stockpile during the past year. Separately, Japan’s Toyota Tsusho, Itochu, and Sumitomo have an investment in upstream sources (at Myanmar, Kazakhstan, Mongolia, and others) and also chip into China’s processing facilities.

This structure implies:
1) major rare-earth importers are likely to have enough reserve to cope with a short-term embargo;
2) a rare earth export ban targeting US only would not work given the internationalized value chain;
3) the international supply chain has taken serious steps to counter the risk in the rare earth chokepoint scenario—processing facilities like the one in Malaysia are pivotal. More would come online;
4) even for US and Australia, a ramp-up of mining and processing capacity domestically and taking the environmental cost is a lesser evil of two options, shall there be an embargo.

Notably, China has relatively less market power on the downstream of rare earth. For instance, Japanese firms control a massive amount of intellectual properties regarding the application of rare earth. Curbing mineral export, thusly, is a double-edged sword. Chinese industries, including rare earth mining, are generally in oversupply caused by the out-of-sync of policies/interests between Beijing and local governments. 2018’s rare earth production in China provides a perfect example: while Beijing previously set to cap production at 105,000 tonnes, the result was way over that target– 120,000 tonnes registered in the official record but probably way more due to the unreported productions. In this end, Beijing may need to think twice to dash out the embargo card, which would hurt local mining interests.

Read More on Chinese Company’s Deleveraging Pain

Needed to Rethink Strategy

Energy Iceberg - Rare Earth and the Trade War

There is a possibility that China would use embargo as a bargaining chip and influencing factor, as most US’ allies are buyers and consumers of the minerals. If that scenario ever happens, a small portion of wind turbine making and the EV market could face some financial risk. But given the long-term and highly intertwined supply chain existed, and the alternative technology (rare earth independent PMSG, for instance) quickly emerge, it is arguably how much long-term impact it would have on the renewable industry.

Not to mention that rare earth embargo is far from an ace in the hole. If the mineral price soars, the US is capable of getting its capacity online and they have been planning that for a while. In that scenario, the Chinese miners could get hurts, too.

But from an environmental perspective, China has been shouldering the majority of the pollution cost by “taking” the role of a world rare earth processing factory. And mineral exporting is certainly less value-added compared to the downstream application. As the domestic reserve is shrinking, it is not a bad option at all to reconsider the mineral’s export strategy in the direction of environmental protection.