Are high rare earth prices good for China

China’s rare earth prices just keep climbing, driving fears of a possible boom-and-bust cycle that experts say would harm global efforts to rebuild rare earth supply chains and reduce reliance on China.

Last month, a price index from the Association of Chinese Rare Earth Industry hit a historic high, breaking 430 — roughly double where it was a year ago (link in Chinese). One kilogram of neodymium oxide, for example, now costs around 1100 yuan ($173), up from around 686 yuan ($108) last March (links in Chinese). Analysts predict the upward trajectory will continue through the year.

“The problem is that the whole industry is riding on the prices of magnet materials, which is unsustainable in the longer term,” says Nabeel Mancheri, secretary-general of the Brussels-based Rare Earth Industry Association, referring to highly sought-after rare earth elements neodymium (Nd) and praseodymium (Pr), which are used in neodymium-iron-boron (NdFeB) magnets. If the bubble bursts, Mancheri adds, it would set back non-China rare earth projects and delay global efforts to diversify rare earth production.

Rising demand, supply disruptions pump up rare earth prices

The global energy transition is fueling demand for rare earths, a group of 17 elements that are key ingredients in climate economy products like permanent magnets that go into wind turbines and electric vehicles.

Sales of EVs — which use rare earths in their motors and batteries — are expected to surge this year; wind power installations are set to hit records, too. All that means rare earths demand will see robust growth of over 5% in 2022, according to energy consultancy Wood Mackenzie.

At the same time, rare earths supply has been tight for a variety of reasons. There were covid-related factory disruptions in China back in early 2020. The pandemic-caused closure of a key border crossing with Myanmar, from which China sources 50% of its heavy rare earths, slowed imports down to a trickle (the border crossing has since re-opened and trade resumed, according to Chinese media). Last fall’s energy crunch in China also impacted supplies.

Are rising rare earth prices good for China?

With China being the world’s dominant supplier of rare earths, it would seem that rising prices of the critical minerals would be beneficial to it. Higher prices could mean more lucrative sales and more tax revenues, for example.

According to Gao Fengping, a rare earths expert and a professor at the Inner Mongolia University of Science and Technology, higher rare earth prices are good for the overall development of China’s rare earths industry. First, more costly raw rare earth materials upstream in the supply chain can weed out inefficient downstream firms, like permanent magnet producers that are unable to absorb the higher prices. Second, higher earnings from the sale of rare earths could help upstream firms pay for environmental governance and pollution mitigation.

“This is actually the redistribution of the industry chain and value chain,” Gao told the Economic Observer (link in Chinese), a Chinese newspaper. “Reasonable distribution is conducive to the healthy development of the whole industry chain.”

Substituting costly rare earth ingredients

The key word, however, is “reasonable.” Industry experts worry that the dramatic rise in rare earth prices could inflate a bubble and lead to an eventual, painful pop.

“In the near term, it’s good for the Chinese government, they receive taxes…they receive a higher price. But is it sustainable?” wonders Luisa Moreno, president and director of Defense Metals, a Canada-based mineral exploration company.

For one thing, if rare earth magnet materials get too expensive, manufacturers may work toward substituting rare earth ingredients with less costly inputs. Japanese scientist Masato Sagawa, for example — who just won the prestigious Queen Elizabeth Prize for Engineering — developed the NdFeB magnet in the 1980s to replace the costly cobalt in samarium-cobalt magnets.

“We believe that the higher rare earth prices rise, the more efforts will be made to replace NdFeB magnets,” Thomas Krümmer, director of Ginger International Trade and Investment, a Singapore-based firm focused on rare earth supply chain management, wrote in a recent issue of his industry newsletter.

The CEO of Neo Performance Materials warned about this very risk at an industry conference last October. “Even though rare earths are terribly important, they’re not indispensable. Given enough motivation, enough resources, and enough brain power, they can be designed out,” said Constantine Karayannopoulos, whose company is building a US-EU rare earth supply chain.

Some Chinese magnet makers are already struggling with the rising rare earth prices, according to Cailian (link in Chinese), an online financial news outlet affiliated with the state-run newspaper Securities Times. Some magnet manufacturers’ inventory of rare earth materials is running low, and they may require bigger upfront payments for future orders to ensure sufficient funds to purchase the ever more expensive inputs, according to the outlet.  

The ripple effects of high rare earth prices

It can be difficult to form a complete picture of the impact high rare earths prices have on the industry, in part because a lot of sales are made via longer term contracts.

“Who’s actually taking advantage of the high prices? I’m not sure…it’s hard to understand how much is floating freely in the market and how much is controlled by contracts,” says Per Kalvig, senior researcher at the Geological Survey of Denmark and Greenland’s Center for Minerals and Materials.

For example, Advanced Technology & Materials, a Chinese producer of NdFeB magnets, told Cailian that the rare earth price increase has had “little impact” on the company because it has a guaranteed supply of raw materials at “favorable prices” from the state-owned giant China Northern Rare Earth Group.

And while high prices may attract investors to rare earths projects outside of China, volatility from a boom and bust could drive investors away and also complicate price projections in feasibility studies, said Moreno of Defense Metals.

“I’d rather see medium prices–$100, $150–just stay at that level instead of going to $200, $300, and crashing down to $60, $70 again,” said Moreno. “People aren’t going to trust this.”

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