February 2011

MAC Economic Commentary

Rare earths: critical and strategic or the flavour of the month?

By Paul Stothart

In political Ottawa, where parliamentarians can be exposed to dozens of different issues in an average week, it is not unusual for policy issues or media stories to acquire profiles based on a superficial level of understanding. This has happened in recent months in the mining sphere, for example, where many MPs supported flawed private member’s legislation regarding international activities of mining companies so as to not be perceived as “opposing social progress.” On a broader scale, much of the art of political communications seeks to capitalize on superficiality and is oriented around developing a simple, effective message and repeating it time and again. (Mining companies have communications lessons to learn on this front, although that is a subject for another day.)

The same practice of applying simplistic analysis to interesting and complex policy issues may be occurring in the area of rare earth elements (REE), where the subject has acquired a high level of sex appeal among politicians in Europe, the United States and Canada in recent months. There are several developments that have contributed to this new heightened profile, although three are particularly relevant.

1. Commentators have become increasingly aware of the fact that China controls a high portion of the supply of the world’s processed rare earth minerals. While figures may vary among light and heavy REEs, the most commonly cited figure is that China produces 97 per cent of the world’s rare earths.

2. China has recently demonstrated that it would not be shy about restraining exports to protect its own interests. Related to a long-standing territorial dispute, a Japanese patrol boat boarded a Chinese fishing vessel in September 2010 and detained its captain. In retaliation, China has, in effect, embargoed REE exports to Japan. This export restraint came on the heels of a Chinese announcement in mid-2010 that the country would be reducing global rare earth export quotas by 72 per cent in the second half of the year so as to protect its own supply chains.

3. Politicians in developed countries have begun to grasp the fact that rare earths are fundamental ingredients in telecom, defense and clean energy technologies; for example, radars, high-powered magnets, wind turbines, hybrid cars, laptops and iPhones all contain rare earth minerals.

The combination of these factors has meant that a class of obscure minerals that no politician had heard of a few weeks previous quickly vaulted to the top of the list of the world’s critical strategic policy issues. The unique magnetic and spectroscopic properties of obscure elements such as lanthanum, cerium and neo­dymium became the basis of high-level planning and policy analysis among governments of advanced countries.

In this sense, a U.S. senator has recently introduced legislation proposing that tax revenues be used to build a national defense stockpile of rare earth metals. In June 2010, the European Commission highlighted potential shortages of REEs and recommended that the European Union should increase its support for exploration of strategic metals, including rare earths, and increase incentives for recycling.

Within the mining industry, given the growth in consumer electronics and potential in green energy technologies, many companies are currently exploring rare earth potential in Canada and in other countries such as Australia, India and Kazakhstan. Rare earth elements are relatively abundant in the earth’s crust, although not all deposits are sufficiently large to be economically extracted. In Canada, companies are gauging the attractiveness of rare earth finds in Quebec,

the Northwest Territories, Yukon, Ontario, New Brunswick, Manitoba and Saskatchewan. One leading company, Avalon Rare Metals, has five projects under consideration in Canada, of which the Nechalacho rare earth deposit in the Northwest Territories is felt to be among the world’s most attractive finds. It is scheduled to enter production, depending on permitting and approval, by around 2015. Among other firms, Quest Rare Minerals, Matamec and Great Western Minerals are conducting promising early-stage REE exploration in Canada.

It is important to note that gauging the economic potential and securing market and price commitments remains a challenging task for companies with respect to proposed REE mining developments. The volume of rare earth minerals consumed worldwide is still relatively small, for example, amounting to a fraction of one per cent of the amount of copper consumed in the world, and there is not a functioning daily market price or trading mechanism to benefit or guide REE suppliers. There are also environmental and waste challenges that accompany rare earth production and refining. For these reasons, the economics of rare earth production have historically not been overwhelmingly positive, and it has traditionally been relatively easy for a few companies or countries to control the market. Faced with these kinds of pressures, including aggressive pricing from Chinese competitors, the only U.S. rare earths mine, Mountain Pass in California, closed in 2002.

On the positive side, as market demand for rare earths grows in the coming years, it should become easier for mining companies to identify and secure customers and to gauge price trends. The increased global demand for REE will eventually be met through new supply. It is expected that Mountain Pass will restart in 2012, while an Australian mine and a Vietnamese mine are expected to begin production in the next few years and a Japanese company is planning to start extracting REE from uranium tailings in Kazakhstan.

As well, given their linkage to clean energy technologies, REE developments will become another component of a positive communications message for the mining industry. Catalytic converters, used to reduce vehicle air pollutants, require cerium. NiMH batteries for hybrid vehicles require lanthanum, energy-efficient lighting requires praseodymium and europium, while wind turbines require neodymium and dysprosium. By consistency of logic, those environmental and social groups that advocate for investment in clean energy technologies should also support global development of the extracted and processed minerals that form the basis of these technologies.

Paul Stothart
Paul Stothart is vice-president, economic affairs, at the Mining Association of Canada. He is responsible for advancing the industry’s interests regarding federal tax, trade, investment, transport and energy issues.

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