Singapore skyline. Photo ©Freya Kerwin, MMTA 2024
CPM Group recently attended both the Minor Metals Trade Association (MMTA) and Metal Events Rare Earths (MERE) meetings in Singapore. Along with the valuable opportunity to reconnect with people sometimes for the first time since Covid, several interesting themes and messages emerged.
Benchmark Minerals presented a discussion of the pricing economics of rare earths in the framework of standard microeconomic analysis. Despite the understandable omission of all hard numbers, Benchmark’s presentation was informative, supporting its hypothesis that rare earth pricing is currently seemingly economically irrational, with prices below the level required to earn the industry’s cost of capital. As a reference point, neodymium-praseodymium oxide prices
(Nd-Pr) are down more than 50% in the past year (although they have recovered a little recently) to the mid-US$50s per kg range for Nd-Pr oxide.
Naturally, Benchmark was not arguing rare earth prices are irrational, just pointing out that there is a mismatch between current prices and the price level needed to permit projects to earn their cost of capital. price is just a statement of the balance in the market at any point, and other capital-intensive industries often struggle to earn their cost of capital for extended periods of time (for example airlines).
Benchmark also presented an anonymised supply curve for the market today. A large majority of projects sit well under the (high-low) range of estimated costs for typical rare earth producers, most of them presumably Chinese firms.
The tail of high-cost projects in our qualitative estimation includes potential and emerging new rare earth mining operations, the vast majority of which are hard rock and sit outside China. Looking at the forecast for supply and demand for rare earth magnet metals over the next 10 years, one could infer that the timing is good for emerging projects, and that for many of them the future looks bright.
In our judgement, this outlook is probably over-optimistic, since (i) CPM projects that actual EV production is likely to fall short of current forecasts and (ii) today’s supply curve is a static snapshot that omits potential future expansions by existing suppliers.
Gallium illustrates the supply issue rather well. Gallium production capacity in China substantially outstrips supply, according to presentations from Chinese firms at the MMTA. New applications, such as the use of gallium as a processing aid in some grades of neodymium-iron-boron magnets, are driving rapid growth in demand for gallium, but while demand growth is strong, supply is expected to continue to increase, maintaining a supply excess in the range of 15-20% or so over demand.
The forecast was limited to the short term, and for Chinese gallium producers there are limits to production imposed by the quality of bauxite feed to Bayer Process alumina refineries. Nevertheless, there is an obvious expectation, at least, of continued supply-side growth to maintain ready availability of the metal. As an example, MMTA participants estimated current annual gallium demand in rare earth magnets at 200-300t at a level of about 1% by weight. This represents about 10% of the total volume of rare earth magnets manufactured today (estimated to be about 200,000tpy of magnets, or about 60,000t of Nd-Pr metal contained).
Not all magnets will require or justify gallium as a processing additive but, as magnet volumes and potentially gallium share grow, the growing gallium supply will provide room to expand supply without severely pressuring costs for magnet makers.
So, turning back to rare earths, the question in our view is not so much what the supply curve looks like today, but rather what the expansion plans of rare earth producers will be in the coming years. This question determines the evolving shape of the supply curve, because if the low-cost end of the curve can grow, it will push further out the high-cost emerging projects and threaten their ability to participate in setting the market-clearing price.
Looking more closely, there are two parts to this question. The first is the willingness of Chinese rare earth producers to continue to invest if they are operating at an uneconomic rate of return, a loss. There has been much comment from the lithium sector (recently, as an example, Huayou Cobalt announcing a review of capital spending owing to much-reduced lithium prices) to suggest this is a possibility, and indeed it is.
That being said, the rare earth industry is a critical industry in China just as in the rest of the world, and from a strategic perspective continuing to invest and maintain the current share of rare earth supply would fit with China’s much broader industrialisation goals. A few billion dollars of capital for rare earths to help underwrite China’s aggressive growth plans in electric vehicles may be viewed by the Chinese government to be a very rational choice. So, while capital availability may become a constraint for rare earth expansion in China, there is a strong argument that it will not.
The second question is resources. China is well supplied with light rare earth metals but is short of heavy rare earths and is dependent for these on imports, especially from Burma (Myanmar). The supply from Burma is imperiled, and Chinese third-country investments are exposed to global political winds, so this is also a legitimate concern for industry growth.
However, heavy rare earth demand may become less critical in the future than it is today. Neo Performance Materials reported that it has developed a high-performance magnet that does not require dysprosium or terbium (Dy or Tb). This is a striking development (the company has not disclosed the details of the innovations needed to achieve this result).
We doubt this development will eliminate the need for Dy or Tb in magnets (their use is as grain boundary stabilisers, from a few percent up to as much as 10% of the rare earth content, to help preserve magnet strength at elevated temperatures), but any meaningful reduction will serve to entrench the position of leading firms, especially the major Chinese rare earth producers.
Emerging miners have the daunting task of selling a story of the future. As the CFO of a South African miner once told one of the authors of this note, “I have to be able to show some blue sky.” In the rare earth market that is challenging, even with capital investment support from concerned governments. Perhaps the clearest answer came from Amanda Lacaze, the CEO of Lynas Rare Earths, whose costs for Nd-Pr production reportedly sit below US$30/kg. She reminded the audience that the key question for the viability of any project is cost of production. We concur.
By Andrew Matheson and Patrick Stratton
CPM Group
About the authors
CPM Group is an independent commodities research, consulting, and investment banking advisory company headquartered in New York. The company is considered the foremost authority on markets for precious metals, along with manganese and molybdenum. Its entry into tantalum research came through a new collaboration with Andrew Matheson and Patrick Stratton, who are both recognised experts in the tantalum market.
Andrew Matheson, the founder and principal of OnG Commodities LLC, has 25 years of experience in the tantalum industry, leading Cabot Corporation’s tantalum ore procurement and mineral development activities, as general manager of Cabot’s sputtering target business and serving as director of R&D. His experience includes a range of other specialty materials including niobium, scandium and rare earth metals.
Patrick Stratton spent 16 years with Roskill, where he led the tantalum research. His experience also covers niobium, gallium, magnesium metal and titanium. In addition to being the lead author of published research reports on these commodities, he has also undertaken many consulting assignments for producers, project developers, financial institutions and government bodies.
