US-China: Washington revives plans for its rare earths industry
Other allies including the EU and Australia also want to reduce dependence on Beijing for elements critical to everything from wind turbines to F-35 jets
It is five years since the giant trucks hauling ore around the Mountain Pass mine in California’s Mojave desert fell silent. Molycorp, the only major rare earths producer in the US, had just collapsed under the weight of a $1.7bn debt. The bankruptcy burnt investors and left the nation almost entirely reliant on China for the supply of 17 metallic elements that are embedded in most high-tech products from wind turbines to electric vehicles and F-35 fighter jets.
Now, as relations between Washington and Beijing deteriorate further the US government is supporting the resurrection of Mountain Pass, which until the 1980s was the world’s biggest producer of rare earths. Disruption to supply chains during the Covid-19 pandemic has underscored the need for the US and other nations to ensure they are not reliant on a single country or company for vital supplies of raw materials and goods.
The Pentagon has agreed to fund MP Materials — a private equity backed company, which bought the mine for $20.5m in 2017 and restarted excavations — to design the first heavy rare earths processing facility in the US at the site. It is also backing a similar project in Texas proposed by Australian company Lynas, amid concerns that China could disrupt US defence and other industries by withholding supplies of rare earths. In July, it handed $29m to Urban Mining Company in Texas which manufactures rare earths magnets by recycling electronic waste.
Beijing’s threat of sanctions on Lockheed Martin in July has added urgency to efforts to break China’s stranglehold over the industry. It controls four-fifths of the global mined-supply of rare earths, and an even larger share of the manufacture of powerful rare earth magnets — industries worth $13bn a year combined. The Trump administration earmarked $209m in public funds for the sector — thought to include the funding for MP Materials — this year.
“We’ve certainly learnt that a single point of failure in the global supply chain for anything critical is a significant challenge,” says James Litinsky, MP Materials’ chief executive, who adds that rare earths are essential to the millions of future jobs in high-tech sectors.
“That is trillions of dollars of gross domestic product that, if we don’t build a supply chain in the western hemisphere, is going to be solely reliant on that single point of failure in China,” he adds.
Washington is not alone in being concerned over Beijing’s control of rare earths. The European Commission is working on a raw materials strategy that aims to wean domestic industry off their dependence on China by boosting industry collaboration and providing sustainable finance for new producers. Australia, which holds one-sixth of the world’s rare earths deposits, has teamed up with the US government to source new deposits and support market entrants. And Russia has unveiled a $1.5bn rare earths plan to tempt investors with tax breaks and cheap loans.
Investors, previously chastened by Molycorp’s collapse, are again interested. MP Materials plans to list later this year on the New York Stock Exchange via Fortress Value Acquisition Corp, a special purpose acquisition vehicle, to raise $500m to fund expansion. FVAC is sponsored by affiliates of Fortress Investment Group, owned by Japan’s SoftBank. Separately, a swath of smaller rare earths miners and processors in the US, Australia and elsewhere are seeking to raise billions of dollars for projects to produce neodymium, praseodymium (NDPR) and other rare earths oxides and metals.
Experts warn that the growing hype surrounding the sector masks the huge challenges new entrants face. China’s dominance of the supply chain stretches from mining to the manufacture of magnets and the assembly of electric vehicles.
“The investment risk on any one of these projects is monstrous,” says Jeffrey Wilson, director of the Perth-USAsia Centre, at the University of Western Australia. “If you’re an investor wanting to put capital into that, then it’s got red flags all over it.”
The sector — a notoriously dirty, environmentally unfriendly business — is also plagued with technical complexity; a skills shortage in the west; and a monopolistic market that hands pricing power to Chinese state-owned incumbents. When Beijing unexpectedly cut export quotas for rare earths in 2010 prices quadrupled — a surge that alerted western nations to their reliance on China.
Establishing a viable non-Chinese supply chain, says Mr Wilson, will take years and require major government support, international co-operation and collaboration from industrial giants in the US, Europe and Japan.
“The Chinese state-owned producers can do the Saudi [oil] trick,” he says, adding: “They turn on the taps, flood the market, the price of dysprosium crashes, the new entrant is washed out, and then they’ve re-established their monopoly.”
Not that rare
Rare earths — the 15 lanthanide elements on the periodic table plus two other related elements, scandium and yttrium — have become an integral part of modern life. More than 90 per cent of hybrid and electric vehicles use rare earth-based magnets in their motors, while each F-35 fighter jet requires 420lb of rare-earth material.
Despite their name, rare earths are relatively abundant. But they tend to be widely dispersed, making them difficult to mine profitably. The process of separating them into commercially viable products also poses technical and environmental challenges, which have caused many new entrants to struggle.
“Outside of China there’s very little expertise. We’re the only company in the past two decades, that have successfully ramped up, not just preliminary processing of rare earths, but right through to separated oxides,” says Amanda Lacaze, Lynas chief executive. “It is not something that you can easily do from a textbook. Our in-house IP [intellectual property] is one of the most valuable things we have.”
Lynas currently ships ore from its Mount Weld mine in Western Australia — said to be one of the richest rare earth deposits in the world — to a A$1bn ($730m) plant in Malaysia for processing into neodymium and praseodymium, key ingredients in the most widely-used rare earth magnets. In July it won seed funding from the Pentagon to design a plant in Texas alongside its US joint venture partner, Blue Line, to process dysprosium and terbium — heavy rare earths — that can, at the moment, only be processed in China.
“The US has a strong and successful history of using the defence industry to create capable industries or supply chains,” says Ms Lacaze, who is hopeful further government funding will become available to actually build, and not just design, a plant in Texas.
A growing number of experts — both inside and outside of the companies — suggest public funding is the only way to build a supply chain outside of China. Lynas has struggled to compete with Chinese rivals, reporting a profit in just two of the past six years. It required a bailout led by Japan Oil, Gas & Metals National Corp in 2016, a state-owned Japanese company and continues to burn through cash — raising A$425m from shareholders in August to bankroll a new facility to help meet environmental rules in Malaysia.
“There is no free market solution to this problem [of a non Chinese supply chain] without significant initial government backing,” says Dylan Kelly, analyst at Ord Minnett, a Sydney-based brokerage. “Barriers to entry are extremely high, a project needs 10 years and over $1bn to get up and running and there is no guarantee of success. Capital markets have been burnt in the past through misadventures.”
Beijing’s strategic vision
Beijing declared rare earths a “strategic” mineral as far back as 1990. A decade later during a visit to a mine in Baotou, Inner Mongolia, then Chinese president Jiang Zemin declared China’s task was to “improve the development and application of rare earths, and change the resource advantage into economic superiority”. When the trade war between Washington and Beijing intensified last year, President Xi Jinping visited a rare earths’ magnet maker in Jiangxi province, almost as if to highlight his nation’s dominance in such a critical element.
Chinese producers now hold about 80 per cent of the global rare earths market — up from 27 per cent in 1990. Beijing initially used production and export quotas to build its rare earths sector into a global leader, helping the nation establish itself as the “world’s factory” and win a greater share of global manufacturing. Under the Made in China 2025 strategy, Beijing is pushing to create an integrated supply-chain in mining, magnets and high-tech manufacturing.
“They want to produce 50 per cent of the world’s electric vehicles and 50 per cent of the world's hybrid vehicles by 2025,” says Dudley Kingsnorth, a professor at Curtin University in Perth. “If that is successful then that will decimate the automotive industry in Europe and North America and Asia.”
He warns that Beijing could further undermine the rest of the world’s ability to produce EVs and other high-tech products by limiting exports of rare earths and magnets. This is potentially a much bigger threat than any sanctions imposed on Lockheed or other defence companies, which probably have stockpiles that could last a few years, he adds.
“If the jobs disappear to your kids and grandkids then that impacts GDP”, says Mr Kingsnorth, who is an adviser to Nato on rare earths, “and then there is less money to spend on defence.”
Ahead of its time
From MP Materials’ headquarters in Las Vegas, Mr Litinsky is plotting the rebirth of the US rare earths industry from Mountain Pass. The founder of Chicago-based hedge fund JHL Capital teamed up with US investment group QVT Capital and Shanghai-listed Shenghe Resources for the 2017 deal to buy the mine.
They restarted mining a year later but have to ship ore to China for processing, generating annual revenues for MP Materials of about A$100m. Using the money raised from its upcoming listing, MP Materials plans to restart the mothballed processing plant at the Californian mine by 2022 and later build the capability to produce metals and magnets.
“Molycorp had a great vision but the execution was lacking,” says Mr Litinsky, adding that MP Materials’ mission to restore the rare earths supply chain in the US will boost jobs, national security and green technologies.
He says Molycorp was ahead of its time but did not benefit from the boom in electric vehicles, which he forecasts will consume the world’s current entire supply of NDPR within a decade. Technical problems that dogged the company’s processing plant at Mountain Pass have now been resolved, adds Mr Litinsky.
But critics remain sceptical about MP Materials’ prospects, warning that another rare earths’ failure could poison the investment climate in the sector for a decade.
James Kennedy, president of Three Consulting, says the geochemistry of the Mountain Pass deposit does not enable MP Materials to produce on a commercial scale the heavy rare earths, such as terbium and dysprosium, required for military grade magnets in the F35 or drones. And politically, Shenghe Resources’ 9.9 per cent stake in MP Materials is not consistent with the US government’s stated goal of building a non-Chinese supply chain, he adds.
The Pentagon briefly paused its initial decision in April to fund MP Materials and Lynas following a call by a group of US senators led by Ted Cruz to only support US rare earth projects.
MP Materials says these concerns are groundless, noting Richard Myers, a retired US general and former chairman of the joint chiefs of staff, has agreed to join the board and that as a soon-to-be NYSE listed company any foreign company, including from China, is free to invest in its shares.
But the project could yet fall foul of geopolitical tensions. “The political wind blowing against MP is the minority Chinese position,” says Mr Wilson. “The question would be: is the US defence department about to fund a big technical study on how to separate US rare earths, of which every single piece of information is going to go straight back to a Chinese competitor?”
Greater collaboration
If the US is to establish a non-Chinese supply chain of rare earths and the magnets that power modern machinery it will require international and industry collaboration, say experts. Rare earths executives complain western industry prioritises low-cost products rather than ensuring its supply chain is not dominated by a single company or nation.
“Most companies require relatively small volumes of rare earths for their operations, compared to other raw materials. And even though rare earths are vital to their operations the procurement decisions tend to be taken by lower ranking executives with an eye on costs, rather than by chief executives who might take a more strategic view,” says Anthony Marchese, chairman of Texas Mineral Resources Corp, which is seeking to develop a rare earths and lithium mine in Texas.
“There needs to be a change in mindset at the top end of the supply chain to ensure a US supply chain is viable,” he adds.
Australian producer Lynas has benefited from this type of support from Japanese customers, which have prioritised security of supply over cheap pricing since China slashed export quotas in 2010. But US and European companies have been less willing to take a strategic approach to procurement, according to rare earths experts.
“China is steadily tightening its grip on the entire rare earths vertical supply chain,” says Mr Kingsnorth. “Until the automotive industry, high-tech manufacturers and western governments collaborate and use their purchasing power to underwrite investments in rare earths processing and other downstream activities, they will continue to be outflanked by Chinese competitors.”