Nearly four years ago, Japan’s navy arrested a Chinese fishing boat captain near some disputed East China Sea islands. China retaliated, some say – although China denies it – by imposing an embargo on the rare earth elements (REEs) it sells to Japan.
What is so significant about this incident is that China produces nearly all the world’s supply of REEs, used extensively in the manufacture of the many consumer electronic products Japan produces. Shaken by this reminder of how dependent it had become on China, Japan began seeking to diversify its sources of supply of rare earths by negotiating agreements with Vietnam, Mongolia, and Kazakhstan to develop new mines.
Chart of global distribution of REE reserves and output shows China's dominance.
“That was the alarm bell that should have alerted electronics manufacturers all over the globe – not just in Japan – that OEMs need to look carefully at their supply chain and make sure they aren’t relying totally on one country as a source of supply,” says Marc Humphries, a specialist in energy and mineral policy at the Congressional Research Service (CRS).
Indeed, in his recent white paper, “Rare Earth Elements: The Global Supply Chain,” Humphries explains how the 17 elements known as rare earth elements are used in the manufacture of everything from flat panel displays for smartphones and laptops, generators for wind turbines, and rechargeable batteries for hybrid and electric vehicles, to aerospace components, ceramic capacitors, computer memories, fiber optics, and energy-efficient fluorescent light bulbs.
REEs are used extensively in many important consumer and industrial products.
While rare earths aren’t necessarily “rare,” Humphries explains, what they have in common is that they are difficult to mine and to extract from the surrounding rock economically. This is especially true for the eight “heavy” REEs that are of the most concern in terms of the future supply-demand balance. The primary application of the “heavy” REEs is in the permanent magnets that have given the electronics industry the ability to make smaller and more reliable devices and equipment.
Permanent magnets made with neodymium, an REE, are more powerful for their size than other types.
Demand for REEs is high and certain to grow in the coming decades as consumers’ tastes for leading-edge technology -- like smartphones, tablets, and hybrid vehicles -- explodes. REEs are scattered throughout smartphones in over 60 locations -- from the glass display (making it harder) to magnets in speakers, to headphones and vibrating motors (making them more powerful despite their small size). And there are nearly 20 pounds of REEs in the battery of the Toyota Prius hybrid, of which there are more than 2 million on the road.
While the U.S. was once self-reliant on domestically produced REEs, over the past 15 years it has become 100% reliant on imports, particularly from China, due to several factors: China’s substantial reserves of the world’s REEs estimated to be as much as 50% (according to the U.S. Geological Survey); the lower cost of its mining operations, mainly due to cheap mining labor; and also a technology transfer that took place in 1995. At that time, two Chinese companies headed by the sons-in-law of then-Chinese leader Deng Xiaoping purchased General Motors’ Indiana-based subsidiary Magnequench, which held the patent for turning REEs into permanent magnets.
Deng reportedly recognized the importance of REEs as far back as 1992 when he said, “The Middle East has oil, but China has rare earths.”
“China acquired the technology, it invested substantially in R&D and the training of engineers for the mines and for the REE-extraction facilities, and for all intents and purposes China has owned almost all the REE supply chain for the last 10 years,” says Humphries.
Production in China grew rapidly between 1990 and 2000 – from 16,000 to 73,000 metric tons, an increase of 450% – while production in other countries plummeted 60%. Access to a reliable supply to meet current and projected demand is an issue of concern, warns Humphries. China has plans to reduce mine output and restrict REE exports even further, he adds, noting that China already cut its exports of REEs from about 50,000 metric tons in 2009 to 30,000 metric tons in 2010. And the Chinese Ministry of Commerce announced export quotas of about 30,000 metric tons for 2011 and 31,438 metric tons for 2012 and 2013.
“There are other potential producers out there,” says Humphries, “like Vietnam, Kazakhstan, Canada, Australia, South Africa, and the U.S., all of whom hope to compete with China, but that will be difficult. China is a well-oiled machine now.”
Researchers, especially in the auto industry, are experimenting with using substitutes for REEs and with reducing the amount of heavy rare earths that go into magnets. Similarly, there are programs aimed at educating consumers and encouraging them to recycle their old electronic devices and fluorescent bulbs, said to be essential to the complicated process of extracting the REEs that can then be transformed into usable materials.
At the same time, mines are being developed throughout the globe, “but the question is who is going to invest in the refining, the permanent magnet production, and so on, to complete the supply chain,” asks Humphries. “That’s the difficult part – getting the investment community to take that risk to build out a non-Chinese supply chain.”
For example, Afghanistan holds a treasure trove of REEs in its ground, estimated to total over 1.4 million metric tons. But, according to one analyst, the ingredients that encourage foreign investment – the rule of law, human capital, and infrastructure – are in short supply there.
“I don’t believe the sourcing challenges have affected pricing or availability in the U.S. electronics industry – yet,” says Rick Pierson, a principal analyst at IHS Technology who specializes in components cost benchmarking. “But there’s a very, very deep concern by strategic procurement teams and strategic managerial teams, even at the C level, that this will have an effect down the road.”
That’s because of the many cutting-edge technologies that could be helped by rare earths to achieve the next level of performance, he says, “and the fact that China can theoretically use its REE exports as a sort of bargaining chip in any type of political haggling if it wants to.”
His best advice to OEMs is to start taking a close look at their bills of materials “and work very closely with your suppliers, and their suppliers, to determine how rare earths could have a potential impact on you in your three-, five-, or seven-year plan. Because the warning signs are out there, we all need to understand that we have an issue here.”