There has been some interesting commentary of late in the rare earths space. Not the hype that occurred as part of the boom and bust of 2010-12 when there were 400 or so “active” rare earth (REO) explorers cum developers, but some concerned efforts to try to work out the future opportunity that the now 20 or so genuine rare earth players present. The commentary tries to define what is happening in North America, Europe, Africa and Australia but the stories miss the most vital part of the logic. What vital part would that be? Answer: China.Why? Answer: If you don’t know or at least have an understanding of what China is doing or is planning in the REO space then it is impossible to develop a position in the non-China REO space for these budding REO explorers cum developers. Since China is and will always be a very large part of the global REO scene, then what it does, will have considerable influence on what the non-China REO opportunity looks like.

So what is the China REO space doing and where is it going? It is important to try to answer this by individual rare earth element or at least by grouping.

The world is becoming awash with cerium and lanthanum. This is mainly due to the capacity of the Baotou region (think north-west China) and its light rare earths deposits. In the last 15 years, Baotou has expanded its total REO capacity chasing neodymium for the magnets market. The resultant over supply of cerium and lanthanum was dumped into the market or went into storage. This out of balance situation will remain. That is unless some new volume of cerium and lanthanum demand comes into being. The new production from Molycorp and Lynas can only exacerbate this imbalance. So Baotou is all about neodymium. It is limited in its output since the REO from Baotou mines is a by-product of iron ore mining and processing. The iron ore produced in Baotou is quite low grade and high in impurities on a global scale and its use in China to make steel is expensive and results in significant pollution. The Chinese steel mills (and the Chinese Government) prefer to import from Australia or Brazil. So Baotou cannot simply ramp up its REO output because of the restriction on downstream iron ore use. So what is the plan for Baotou? You need to understand the history here. Baotou used to supply bastnasite concentrates to Eastern China for value adding. Baotou then realized there was more opportunity by doing the extraction itself and selling REO carbonate to Eastern China for separation. Baotou then realized there was more opportunity by doing the extraction and separation itself and selling intermediate products to others for value adding. It now realizes that there is more opportunity in continuing down that value adding path. And with control of the REO feed stock Baotou can and is producing specialized cerium and lanthanum products, specialty REO metals, alloys and magnets. And for those who are interested, it is also one of the most impressive cities on a world scale. It has its poor environmental history behind it.

I mentioned that Baotou is a light REO district. So to get into the specialized magnet business they needed imported dysprosium and terbium to combine with their domestic neodymium. Where did this heavy REO supply come from? Answer: Southern China. And just as Baotou wants to maximize its value add, so did Southern China by decreasing its sales of heavy REO concentrates to Eastern China and Baotou, but it then needed to buy neodymium from Baotou to produce magnet feed material. The progressive production of REO in the Chengdu region (think central-west China) adds complication to the equation but what I am getting to is that the relatively recent consolidation of the REO producers by the Central Government is not just about efficiency and reducing pollution. It is about maximizing the benefit of REO enabling technology to China in a carefully planned and executed manner. Think about it. We have seen China progressively move along the value add route from selling concentrates, then oxides, then metals, then alloys, then intermediate products, and then magnets (for example). I have witnessed first-hand some of the most sophisticated and advanced phosphor plants in China. I have seen pseudo-manufacturing plants cum universities turning out experienced REO engineers in the many hundreds. Where am I going with this? Answer: China is taking its rare earths resources as far down the adding value to high technology uses chain as it can. And it is very committed to R&D to take it further. They see the REO opportunity now and into the future. What does this mean to REO exports from China?

There will be ongoing imbalance in cerium and lanthanum, so expect some export volume. As for the other rare earth elements, China will continue to value add and will progressively consume all of its non-cerium, non-lanthanum REO domestically. It is also reasonable to expect the progressive need for import of REO, that is, until the Chinese R&D into REO recycling takes effect.

I want to summarize the China situation as it impacts on dysprosium. China is targeting its magnet technology to make the most effective use of its dysprosium. These super-magnets certainly will appear in off-shore wind turbines and may be targeted at the new age nuclear technology. But what is the non-China world doing re dysprosium? Answer: looking at R&D to engineer out dysprosium in magnets. It then becomes a good question, that if non-China removes or substitutes dysprosium what does it mean to budding REO hopefuls? I think we need to answer the technological implications first.

In the current magnet world, the high-value top-end magnet technology needs dysprosium in the magnets. With no dysprosium, wind turbines lose efficiency and effectiveness. They become more expensive to build and maintain. The result is second rate technology with second rate overall performance. The loss of performance particularly puts at risk the renewable energy goals of many developed countries. With no dysprosium, hybrid and electric vehicles lose efficiency and effectiveness. Again, the result is second rate technology with second rate overall performance. The loss of performance particularly puts at risk the energy efficiency and exhaust emission goals of those same developed countries. So before we can establish the scene for the REO hopefuls, before we can attempt to predict and understand the dysprosium-enabled technology users’ direction, we need to ask if our governments are serious in their targets for energy efficiency and environmental protection. I can only assume they are. If that is so then it is almost mandatory for our technology industries to base their future on dysprosium and its known benefits. The budding REO hopefuls are waiting for a signal so they can progress their projects to supply the essential technology enabling elements.

There is further justification for government (and industry). What if they settle on second rate magnet technology with poorer performance? Note here that this does not apply to China since they are designing-in their domestically produced dysprosium. Interesting! The Western World deliberately deciding to be second best to China in the technologies of the future. A little scary. OK, if there was to be no non-China market for dysprosium, then there would be no need for dysprosium production. The current HREO hopefuls would lose much of their possible income. They would not justify start up. Then what happens? There would be little yttrium available in the non-China world also. What no iPads, no iPhones or similar gadgetry? That’s right, because China is consuming the yttrium it co-produces as it produces dysprosium in its own domestic market. Getting scarier isn’t it. So not only are we second rate in magnets, we become second rate in phosphors and allied technologies.

It gets worse! We now have no HREO at all! The opportunities for terbium, ytterbium, lutetium and so on are also not available to us. We appear to be deciding to be second rate now AND forever into the future! Now it’s really scary. But it is so easy to rectify. Jack Lifton recently said that the supply and demand situation in non-China HREO was like the chicken and the egg question. Which needs to come first? Sorry Jack I disagree with the analogy. Why? Because the HREO developers (the egg) cannot go forward into a market place as it is currently defined. They can never get finance without a long term assurance of the need for the dysprosium and yttrium. They do not and cannot influence the equation. They are there to put in place supply once the demand side (the chicken) affirms its future in the HREO space and then business models can be developed, tested, approved and financed. Models that make money for all are there! Models that let the West be technology leaders are there!

So Governments of the Western World, are you serious about your energy efficiency and environmental protection goals? If so, we would appreciate a little pressure on those technology development companies who seem to be sitting on their hands at the moment. Our position on the technology scale is at risk!

As an addendum. The current stock market capitalization of the top ten non-Chinese REO companies is less than $1 billion. The combined REO capacities of those ten projects is equal to the current China production allocations. AND there is more HREO as a percentage of TREO. Imagine. All the REO the Western World needs for less than the cost of one single potash project! Strange world.