The media frenzy being played out under the guise of the US-China trade tariff dispute is misplaced.

Like a slow-boiling frog, consumers have either ignored or merely croaked about China’s increasing dominance of the rare earths market, when they should have been hopping to develop alternative supplies. The media frenzy being played out under the guise of the US-China trade tariff dispute is misplaced. As China advances its economic and environmental agendas, its technological and trade advantages grow, threatening the security of other nations. China is often portrayed as the villain in this story, but the rest of the world must accept responsibility for helping to create this situation and move fast to change it.

Rare earths: why should we care?

Rare earths are 17 elements referred to as the ‘vitamins of industry’, due to the minute amounts required for a range of advanced technologies on which developed nations depend.

China first realised the importance of rare earths some 40 years ago when Deng Xiaoping said ‘The Middle East has oil, but China has rare earths’. China proceeded to quietly invest hundreds of billions of dollars in domestic rare earth resources, research and industry – a strategy spelt out in the Made in China 2025 policy – creating a value-added supply chain for rare earth products comprising 90% of global output. The rest of the world largely stood by and watched.

Call it foresight or luck but rare earths are critical to today’s clean and green economy, where zero carbon emissions targets are the new normal. The clean energy and clean transport megatrends are major drivers of the US$3-5 billion rare earths market. China turns rare earths into finished products in high demand, including smart devices, wind turbines, electric motors, vehicles and hybrids, reaping massive returns.

China’s cleaning up. What’s wrong with that?

China’s objective is to become a sustainable, developed country of equal standing to other G20 nations. China’s transformation is the sum of many moving parts, not least of which is the race for 400 million Chinese baby boomers to become rich before they grow old, while another is the imperative to create an environmentally sustainable, circular economy.

Waging ‘war on pollution’, China is committed to reducing its reliance on coal, the source of 70% of China’s energy and much of its air pollution. The crackdown on water and soil polluters will be even more severe, with thousands of chemical factories facing the risk of closure at a moment’s notice, plus massive remediation costs.

Water scarcity in northern China has reached crisis as people, agriculture, energy and industry compete for this precious resource. Cheap Chinese exports consume vast quantities of water, but this is changing fast. China’s Three Red Lines policies balance economic growth against limited water resources and environmental sustainability. China is especially targeting polluting industries with low GDP contributions and high water and energy consumption. The textile industry and paper industries have already been hit, and the chemicals industry is next.

As China tightens environmental standards, supply chains for thousands of products are now vulnerable to long-term supply disruptions.

Stand by for rare earth supply disruptions. Whose fault are they?

Decades of unrestrained growth created unsustainable Chinese supply chains for millions of products as rest-of-world companies closed down and we bought from China. Short-sighted companies and purchasing managers, motivated by short-term objectives and personal incentives, talked about supply security and sustainability but continued to buy the lowest priced commodities from polluting Chinese companies. They demanded that new, non-Chinese projects matched, or even undercut, Chinese prices, and were not prepared to invest in new projects themselves, for their own long-term supply security. Unfortunately, it will probably take supply disruptions to change this behaviour, and that means there will be a long lag before new projects replace Chinese supply.

(Securing lithium supply for batteries is a recent exception to this behaviour pattern, but devices and vehicles requiring lithium batteries also need rare earths.)

A Chinese ban on rare earth exports happened briefly in 2010, resulting in rare earth prices jumping 300-1,600%. Japan’s response to the crisis was to create a US$1billion fund to finance non-Chinese rare earths projects to support Japanese industry. In the rush for development, most of this fund was wasted on bad projects, but Lynas emerged as a beacon of hope, and prospers today thanks to ongoing support from its Japanese partners.

In the next decade, at least three more projects of equivalent size to Lynas are needed to meet continued exponential demand growth for electric vehicles, with China leading demand. China could become a net importer of rare earths. What will other nations do then?

Australia has a new rare earths project. Who’s smart enough to hop on board?

Typically, the Chinese aren’t waiting for a crisis to occur. Private and state-owned Chinese companies are moving to control rare earth resources in Australia, Africa and elsewhere, before the rest of the world realises that we’re in hot water. The Chinese will buy cheap raw materials abroad and capture most of the value at home.

Cash-strapped small mining companies ultimately turn to China for financing and offtake agreements, and their countries consequently lose sovereignty over their resources as well as losing the greater processed value of their minerals.

It doesn’t have to be this way.

In central-west NSW, Alkane Resources’ Dubbo Project can supply 6,500 tonnes of rare earth oxides annually (including approx. 1,400 tonnes of the key rare earths used in permanent magnets), for 75+ years. The most advanced project of its kind outside China, its strategic value is clearly high and increasing. To progress the Dubbo Project to construction, Alkane Resources seeks a blend of financing from export credit agencies, strategic partners and equity and debt markets. Information for investors is available here.

New US Defence Law Bans Magnets from China, Creates New Demand Potential

  • New US Defence law prevents purchase of rare earth magnets from China
  • Signed into law by President Trump this week, increases defence spending
  • Alkane says this to increase interest in its rare earths project as independent supply source

United States President Donald Trump this week signed into law the John S. McCain National Defense Authorization Act which sets an increased budget for defence expenditure.

Section 871 of the act prevents purchase of rare earths magnets from prohibited countries, like China, Russia, North Korea and Iran.

Multi-commodity explorer and miner, Alkane Resources (ASX: ALK)* sees this as a boost for its A$1.3 billion Dubbo project, which contains deposits of rare earths, hafnium, niobium and zirconium, since it represents an independent supply source from China.

A principal use for rare earths metals from the project is magnets, used across the automobile, renewable energy, aerospace, robotics and telecommunications industries globally.

Currently China produces 85-90 per cent of the world’s rare earth magnets, some 90% of rare earths magnets consumed by the US military are produced by China, world demand is outstripping supply and a shortfall of rare earths magnets is predicted by 2020.

This development follows a statement earlier this year by Prime Minister Turnbull at the time of his visit to the United States, which indicated an intended joint cooperation with the US on rare earths and high-performance metals.

According to Alkane Managing Director, Nic Earner, US needs could not be met without investment in new rare earths projects.

“Alkane’s Dubbo project is one of the few in the world which does not have a major Chinese shareholding or offtake committed to China,” Mr Earner said.

“This US development also opens the door for Australia in the downstream value adding manufacture of rare earth magnets,” Mr Earner said.

Alkane’s Dubbo project, which has a mine life of over 70 years, is construction ready with approvals in place and is awaiting financing.

Funding of the project to date has been assisted by Alkane’s nearby Tomingley Gold Mine, which generated A$60.1 million in cash flow for the year to June 2018, and currently Alkane has cash reserves of A$80 million.

In signing the act into law, President Trump described it as “the most significant investment in our military … in modern history”.

* Owner and operator of Alkane’s Dubbo project is wholly-owned subsidiary, Australian Strategic Metals Ltd.

Media Release: PM Turnbull Flags Greater Cooperation with USA on Rare Earths and Strategic Materials

  • PM flags strengthening ties with United States
  • Key components are infrastructure, trade and a Strategic Partnership on Energy
  • Energy Partnership to focus on “rare earths and high performance metals”

As Prime Minster Turnbull concluded his recent visit to the United States, he issued a statement indicating joint cooperation with the US on rare earths and high performance metals.

This has direct relevance for multi commodity explorer and miner, Alkane Resources (ASX: ALK)*, which is moving towards final commitments and financing of its A$1.3 billion Dubbo Project which contains deposits of rare earths, hafnium, niobium and zirconium.

These minerals have been designated “critical” in the USand the Prime Minister’s statement said:

“We launched the Australia-United States Strategic Partnership on Energy in the Indo-Pacific, and intend to work together on strategic minerals exploration, extraction, processing, and research and development of rare earths and high performance metals.”

A feature of Alkane’s Dubbo Project, in central west New South Wales, is that it offers a source of critical technology metals that is independent of China and traditional titanium sands production.

According to Alkane Managing Director, Nic Earner, the governments of Australia and the United States have recognised the value of an alternative source of rare earths and high performance metals.

“As there is increasing demand for the metals that are critical for uses in aerospace, renewable energy and electric cars, Alkane as a future supplier of these metals is likely to benefit from this new government prioritisation which puts the project directly into the national interest of both countries,” Mr Earner said.

Future production from Alkane’s Dubbo Project and uses of these metals includes:

  • Rare earths – for permanent magnets for wind power turbines, electric vehicles and industrial robots, as well as applications in medical imaging and smartphones
  • Hafnium – for increasing high temperature resistance, especially in space, aerospace and separate uses in semi-conductors, with Alkane’s resource positioning it as a leading source of supply
  • Niobium – a steel strengthening agent, with aerospace applications
  • Zirconium – for ceramics, fuel cells, jet turbine coatings and medical and smartphone applications

Establishing the importance of Alkane’s independent positioning is that China currently produces more than 95% of the world’s zirconium chemicals, over 90% of high-value rare earths, with Brazil providing 85% of the world’s niobium.

Alkane’s Dubbo Project is construction ready subject to financing and has a mine life of over 70 years.

Funding of the project to date has been assisted by Alkane’s nearby Tomingley Gold Operations, which in 2017 produced revenue of A$117.5m and profit before tax and non-recurring items of A$17.1m.

* Owner and operator of Alkane’s Dubbo project is wholly owned subsidiary, Australian Strategic Materials Ltd.

 

How to secure our critical rare earths supply: lessons from China

Not to advance is to drop back – Chinese proverb

Rare earths are a group of 17 elements, known as the ‘vitamins of industry’ because many applications require only minute – but critical – amounts. Permanent magnets are an exception, being composed of 31% rare earths. Permanent magnets are the main driver of the US$3-4billion global rare earths market, accounting for just 20-25% of volume, but 80-85% of value, due to their multiple applications in advanced technology for transport, information and communications, defence and medicine. Permanent magnets are critical for high performance electric vehicles, wind turbines, smartphones, computers, and magnetic resonance imaging, for example.

Dig the well before you are thirsty – Chinese proverb

In 1992, Deng Xiaoping said ‘There is oil in the Middle East. There is Rare Earth in China.’ China’s rare earths industry began with mining and extraction and extended to downstream manufacturing. China has now conquered more than 90% of the rare earths market.

Most people are unaware of the critical role of rare earths in technologies we use daily, and on which our future industries and wellbeing will depend. Consequently, they are unaware of the threat presented by China’s near monopoly in rare earths supply. Single country domination in the production of minerals essential for clean and efficient energy generation, advanced computing and communications, and high-tech defence applications, has the potential to disrupt economies and the security of all nations. While the US, Canada, Japan, Korea and Europe are taking action to secure their rare earths supply, Australia has no such strategy in place.

When you drink the water, remember the spring – Chinese proverb

Companies who buy materials and technology without concern for the origins of their components are enabling China’s dominance of supply. Purchase specifications usually focus on performance criteria and prices, ignoring the source of components. A traceable supply chain from mineral sources through to products requires elemental mapping of materials and devices, and is the first step to addressing the risk of supply monopoly.

There are three truths: my truth, your truth, and the truth – Chinese proverb

Industry platforms quote daily rare earths prices, and news items about market developments provide other price data. Estimating supply is more difficult, as actual rare earths production appears to be much higher than official Chinese government production quotas. Inspections by China’s Ministry of Environmental Protection have identified widespread non-compliance, illegal activities and corruption in rare earths production.

The best way to determine the true state of the rare earths market is to study demand for the rare earths in permanent magnets, which leads price increases. Prices for praseodymium/neodymium (Pr/Nd) oxide, the main magnet rare earths, have increased by over 70% since the beginning of this year.

When the winds of change blow, some build shelter while others build windmills – Chinese proverb

Based on data provided by Professor Dudley Kingsnorth from the Industrial Minerals Company of Australia, some of the big changes affecting the price of rare earths in recent years are as follows:

  • In 2011, China had more than 150 companies involved in mining, processing and marketing rare earths. Consolidation since 2014 has resulted in just six state-owned enterprises, and their subsidiary companies, controlling the rare earths market.
  • In 2015, China removed export taxes of 15-25% from rare earths.
  • The Made in China 2025 initiative is providing $US hundreds of billions in Chinese government support for ten high-tech industries to achieve 70-80% domestic supply by 2025. Electric vehicles, wind power and industrial robots are included industries, which require permanent magnets.
  • Demand for Pr/Nd oxide for permanent magnets has increased from 27,500t in 2011 to an estimated 46,500t in 2017 – a compound annual growth rate of 9%.
  • China’s ‘war on pollution’ (announced in 2014) is showing signs of being a permanent campaign. The cost of rectifying the environmental damage caused by mining and processing over the past 30 years is estimated at US$30-40 billion, driving up rare earths prices.
  • Since 2011, illegal Pr/Nd oxide production has increased by around 3.3 times to 24,500t, or 50% of total supply. (This is a conservative estimate, based on Chinese domestic consumption only.) The Chinese government’s attempts to stop illegal mining – partly to prevent further environmental damage – have driven prices up as customers compete to secure legal supplies.
  • Production shortfall for Pr/Nd oxide has increased from 35-40,000t to 100-120,000t.

Opportunities multiply as they are seized – Chinese proverb

In summary, China’s ‘war on pollution’ appears to be reducing its illegal rare earth supply while domestic demand is increasing with support from government policies. With demand for permanent magnets set to grow at 9% p.a. or more, where will extra supply come from to feed insatiable demand from China and the rest of the world? Chinese companies are not waiting for legal Chinese supply to increase to match demand, but are actively seeking foreign sources of rare earths to fill the gap.

ASM’ Dubbo Project is construction-ready, having received all necessary government approvals. With a substantial estimated mine life, it will produce critical zirconia, niobium, and light and heavy rare earths.

It doesn’t require the wisdom of Confucius to know that Australians should seize this opportunity to secure our high-tech future and economic wellbeing.

The best time to plant a tree was twenty years ago. The second-best time is now – Chinese proverb

ASM