Rare Earth Elements: A Critical Challenge

This story features LYNAS RARE EARTHS LIMITED. For more info SHARE ANALYSIS: LYC

Rare earth elements are critical in decarbonising the global economy but the world wants cleaner options and less challenging alternatives.

-Rare earth elements are not rare and their critical role in decarbonisation of the global economy is hotly debated
-Heavy usage of chemicals and environmental damage are two important negatives
-Large listed companies are looking for substitution and alternatives
-Australia's largest producer Lynas is relocating away from Malaysia back onto Aussie soil

By Megan Stals, Market Analyst at Stake (https://hellostake.com/au)

Several factors are behind the complicated market dynamics for the highly specialised commodities that are rare earth elements.

A critical mineral with constrained supplies and government backed projects ought to be a golden opportunity for investors. Despite this situation, the development of rare earth element (REE) assets has not been a straightforward journey.

The group of seventeen metals are not necessarily rare as their name suggests. Rather, REEs are not usually found in their pure form, especially in quantities that can be economically extracted. Yet they remain sought after due to specific properties that make them integral to several modern technologies like the permanent magnets used in various electronics and motors.

The expected growth of these permanent magnets is significant, mainly due to their use in EVs and wind turbines. The average electric vehicle requires around 1kg of REEs and a wind turbine needs nearly half a ton. This means a steady supply of these minerals is needed by anyone who wants to take part in the decarbonisation trends. Heated geopolitics has also made achieving greater energy independence more attractive in recent times.

Demand growth will be driven by passenger EV motors, which are expected to lead demand growth and account for more than half of REE consumption by value in 2035, followed by wind power applications adding another 25%.

Source: Adamas Intelligence

While the proportion of REEs mined in China has declined from 86% of the global total in 2014 to 70% in 2022 according to the United States Geological Survey, the country still dominates upstream activities. This area requires specific technical expertise, but comes with financial reward as certain products command premium prices. Rare earth element miners typically calculate a basket price for the combined product and the majority of the value is driven by a few REEs.

Heading to the source

In particular the Neodymium (Nd) and Praseodymium (Pr) used in permanent magnets are responsible for a high proportion of earnings and projects. The most geologically abundant REE, cerium, plays a much smaller role in the profit margins. As rare earth elements are very chemically similar to each other, they’re difficult to separate after being extracted from a deposit. The process is often costly and involves large amounts of chemicals.

Many deposits also contain radioactive elements like uranium and thorium. Australia’s only major REE producer, Lynas Rare Earths ((LYC)), needs to store the resulting radioactive waste materials extracted during processing. This has been an ongoing issue for the firm and a major reason for their planned move from Malaysia to Australia. It should be noted that when western countries exported manufacturing capabilities in previous decades, they also outsourced pollution.

Now countries and companies face increased scrutiny about the sustainability of all aspects of the supply chain as they try to gain greater control over the sourcing of critical minerals. China has spent years shutting down illegal operations and the environmental damage will be long lasting. On the other hand, the nation has built up great knowledge and stockpiles due to their early prioritisation of REEs.

Shaping the path ahead

By introducing new standards for their own miners, consolidating firms and implementing annual export quotas, China yields a significant influence over global supply levels. While rare earth element markets are relatively opaque and largely depend on private contracts, prices are impacted by these factors. Private businesses might need to absorb lower REE costs for long periods when developing new projects and processing facilities.

Investors could have concerns about whether some of these activities, especially the more expensive upstream assets, would go ahead without being given precedence and financial backing by governments. Given the applications of REEs in military equipment like night vision goggles, lasers and communications systems, the US Department of Defense has a high interest and deep pockets to support projects in appropriate locations.

However, these supply concerns bring incentives to develop new methods and find alternatives for REEs. Tesla has been reducing REE content in its permanent magnets and has announced plans to avoid them entirely in future models.

Apple intends to use only recycled REEs in its products by 2025. Listed companies have the additional motivation to try to insulate themselves from raw material costs.

Whether these substitutions can be realised in the near term remains to be seen, as motors with permanent magnets are generally considered to be the most efficient and lightest option. Rare earth elements are still in demand from a variety of technologies and bringing new capacity online can take time.

Only time will tell if the long term strategic plans will prevail in the REE industry and investors will likely need to ride out the usual volatility of commodities markets.

This does not constitute financial product advice. Past performance is not indicative of future performance.

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