CUT DEEP into the desert rock of southern California are the jagged tiers of an open-pit mine. Mountain Pass is North America’s only mine of rare-earth metals, used in everything from fighter jets to the drivetrains of electric cars. In 2015 Mountain Pass shut, unable to compete with rare-earth producers in China. But the mine has begun a new chapter. MP Materials, which bought the mine in 2017, said on March 18th that production in 2020 jumped by 40%. More expansion is planned. With grants awarded by America’s defence department last year, MP Materials will build facilities to process rare earths, part of an effort to secure supply independent from China.
America’s support of Mountain Pass points to a broader phenomenon. The trade war with China and covid-19’s disruptions to supply chains have stoked fears of dependence on foreign production of medicine, semiconductors and more. Minerals have attracted particular attention, both because they are essential to modern technologies such as batteries, laser-guided missiles and wind turbines and because many minerals’ supply chains are controlled by China. Faced with muscular Chinese industrial policy, governments that long trusted companies to manage their own supply chains are stepping in.
In February Joe Biden’s White House issued an executive order to review the vulnerability of supply chains key to economic and national security, including critical minerals and batteries. The European Commission in September launched a public-private alliance to secure key raw materials. In March Australia unveiled a plan for processing critical minerals, inviting companies to apply for public funds, and Canada published a list of 31 critical minerals, part of a scheme to boost supply. But if minerals show governments’ increased appetite for intervention, they also reveal the limits of what that intervention might achieve quickly. China remains at least a decade ahead. Shenghe Resources, controlled by the Chinese state, owns about 8% of MP Materials’s shares. It is also Mountain Pass’s sole customer—the mine sends its entire output to China for processing.
America long guarded against supply disruptions by hoarding minerals in a national stockpile. After the fall of the Soviet Union, the need for a stockpile seemed less urgent and most of its contents were sold; proceeds went towards other military expenses and the building of a memorial to the second world war. What remained in government stores was of questionable utility. In 2008 a committee for the National Research Council, charged by Congress with assessing the remaining stockpile, concluded: “The department of defense appears not to fully understand its need for specific materials or to have adequate information on their supply.” America’s strategic plan was, essentially, nothing of the kind.
Rare vision
China took a different approach. In the 1980s Deng Xiaoping recognised the importance of the country’s deposits of rare earths such as neodymium and praseodymium. “The Middle East has its oil,” he said, “China has rare earths.” Targeted support for mines and domestic processing meant that by 2010 China controlled about 95% of the mining of rare earths. The rest of the world was caught off guard when, that year, China sharply tightened the metals’ export. The move was aimed in part at rationalising a domestic industry plagued by illegal mining and environmental degradation—by one estimate, 300 square metres of topsoil was removed to recover every tonne of rare earth in southern China, with more than 150 square kilometres of forests destroyed by rare-earth mining near Ganzhou. However some observers saw the export restrictions as part of a broader dispute with Japan, a large importer, over the Senkaku Islands. Politicians in Japan, Europe and America woke up to the possibility that China could use its dominance in a key commodity to punish rivals.
Japan, Europe and America prevailed against China’s export quotas in a dispute before the World Trade Organisation. But in recent years concern about supplies of rare earths and other minerals has intensified. That is in part because China has continued to invest not just in rare earths, but in foreign mines of key metals, which are shipped to China for processing—China processes 72% of the world’s cobalt and 61% of its lithium, according to the Centre for Strategic and International Studies, a think-tank, and BloombergNEF, a data group. It is also because, even if governments in America, Europe and Japan were comfortable with China’s heft in mining and processing, total investment in key minerals does not look commensurate with demand for them.
As ambitions for clean energy grow, the European Commission reckons that its members will need up to 18 times as much lithium and five times as much cobalt in 2030 as it does now. “Europe’s transition to climate neutrality could replace today’s reliance on fossil fuels with one on raw materials, many of which we source from abroad and for which global competition is becoming more fierce,” the commission argued in September. If the world moves to limit the rise in temperatures to 2°C above pre-industrial levels, the World Bank estimates, global production would need building up. By 2050 output of lithium, cobalt and graphite, for instance, would have to be more than 450% higher than in 2018 to meet demand for batteries. The bank expects recycling to help a bit, but large investment in new mines is still required. In a preview of what might be to come, in recent months rising demand and constrained supply have pushed up the prices of lithium, cobalt and neodymium-praseodymium oxide.
Faced with such figures, mining may seem set to attract a flood of capital. Indeed the craze for special purpose acquisition companies (SPACs) has reached even the obscure metals on the lower rows of the periodic table—one such SPAC helped raise over $500m for MP Materials in November. But it is possible that total investment remains meagre.
Mining projects are notoriously risky, with investors wary that volatile commodity prices will threaten a given mine’s economics. Some metals, such as lithium, still have no futures price, clouding the outlook further. “The markets are not as transparent or as fluid as oil,” points out Morgan Bazilian of the Colorado School of Mines, “and there’s not good price discovery.”
It doesn’t help that, as investors become more concerned about environmental, social and governance factors, many mines tick all the wrong boxes. Cobalt mining is concentrated in the Democratic Republic of Congo, long plagued by corruption and child labour. Countries with well established legal systems are theoretically more attractive, but bring their own problems. Lithium Americas, a Canadian company, wants to build a lithium mine in northern Nevada. It faces litigation over the effect on local groundwater and the greater sage grouse. By the middle of the 2020s, says Andy Leyland of Benchmark Mineral Intelligence, a research outfit, shortages of minerals for lithium-ion batteries could reverse the long decline in the price of batteries. Raw materials comprise about two-thirds of batteries’ costs.
Rare earths illuminate the problem. “If you have a back yard with rocks, you have a rare-earth mine,” says James Litinsky, the chief executive of MP Materials. “The challenge is the economics.” China’s control of the processing industry gives it huge influence over rare earths’ prices, which has dissuaded a surge of investment elsewhere. If that wasn’t disincentive enough, separating rare earths has historically been both complex and environmentally damaging—rare-earth minerals are often nestled beside radioactive ones. And, though rare earths are essential to enormous sectors such as defence, transport and personal electronics, collectively worth trillions of dollars, the market for rare-earth oxides amounts to only about $5bn, according to Adamas Intelligence, a research group.
The result is that rare earths are attracting some investment, but not enough. Mountain Pass, says Mr Litinsky, can produce and separate rare earths in a sustainable manner, the first steps toward creating a secure supply chain. However Adamas estimates that by 2030 the world will face a shortage of neodymium-praseodymium oxide equivalent to about three times the yearly output of Mountain Pass. In the meantime Adamas expects prices to climb by 5-10% a year.
A Japanese lesson
Japan provides one example of how governments outside China might intervene. After China tightened exports of rare earths, Japan moved more aggressively to shore up supplies than did governments in America or Europe. Most important, in 2011 the state-backed Japan Oil Gas and Metals National Corporation (JOGMEC) and Sojitz, a Japanese trading firm, said they would supply $250m in loans and equity to Lynas, an Australian miner of rare earths. In exchange, Japan would receive about 8,500 tonnes of rare earths each year, equivalent to about 30% of Japan’s demand.
Japan’s support of Lynas is broadly viewed as a success. But the strategy brings risks. After Chinese exports eased and rare-earth prices plunged, Lynas was on the brink of collapse, so in 2016 JOGMEC and Sojitz agreed to restructure the company’s debt. Lynas’s processing facility in Malaysia faced controversy over radioactive byproducts. JOGMEC’s other efforts to secure rare earths, for instance ventures started over a decade ago in Kazakhstan and Canada, have to date borne little fruit.
Some carmakers are beginning to think more seriously about battery supply chains. Tesla has signed offtake agreements with Glencore, which mines cobalt in the Democratic Republic of Congo, and this month the company became an adviser to a nickel mine in New Caledonia. Its boss, Elon Musk, has even proposed that Tesla mine its own lithium in Nevada using novel techniques. However that plan has met scepticism from the mining industry itself and the broader situation looks sufficiently untenable that politicians in America and Europe are stepping in. “There’s beginning to be a return to favour of more interventionist policies in activities which might have been viewed as strictly commercial,” argues Roderick Eggert of America’s Critical Materials Institute.
In Europe, mining and processing projects are now eligible for financing from the European Investment Bank. The American defence department’s recent grants include not just those to Mountain Pass but to Lynas, to build a rare-earths processing facility in Texas. Last year America’s Development Finance Corporation for the first time took a direct stake in a company: it invested $25m in TechMet, a firm whose projects include a nickel and cobalt mine in Brazil.
Such steps are not without controversy. Europe’s public-private effort to support critical minerals includes a rare-earth project in Greenland in which Shenghe Resources has a stake. Concern about that project’s environmental risks has galvanised an election in Greenland on April 6th. In America senators including Ted Cruz and John Barrasso bristle not at government intervention, but that the government should support mining and processing elsewhere. (Messrs Cruz and Barrosso, both Republicans, represent states that have their own potential rare-earth projects.) Marco Rubio, another Republican senator, prefers creating an American co-operative of rare-earth suppliers, exempt from antitrust policy. Mr Leyland of Benchmark Mineral Intelligence expects some uptick in American mining, with limits. “These are going to be global supply chains,” he says, “because you can’t change geology.”
Mr Biden’s executive order on supply chains may turbocharge government involvement; by early June his deputies must present recommendations for shoring up supply chains. JOGMEC continues to show how governments’ activities might expand—its recent investments include mining for cobalt from Japan’s seafloor.
This may bring results. The oil embargoes of the 1970s prompted impressive innovation in oil drilling and alternative energy. However progress then, as now, can be slow. Investments in recycling and in alternatives to scarce metals are both worthy and may take a decade to produce the desired outcome. A typical mine, Mr Leyland estimates, can take at least five years to come online and sometimes many more.
That poses a problem. Governments face two sources of intense time pressure: uncomfortable dependence on China as tensions escalate and the urgent need to limit climate change by deploying clean-energy technologies. “Hopefully China will have more competition,” argues Brian Menell, TechMet’s chief executive, “but they have a big head start.” The main risk to clean-energy adoption, argues Erez Ichilov of Traxys, a trading house that backs mines of key battery metals, is bottlenecks in supply. “It takes time to develop the mines; it takes time to develop the plants.”
Source: Finance - economist.com
