Brad Pyles
Into Perspective

An Overview of Rare Earth Metals

By, 11/30/2010

Rare earth metals have recently become a popular yet often misunderstood topic. Below are answers to some common questions.

What are rare earth metals, and how rare are they?

Rare earth metals are typically considered the 15 chemically similar elements known as lanthanides, plus two other non-lanthanide metals (see Exhibit 1). Rare earth metals are commonly used in small quantities in the defense and technology industries for everything from magnets to lasers.

Exhibit 1: Rare Earth Metals

Despite their name, rare earth metals actually aren't very rare. The most common of them are more abundant than copper. A recent USGS survey estimated the US has 13 million metric tons of reserves spread throughout the country with significant deposits in fourteen states. By comparison, the US uses roughly 10,000 metric tons a year. That means the US has 1,300 years of reserves at current consumption rates!

The USGS estimated global reserves at 99 million metric tons with China holding the largest quantity at 36%. But according to the survey, global reserves may even be much larger because very little exploration has taken place outside of China in the last 50 years.

If they're so common, how did rare earth metals get their name? They are rarely discovered in a pure form. Instead, rare earths are commonly found strongly bonded to other materials. These bonds are so strong it takes a very harsh chemical process to separate them into pure form. The separation process can be very toxic to the surrounding environment if proper precautions are not followed.

The media speculates China is "strategically" hoarding rare earths and can hurt the global Technology industry if they so desire. Is this true?

Not exactly. It's true that China is the primary producer of rare earth metals, accounting for over 95% of global production. However, as previously outlined, this is not due to a lack of supplies in other countries.

The US was once a major producer of rare earth metals, but its mines were eventually shut due to environmental concerns. The last two US mines were closed in 2002. While US production declined, China's production grew. As China began economically developing in the mid-1980s, it rapidly became the low-cost producer of rare earth metals due to abundant reserves and lax environmental controls. This drove everyone else out of the business, leaving China as virtually the lone global supplier (see Exhibit 2).

Exhibit 2: History of Rare Earth Metal Production by Region

Source: Raremetalmining.com, from Russian Journal of Non-Ferrous Metals, based on USGS data

However, throughout China's development, environmental standards have improved, and the government no longer wants to subsidize the world's environmentally toxic industries. Therefore, the Chinese have lowered export quotas of rare earth metals eight years in a row—cutting the quota 40% in 2010 alone. It appears the goal is ending dependence on China for rare earth metals. If the Chinese wished to negatively disrupt the Technology sector, they could abruptly end all rare earth exports. As it stands, the government is gradually cutting export quotas to minimize global price shocks and give the rest of the world time to restart development of their own rare earth metal deposits.

While rare earth metal prices have temporarily risen tied to the reduction in supplies, it appears any supply shortage will likely be a relatively short-term phenomenon. Significant deposits in Australia and the US are now back under development with new environmental permits. The Rare Earth and Critical Materials Revitalization Act was recently passed by the US House of Representatives to subsidize rare earth metal production and is awaiting consideration by the Senate. Due to these developments, it appears unlikely the global defense or technology industries will be significantly constrained by a shortage of rare earth metals in the near future.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.