Sun, Jun 02, 2019 - Page 7 News List

People need to calm down about rare earth issue

By David Fickling  /  Bloomberg Opinion

Once every decade or so, the world goes through a collective freak-out about rare earth elements.

The suite of 17 elements strung toward the bottom of the periodic table are notable in that they are essential in several high-tech applications such as wind turbines, electric vehicles and lasers, and largely produced in China.

That makes them a scary-sounding weapon in economic and diplomatic disputes.

In 2010, China cut off exports of the minerals to Japan when the two governments were in dispute over ownership of some islands east of Taiwan [which Taiwan also claims]. Now, state-owned Chinese media have been clamoring to do the same again in the trade war with the US.

“If anyone wants to use products made of China’s rare-earth exports to contain China’s development,” the Global Times quoted an unnamed official as saying, the Chinese people “will not be happy with that.”

However, the truth is that rare earths are a paper tiger. As we wrote last month, the 2010 case backfired spectacularly for China. Fearful of being caught short again, Japan Oil, Gas and Metals National Corp — a government agency — went in with trading house Sojitz Corp to provide a series of development loans to Lynas Corp, an Australian company looking to build a rare-earths supply chain outside China.

The first loan, at an interest rate of about 3 percent, was astoundingly good value for a company that would not post operating cash flow for nearly five years. Australia’s Fortescue Metals Group Ltd, the world’s fourth-largest iron-ore producer that was then getting operating margins in the region of 50 percent, had to pay as much as 8.25 percent at the time for its borrowings in the US’ junk-bond market.

The result worked out well for all three players. China’s share of rare-earths production has fallen from 97 percent of the world’s supply in 2010 to about 71 percent last year. Lynas is now the second-biggest producer globally of neodymium-praseodymium, two rare earths crucial for making high-strength magnets, with about a quarter of the global market. Its sales agreement to Sojitz alone represents about 30 percent of Japan’s rare-earths demand.

Lynas’ American cousin was less fortunate. Molycorp Inc sought to turn the Mountain Pass mine in the Mojave Desert into another non-Chinese source of rare earths, but things fell down — and down — over financing its roughly US$1.7 billion in capital expenditure. An application for a US$280 million loan guarantee from the US Department of Energy was unsuccessful; US$650 million in senior secured notes were issued at 10 percent, and Molycorp then had to seek another US$400 million of support from distressed-debt fund Oaktree Capital Group LLC.

Ultimately, the whole thing ended in bankruptcy court, and Mountain Pass is now owned by two US funds and Leshan Shenghe Rare Earth Co, a Chinese rare earths processor.

All that investment was not a complete waste, though. While Mountain Pass’ new owners now export semi-processed ore for refining in China, full processing is due to restart in California by the end of next year.

Meanwhile, Lynas last week signed a joint venture agreement with Blue Line Corp to build a rival plant in Texas. If there is anything that is going to accelerate the shift to a wholly American supply chain, it is the threat of a Chinese export ban.

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