Retaking Control Of The U.S. Rare Earth Supply Chain
Jun. 23, 2020 11:45 AM ET|4 comments | Includes: LYSCF, TMRC, XAR
Robert Castellano
Robert Castellano
Semiconductor Deep Dive
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Summary
U.S. trade tensions with China have highlighted the world’s dependence on China for rare earth supply given it controls 80% of the market.
Not only does China dominate rare earth mine production, China acquired from the U.S. nearly all of the ability for processing the rare earth ore into end products.
The U.S. government is now actively awarding funds to mining companies to retake control of the rare earth industry, from mining to completed magnets.
This idea was discussed in more depth with members of my private investing community, Semiconductor Deep Dive. Get started today »
Through a series of clever, systematic manipulations China now owns the rare earth element market. During the past 20 years there has been an explosion in demand for many items that require rare earth metals. China being China capitalized on its rich REE deposits and cheap labor to drive down prices to a point that nearly every mine outside China was forced to shut down because they couldn't compete on price. The rest of the world (ROW) being the ROW (including the U.S.) allowed China to take away business because of cheap labor.
Then things changed once China controlled the industry when in 2009 and 2010 the country implemented stringent export quotas, choking off much of the supply of rare earth elements and their byproducts to technology companies and high-tech manufacturers around the world. The quotas, which were first implemented in 2009 and then cut by a further 35% in 2010, sparked a panic, with rare earth prices spiking. The price of rare earth byproduct dysprosium oxide, for example, shot up from $166 per kilo in 2010 to nearly $1,000 per kilogram in 2011.
According to our report entitled "Rare Earth Elements In High-Tech Industries: Market Analysis And Forecasts Amid China's Trade Embargo," prices began dropping in 2012 and stabilized in 2013, as shown in Chart 1 for Neodymium, a primary component of NdFeB magnets.
Chart 1
Ten years ago I discussed China's rare earth dominance in a Nov. 5, 2010, Seeking Alpha article entitled "How China's Rare Earth Embargo Impacts High Tech Companies." Ten years have elapsed since the article, and in light of expanded applications for REE, an impending China-U.S. trade war, and a very different REE industry outside China, I want to expand and update my analysis of the market.
China was able to dramatically impact REE prices because the country excavated more than 90 percent of rare earth elements produced in the world in 2010. Then, it acquired nearly all of the ability for processing the rare earth ore into end products.
These processing capabilities include:
Separating the rare earth ore into individual rare earth oxides;
Refining the rare earth oxides into metals with different purity levels;
Forming the metals into rare earth alloys; and
Manufacturing the alloys into components, such as permanent magnets, used in defense and commercial applications.
In other words, even if there are alternative sources of rare earth minerals mined in the U.S, there are no sizable refineries for converting the rare earths from rock to separated elements.
Rare Earths for Defense
Table 1 presents a list of REE and various applications. Many are used in defense applications, and I detail this section because of the DoD interest in REE.
Rare earth metals are used in commercial and defense applications. For example, the directional capabilities of precision-guided munitions in missiles and guided bombs rely on rare earth materials, as do lasers used in target interrogators, target designators and rangefinders. Rare earth materials also are found in electronic counter measures, coatings, optical equipment, as well as in the electrical systems in aircraft, which use samarium-cobalt permanent magnets to generate power.
Chart 2 illustrates the type of military weaponry, the REE used, and applications.
Chart 2
Virginian-class nuclear-powered submarines each use 9,200 pounds of rare earth metals, while Arleigh Burke guided missile destroyers require about 5,200 lbs of rare earth metals - there are 66 destroyers in service and 14 either under construction or on order.
The F-35 Joint Strike Fighters each require 920 lbs of rare earth metals. Current Department of Defense plans call for acquiring a total of 2,456 F-35s1 for the Air Force, Marine Corps, and Navy at an estimated total acquisition cost, as of December, 2019, of about $397.8 billion in constant (i.e., inflation-adjusted) FY2012 dollars. Two U.S. allies are expected to purchase hundreds of additional F-35s, and eight foreign nations are cost-sharing partners in the program.
Defense contractors BAE Systems (OTCPK:BAESY), Northrup Grumman (NOC), General Dynamics (GD) and Lockheed Martin (LMT) are among those that would be impacted by a rare earth embargo. These companies are in the top 10 holdings of the SPDR S&P Aerospace & Defense ETF (XAR).
U.S. Efforts to Revive REE Supply Chain
Ten years ago I discussed China's rare earth dominance in a Nov. 5, 2010, Seeking Alpha article entitled "How China's Rare Earth Embargo Impacts High Tech Companies." Ten years have elapsed since the article, and in light of expanded applications for REE, an impending China-U.S. trade war, and a very different REE industry outside China, I want to expand and update my analysis of the market.
China was able to dramatically impact the REE prices because the country excavated more than 90 percent of rare earth elements produced in the world in 2010. Then, it acquired nearly all of the ability for processing the rare earth ore into end products.
These processing capabilities include:
Separating the rare earth ore into individual rare earth oxides;
Refining the rare earth oxides into metals with different purity levels;
Forming the metals into rare earth alloys; and
Manufacturing the alloys into components, such as permanent magnets, used in defense and commercial applications.
In other words, even if there are alternative sources of rare earth minerals mined in the U.S, there are no sizeable refineries for converting the rare earths from rock to separated elements.
Lynas and MP Materials
That was supposed to change when Australia’s Lynas Corp. (OTCPK:LYSCF) and privately-held U.S. firm MP Materials both said on April 22 they had been awarded funding by the Pentagon for rare earths separation facilities. Lynas is the only significant producer and processor of rare earths outside of China. Lynas sources its rare earths from a mine in Western Australia and currently processes the ore in Malaysia.
It was Lynas' U.S. venture partner Blue Line Corp that was awarded the Phase 1 funding by the U.S. Defense Department for the proposed rare earths processing operations in Texas for the heavy rare earths used in military applications.
Then on May 22, the DoD reversed its decision to fund the two projects - a step backward for President Donald Trump’s plan to redevelop the U.S. rare earths supply chain and reduce reliance on China.
U.S. Senator Ted Cruz and five other senators sent a letter to the Pentagon pushing it to only fund U.S. rare earth projects. In addition to Lynas being an Australian company, it was determined that a Chinese company held a minority stake in MP Materials.
USA Rare Earth and Texas Mineral Resources
While that program is put on hold, another just received permits to begin a pilot plant. USA Rare Earth, LLC, the funding and development partner of the Round Top Heavy Rare Earth and Critical Minerals Project in West Texas, together with Texas Mineral Resources Corp. (OTCQB:TMRC), announced on June 11, 2020, that its rare earth and critical minerals pilot plant processing facility in Wheat Ridge, Colorado, has received its required permits and its pilot plant is now being commissioned.
With the Round Top project, the processing facility and the recent acquisition (April 7, 2020) of the neo magnet plant formerly owned and operated by Hitachi, USA Rare Earth has a three-pronged mine-to-magnet strategy to establish a resilient, 100%-domestic supply chain for rare earth magnets, which are essential for modern manufacturing ranging from defense applications to wind turbines, electric vehicles, smart phones, advanced medical devices, and the physical backbone of emerging 5G networks.
At 2,000 tonnes per year, the USA Rare Earth Magnet Plant would produce approximately 17% of the current U.S. market, and would generate more than $140 million in annual sales. At present, no other NdFeB permanent magnet manufacturing plant is operational in the Americas.
Investor Takeaway
Increased U.S. trade tensions with China have once again highlighted the world’s dependence on China for rare earth supply given it controls 80 per cent of the market. In 2019, the China-Trade war promoted rumors of a REE embargo, and that the Chinese could readily impose a tariff on rare earth elements as it did beginning in 2010. Chart 3 shows the peak in Neodynium prices May 2019. So far in 2020, there is no evidence of an increase in price.
Source: Trading Economics
Because of the probable re-approval of the U.S. DoD Phase 1 funding, now may be the time to consider Lynas. Although the stock is down 30% year-to-date, it's up 4,367% over five years.
Texas Mineral Resources Corp. is another play following approval of permits to initiate the construction of a pilot plant that will refine rare earth ores into rare earth magnets. TMRC is up 585% YTD.
Another play is SPDR S&P Aerospace & Defense ETF XAR. Although down 14% YTD, it was up 40% in 2019 and holds a portfolio of aerospace and defense stocks with a 40/40/20 weighting among large, mid, and small caps, respectively. Defense and military contractors will benefit from sources of rare earth metals in the U.S. instead of China.
This free article presents my analysis of this semiconductor equipment sector. A more detailed analysis is available on my Marketplace newsletter site Semiconductor Deep Dive. You can learn more about it here and start a risk free 2 week trial now.
Disclosure: I/we have no positions in any stocks mentioned
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