Rare Earths Not So Rare?

• The bankruptcy of the main US producer of "rare earth" materials signals the end of a multi-year crisis over their global supply and cost.

The announced Chapter 11 filing of US-based rare earths mining and refining company Molycorp effectively marks the end of a crisis that managed to escape the notice of most people. Rare earths are elements of low abundance, compared to the ores of metals like iron and copper. Despite their relative scarcity, they have proved extremely useful in industrial applications including renewable energy technologies. Five years ago it appeared that China had cornered the market on rare earths and was exercising its market power to, among other aims, lure businesses reliant on these minerals to shift their operations to China.

Molycorp's modernization of its rare earth mine in California and subsequent expansion into other aspects of the business were responses to a perceived global crisis. China's restrictions on rare earth exports threatened the economic competitiveness of hybrid and electric cars, wind turbines, non-silicon solar cells, compact fluorescent lighting (CFL), and other devices of interest to energy markets and policy makers.

The situation also raised concerns in the defense industry, due to the importance of rare earth metals and alloys in the manufacture of missile components, radar and sonar equipment, and other military hardware. Governments created or expanded strategic stockpiles for these materials, and took other steps to manage their reliance on supplies from China.

However, as reported by the Council on Foreign Relations last fall, the effectiveness of efforts by the Chinese government to leverage their control of rare earth supplies was short-lived. Its policies led to mostly market-based responses, involving both supply and demand, that undermined China's near-monopoly and ultimately contributed to Molycorp's present financial difficulties.

Molycorp wasn't the only company to bring new supplies into production, or the only one to struggle as the crisis unwound. New supplies were already in the pipeline at the time China restricted its exports, in reaction to price spikes that preceded the policy as global demand bumped up against the output of China's mines and processing facilities. Nor was government control of China's fragmented rare earth industry sufficient to prevent continued exports exploiting loopholes of the restrictions.

Finally, and probably most importantly for both China-based and non-China-based producers, innovators in the industries using these materials found ways to make do with lower proportions of rare earths in permanent magnet motors and generators, or to do without them altogether.

The upshot from an energy perspective is that if anything will slow the expansion of wind and solar power, hybrid cars and EVs, and other alternative energy and energy-saving technologies, it is unlikely to be a shortage of rare earths. They may be rare relative to other industrial commodities, but in the small proportions used it seems they are not rare enough to pose more than a temporary bottleneck.

Commodity Cycles and Renewable Energy Costs

It's an article of faith for many that the costs of renewable energy sources will continue to decline, even while the costs of many other forms of energy increase. This view is supported by the impressive experience with both wind turbines and solar photovoltaic (PV) installations over the last couple of decades. The latest survey of US solar cost trends from the Lawrence Berkeley National Laboratory (LBNL) showed that between 1998 and 2009, the capacity-weighted average cost of PV installations fell by more than 30%, from $10.80/Watt to $7.50/W, with another drop of roughly $1/W occurring during 2010. However, it's important to think about what's behind these trends when assessing their future progression. Continued cost declines are subject to many uncertainties, not the least of which is the current rising tide of commodity prices as the global economy recovers.

The rationale for continued cost declines that I encounter most often is based on volume: If we install more wind and solar capacity, costs will fall in a virtuous cycle, making subsequent installations cheaper and prompting even more of them. The underlying logic behind this argument derives from empirically observed "experience curves", in which cost components such as manufacturing fall by a set percentage for each doubling of cumulative output. The problem with these curves is that they tend to flatten out fairly quickly, delivering their maximum effect in the early years of a technology, when doublings are frequent. Then they slow significantly as the technology gains scale and the interval between doublings grows. A look at global wind turbine capacity shows that it doubled four times between 1996 and 2008. At the currently expected pace of additions, the next twelve years could produce just two or three doublings. And as the experience curve effect slows, other factors including commodity costs can overwhelm it.

We saw that a few years ago, when the boom economy stoked by the inflating global financial bubble drove up commodity and construction costs to such a degree that wind project costs stopped falling and began to rise. These pressures eased after 2008, mainly because the recession and financial crisis reduced overall demand for construction and raw materials, while the rapid growth of renewable energy equipment manufacturing, especially in Asia, led to overcapacity and stronger price competition. That probably accounts for much of the effect that LBNL saw in its solar trends in the last two years, rather than the sort of scientific and engineering improvements that drive experience curve effects.

So what is likely to happen as the economy rebounds and the slack that developed is taken up? We're already seeing the early results in higher prices of raw materials such as steel. And higher prices for oil and coal, which are important inputs in the extraction and processing of many other raw materials, should intensify the pressure already being felt from the demand in developing Asia. For renewables, this could be further complicated by tightening supplies of critical materials such as rare earth metals, Tellurium, Lithium and other key ingredients of electric motors, thin-film solar modules, and electric vehicle batteries. Toyota and other makers of hybrid and electric vehicles are working on ways to circumvent these materials, but the results might not come fast enough to prevent a crunch.

The renewable energy industry is counting on a return to economic growth to boost demand for electricity. Together with government-mandated renewable energy targets, that should translate into increased demand for equipment like wind turbines and solar panels. However, if the underlying source of that demand increases their material and construction costs just as governments are coming under increasing pressure to reduce subsidies for the industry, the result might be that the end-users of these products could see their effective costs go up for the first time in several years. That would be a rude shock for those who believe that these costs must inevitably fall as installations grow.

China's Leverage on Renewable Energy Increases

Last month's announcement that China was cutting its export quota for rare earth elements by 72% for the second half of 2010 didn't seem to attract wide attention, but now that the other half of its strategy has been revealed, that might change. Today's Wall St. Journal reported overtures from Chinese officials to firms interested in accessing these materials, which are critical for the production of some components of renewable energy technology and advanced vehicles. The apparent deal: invest in rare earth processing in China to obtain access, with the output from new facilities incorporated into products for the rapidly-growing internal market or export. Not only would this practice compound the difficulties faced by US and other foreign renewable energy firms seeking to market their products in China, it could also make it much more expensive to produce them outside the People's Republic.

For some time I've been intrigued by growing concerns about access to rare earths and scarce metals. These include the true "rare earths" from the periodic table of the elements, as well as other scarce elements such as Indium, Gallium and Tellurium. Their uses include solar panels, wind turbines, hybrid car motors and batteries, and other "clean energy" devices, along with many non-energy applications. As the Journal noted, China accounts for over 90% of global production of the rare earths and is among the top producers of the other scarce materials. And although China doesn't have a natural monopoly on them, it currently enjoys an effective one, as plans to resume or ramp up production in North America, Australia, South Africa and elsewhere will require both time and significant capital.

This development poses an unwelcome challenge to a variety of renewable energy firms. At a minimum, it could significantly raise their production costs, just as they are trying to move down the experience curve in order better to compete with conventional energy--including newly-abundant natural gas--and at the same time that governments around the world are being forced to cut back on subsidies, due to fiscal imbalances and the weak economy. Any company that depends on a stable, let alone expanding supply of these ingredients must either be looking seriously at relocating production to China or making potentially fundamental changes in their technology to switch to more abundant raw materials. Green jobs, perhaps, but where?

China's efforts to capture higher returns and more of the value-added for these scarce materials shouldn't surprise anyone; it's basic economics. OPEC tried this strategy in the 1980s, when it built export refineries in the Middle East and bought existing ones elsewhere. This didn't work out very well, because it contributed to a persistent glut of global refining capacity that, with the exception of a few standout years, generally benefited consumers more than producers. China could experience something similar in rare earths, once new, non-Chinese sources are brought online--assuming they are. Mining and processing such deposits entails large capital costs that, once invested, can set up a classic boom-and-bust commodity cycle. Unfortunately, the prospect of a future rare earth glut will be of little comfort to makers of wind turbines, advanced car batteries, and thin-film solar cells for the next several years, at least.