How China's Rare Earth Embargo Impacts High Tech Companies

by: Robert Castellano

Much has been written in Seeking Alpha recently about the impact of China’s rare earth element (REE) embargo. In a nutshell, China, the world’s largest rare- earths producer, cut export quotas for the minerals needed to make hybrid cars and televisions by 72 percent for the second half, raising the possibility of a trade dispute with the U.S.

Shipments will be capped at 7,976 metric tons, down from 28,417 tons for the same period a year ago, according to data from the Ministry of Commerce.

China’s rare earth industry started in 1950’s and has become the largest country of rare-earth deposits, producer, consumer and exporter. During the past twenty 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 ROW being the ROW allowed China to take away business because of cheap labor.

At the same time, China doesn’t only want to be a miner of REE, it wants to be involved in the more lucrative end products – products such as wind turbines, consumer electronics, batteries for hybrid and electric vehicles.

It’s been a wake-up call for non-Chinese mining operations, governments, and corporations to take proactive steps to get out of the stranglehold China has on the rest of the world.

In our report “Rare Earths Elements In High-Tech Industries: Market Analysis And Forecasts Amid China’s Trade Embargo,” we estimate that the Chinese held 90.0% of capacity of rare earth oxides with 103,300 tons, but its share will drop to 67.2% in 2014 based on output of new mines coming onstream. China’s capacity will only increase 10.4% to 114,000 tons between 2010 and 2014, whereas non-Chinese capacity will increase nearly 5 fold, from 11,500 to 55,800 tons.

That should somewhat alleviate the problem long term, but what about the short-term ramifications? Let’s take a look as some of the high-tech applications detailed in our report:


Rare earth materials are used in several applications in semiconductor manufacturing. I focus here on two - (1) High-k dielectric films and (2) Polishing materials.

Rare earth oxides have relatively higher dielectric constants and are suitable as gate dielectrics. Semiconductor manufacturers such as Intel (NASDAQ:INTC), Advanced Micro Devices (NYSE:AMD), Texas Instruments (NYSE:TXN), IBM (NYSE:IBM), STMicroelectronics (NYSE:STM), Taiwan Semiconductor Manufacturing (NYSE:TSM), and Freescale Semiconductor (NYSE:FSL) have replaced the transition-metal oxide hafnia (HfO2) as a 1st generation high-k gate dielectrics for yet better performing gate dielectrics for MOSFETs with REE-based gadolinium oxide, Gd2O3, attracts more attention than other oxides in this class.

Only 744 tons of Gadolinium were mined in 2009, and while Gd exhibits the best physical and chemical properties for high-k semiconductors, alternative materials may be required in the event of high prices or shortfalls.

Ceria is the only rare earth with the chemical and mechanical properties to be utilized in STI CMP. We will see STI slurry prices in the $70 per gallon range in the short term. Slurry suppliers need to reduce the amount of ceria solids in the slurry to keep prices stabilized, yet maintain the slurry’s high performance and selectivities already standard in IC manufacturing.

Hard Disk Drives (HDDs)

Rare earth materials are used in several applications in HDD manufacturing. I focus here on three - (1) Neo-magnets, (2) Glass substrates, and (3) Polishing materials. Companies impacted are Seagate (NASDAQ:STX) and Western Digital (NYSE:WDC).

For magnets, 50% of the world's neodymium magnets are currently used in HDDs with each HDD typically containing two magnets. The magnets are used in the actuator - a device which moves the actuator arm on the tip of which is the head which reads and writes data to/from the ultra-delicate platters. Driving the arm using magnets means that mechanical wear and tear is not an issue - unlike old-fashioned stepper motor powered hard drives.

Rare-earth magnets account for 80 percent of the market for “permanent” magnets that retain their charge, up from zero in 1980

To make matters worse for substitution of Neo magnets, according to Lynas Corporation (OTCPK:LYSCF) in 2010 there was a demand for 29,400 tons of Neodymium and a supply of only 22,729 tons. For 2014, there will be a demand for 45,400 tons and a supply of only 31,538 tons, making a shortfall of nearly 14,000 tons.

For slurry, manganese oxide abrasives can be used to replace cerium oxide abrasives for the polishing of glass substrates. Using ceria, the mechanism is a chemical interaction with the glass. There is no chemical interaction with manganese oxide. Therefore, mechanical polishing is the mechanism. Parameters need to be adjusted to maximize the abrasive density, pressure, and speed of the process.

For polishing glass disks used in HDDs for mobile applications, there is no substitute for ceria.

Displays – FPD/CRT

Rare earth materials are used in several applications in flat panel display/cathode ray tube (FPD/CRT) manufacturing. I focus here on two - (1) Polishing materials and (2) Phosphors. The leading U.S. company impacted is Dow Corning.

Cerium oxide, through its unique physical and chemical properties, has been the building block upon which glass polishing has been based for over 40 years. It is a very efficient polishing compound as it removes glass both by its chemical dissolution and by mechanical abrasion. Ceria polishing powders are used to polish CRT, PDP and LCD glass.

Europium and terbium are the key materials for phosphors. Clearly the market for PDP TVs is flat, so use of phosphors for these products is will be flat in the near and probably long term. The CRT market is rapidly declining, minimizing the need for phosphor.

A typical laptop display uses a tiny Cold Cathode Fluorescent Lamp (CCFL) for the backlight. One of these small tubes is able to provide a bright white light source that can be diffused by the panel behind the LCD. The light we see from a fluorescent tube is the light given off by the phosphor coating the inside of the tube. We are seeing a move to LED backlight TVs (LED TVs), impacting the phosphor consumption for LCD TVs. CCFL will continue to be used for notebook displays and small LCD TVs.

Europium and terbium are the key REE materials for phosphors. For both, there was a shortfall in 2010 and an anticipated shortage in 2014 according to Lynas.

Disclosure: No positions