Rare metals are "the lifeline of industry"
Japanese Rare Metals Task Force
For an excellent primer on rare earth (NYSE:RE) metals read this article. They are present in small quantities in almost every technological device from TVs to electric windows. However with the world turning to technology to ameliorate our energy crisis, the demand for REs is set to ramp up. Are there enough REs to go around?
The current state of REs may be summarised by a couple of graphs (Source USGS):
Despite having just 30% of RE reserves, China has a virtual monopoly on the production of REs. The reasons for this are that China's RE mines are relatively high grade and low cost, which led to a collapse in production in the US. To analyse the situation going forward I'm going to drill down into the use of Neodymium-Iron-Boron magnets (NdFeB).
"The global market demands for rare earth resources can be satisfied if the demand for the NdFeB industry is satisfied"
Prof. Feng Hong: CEO, China Rare Earth Office
This is true because REs always occur together and thus if Neodymium is going to be extracted, the others will be also. NdFeB magnets are the fastest growing segment of the rare earths.
The US government studied the supply of REs and published a criticality index:
Tonnage of NdFeB magnets is growing at 16% per year:
What this graph shows is that the majority of NdFeB magnets are now made in China (77% based on the above graph) and this share is growing. The three emerging big users of NdFeB magnets are electric bicycles, hybrid cars and wind turbines.
There are 100 million electric bicycles (EBs) on the road in China today; they outnumber cars 4:1. Of the 23 million EBs sold worldwide last year, 21 million were sold in China. The following graph delineates this (Source):
These EBs contain lightweight, compact, NdFeB magnets for their miniature motors. They use approximately 350grams of NdFeB per bicycle. The chemical formula is (Nd-2-Fe-14-B) so this yields 86g Nd/EB. In 2007, EBs accounted for 5800 tons NdFeB or 13% of the worldwide total. I don't have figures for the neodymium produced in 2008 but if it was the same as 2007, the share would have increased to 18%. The average growth rate for the past 8 years was 35%. If this continues then by 2014 Chinese demand would be 100 million/year or 35000 tons NdFeB.
There does not appear to be an alternative to NdFeB in bicycles due to space and weight considerations. The price of NdFeB magnets are about $40/kg so the bicycle contains $14 of magnets and $1.70 of Nd @ current $20/kg.Nd. EBs retail @ $290 and neodymium represents 0.6% of that.
Hybrid electric vehicles (HEVs), plug-in hybrids (PHEVs) and pure electric (EVs) all require an electric motor. At present the vast preponderance of HEVs, including the Prius, use a Permanent Magnet Brushless Direct Current (PMDC) motor. These contain NdFeB magnets and there is no alternative (you could argue Sm-11.2%-Co-53.3%-Fe-27.5% (wt%) but the high reliance on cobalt is an Achilles' heel). The best performance one is a sintered magnet of composition Nd-31%-Dy-4.5%-Co-2%-Fe-61.5%-B-1% (wt%). Dysprosium is critical in this application to give resistance to demagnetization at high temperatures as the magnet reaches service temperatures of 160C.
A motor can be up to 100kW although 55kW is a reasonable figure. For a 55kW motor 0.65kg of Nd-Dy-Co-Fe-B is required which gives 200g Nd/Motor (3.6g/kW) and 30g Dy/Motor (0.55g/kW). A 25kW generator is typically required to recoup braking energy so for analysis purposes a hybrid vehicle contains 288g Nd and 44g Dy. At $20/kg a car contains $5.76 worth of Nd and at $110/kg Dy a car contains $4.84 worth of Dy. At $10.60 worth of REs per car and a selling price of, say, $20,000, REs represent 0.05% of sticker price.
If you accept John Petersen's analysis that binding targets on fuel standards imply an impending widespread adoption of hybrid technology then it is clear use of motors is set to take off. The current use of hybrids is very small (1m Priuses sold to date). If, for example, half of the EU's 15million new cars were hybrids in 2012; 2160 tons Nd (8802 tons NdFeB) and 330 tons Dy (390 tons Dysprosium oxide). Thus 20% extra Neodymium would have to be produced and 25% more Dysprosium (based on 2005 prodution of 1400 tons).
Dysprosium is especially rare and Dysprosium reserves are almost entirely located in China. Japan is painfully aware of this fact and is scouring the globe looking for Dy deposits while also trying to develop magnets without Dy.
This seems like a good point to stop. There is an alternative to PMDC motors - AC induction motors - which I'll discuss in a follow-up if there's any interest. I'll furthermore analyse the use of NdFeB in wind turbines.
RE miners and investors can judge the direction of the industry if they understand the dynamics of NdFeB. My interim observation is that magnets represent a very small proportion of the sticker price of EBs and cars in particular. This would indicate that they are capable of absorbing a higher Neodymium price and manufacturers would be prepared to accept this for diversity and security of supply. This may make production of REs in the US and elsewhere more economic.
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Disclosure: I don't own any stocks and never have