Earlier today I got word that the US Department of Energy (DOE) has released an update to its Critical Materials Strategy, which was first published as a report in December 2011 2010. This document has helped to shape a fair amount of the debate on rare earths in particular, and critical & strategic materials in general, in the past 12 months.

You can download a copy of the report from here.

I’m still digesting the contents of the report; I can tell you that the DOE still considers the five rare earths dysprosium, neodymium, terbium, europium and yttrium to be critical in the short and medium term; indium is judged to now be near-critical in the near term, compared to being categorized as critical in the 2010 report.

New sections include one that covers the use of rare earths in fluid cracking catalysts, and how the petrochemical refining industry reacted to escalating prices of materials in 2011.

More to follow once we’ve had a chance to read through the report more thoroughly.

Update (01/17/12): the URLs for the report have been updated, since the original links no longer work.

I’ve received a number of emails today from people wanting to hear my thoughts on a news release from Northeastern University published earlier today, pertaining to a new magnetic material that researchers at the University have apparently discovered.

According to the announcement, the “super-strong magnetic material” may “revolutionize the production of magnets found in computers, mobile phones, electric cars and wind-powered generators“. According to one of the co-authors of the study, “[s]tate-of-the-art electric motors and generators contain highly coercive magnets that are based on rare-earth elements, but we have developed a new material with similar properties without those exotic elements“.

The material is apparently based on a compound of manganese (Mn) and gallium (Ga), with Northeastern claiming that the material “can be synthesized on the nanoscale to produce a coercive field that rivals materials containing rare-earth elements, which are considerably more expensive to process and mine“.

The message boards are abuzz with this announcement, apparently with many people (i.e. retail investors in the rare-earth sector) now worried that this material is the death knell for permanent magnets based on the rare earths neodymium / praseodymium (Nd / Pr), and thus the hopes and dreams for untold riches from these commodities…

Take a deep breath, folks.  Being a materials scientist by training, I am naturally a big fan of ongoing research & development work on new engineering materials, and I will read with interest more details on this research, in a forthcoming edition of Applied Physics Letters. I am much less of a fan of the now well-worn path of hype disguised as scientific (and more importantly engineering) breakthroughs, which this announcement represents.  Here’s why:

• While Mn is cheap as chips, Ga is at present 2-3 times more expensive than Nd / Pr;

• The production of Ga is approximately 200 tpa – of which perhaps 100 tpa comes from recycling – and it is presently all spoken for. Compare this to the more than 20-25 ktpa of Nd + Pr available each year, and the prospects for multiples of this production rate in the near future, from new sources of supply.

• All new Ga is produced as a byproduct of aluminum and zinc production. The supply dynamics of these two metals alone will determine future availability of Ga – not its potential use in a permanent-magnet material.

• Given the painfully long road to commercialization for other materials that rely on similar processing routes, it is highly unlikely that synthesis “at the nanoscale” will be less expensive than mining and processing rare earths any time soon.

• Finally, while we’re at it – a “highly coercive” magnet material, is not the same thing as a “super-strong” magnetic material. The former refers to the ability of a material to resist being demagnetized; the latter to the ability of the magnet to do work.

Yesterday I listened to a conference call hosted by Molycorp Inc. (NYSE:MCP), to discuss the company’s Q3 2011 financial performance. The call covered the expected ground, going over the financials and milestones that the company achieved in this last period. No surprises there; Mark Smith, the company’s CEO, pointed out the record revenues that the company earned in this period, which of course is great news for Molycorp shareholders.

As the call proceeded, Mr. Smith started to review what he called the company’s “multi-pronged heavy rare-earth strategy” for the mid- and long term. My ears pricked up at this point, to see if he would confirm some important information about the heavy rare earths at Mountain Pass that I had heard about for the first time earlier this week, from someone else at Molycorp. Unfortunately he did not; later in this article I will share with you what I heard earlier in the week anyway, and let you come to your own conclusion.

Mr. Smith described four different parts to the Molycorp’s heavy rare-earth plan. These include recycling, increasing the efficient use of heavy rare earths in key applications, and deploying new cracking technologies at Mountain Pass, to enable both bastnaesite and monazite ores to be processed at the facility. In the past, Mr. Smith noted, only bastnaesite was processed, with the monazite present in the ore body going into the tailings basin. Mr. Smith noted that with this capability, the new cracking facility would be capable of processing mineral concentrates from other rare-earth resources as well, and in response to a question from an analyst, named this capability as the most important part of the overall plan.

Mr. Smith also mentioned the recently announced strategy from Molycorp, to look at additional properties known to Molycorp, which contain minerals with significant heavy-rare-earth element (HREE) content. While he gave no further detail on the make-up or location of these projects beyond that which has been previously provided, given his statement about the cracking facility at Mountain Pass, one could reasonably surmise that such deposits are likely to be dominated by monazite, since there is usually very little HREE content in bastnaesite minerals.

Molycorp has consistently stayed “on-message” with its statements that it will be producing 10 rare earths in “commercially significant quantities”, from the Mountain Pass ore body. This was re-iterated once again in the company’s October 2011 presentation, titled “Rare Earth Resurgence: Molycorp’s Plan to Increase Global Diversity in Rare Earths Through Technology Innovation” and available on its Web site. In this presentation the 10 “significant REEs” are listed as lanthanum (La), cerium (Ce), praseodymium (Pr), neodymium (Nd), samarium (Sm), europium (Eu), gadolinium (Gd), terbium (Tb), dysprosium (Dy), and yttrium (Y). I’ve re-ordered the list shown on the Molycorp slide, to reflect ascending atomic number. The slide includes a statement below the list which says that “Molycorp intends to produce all 10 of these rare earth elements commercially”.

Later in the slide deck, in a separate section titled “Project Phoenix Update”, is a chart which shows which rare earths and metals Molycorp plans to produce during Phases 1 & 2 of their new production capabilities. The list includes oxide equivalents of Ce, La, Nd-Pr (together known as didymium), as well as La metal and “other”. The first four items on the list total around 99% of production, if I read the chart right; looking at the REE distribution in the Mountain Pass ore body, that makes sense, since it matches the average content of those items in the ore body.

One might infer from my last two paragraphs above that, although the REEs Sm-Eu-Gd-Tb-Dy-Y are a small proportion of the Mountain Pass ore body, that they will still be processed into finished products in the near future, just like their more dominant Ce-La-Nd-Pr counterparts.

A reasonable inference, but, it turns out, an erroneous one.

I’ve wondered for a long time now, just how Molycorp intended to produce these “other” REEs in “commercially significant quantities”, given the small quantities present in the ore body. Surely it wouldn’t make sense, I thought, to build HREE separation circuits, given the significant costs associated with such a capability, for such a small quantity. I know others have wondered the same thing, how such capabilities could be accounted for in the $781 million budget for Project Phoenix.

Well finally, all appears to have become clear, following some comments that I heard this week from a Molycorp official other than Mr. Smith.  The first comment concerned the fact that the quantities of Dy and other HREEs to be produced from Mountain Pass remain to be determined, in part because there is still work to be done to quantify the distribution and quantity of Dy and the other HREEs present in the Mountain Pass ore body.

The official then mentioned that the separation of MREOs / HREOs (i.e. oxides of Sm-Eu-Gd plus the remaining HREOs) would likely form part of a “Phase 3″ for Project Phoenix, and that until then, any MREE / HREE-rich concentrates produced in the new cracking facility, would likely be stored as concentrates, for future disposition. When I asked if the official could confirm that the costs for such a Phase 3 MREE / HREE separation facility, were NOT included in the $781 million budget for Project Phoenix, he indicated that they probably weren’t. Therefore, if I understood this official correctly, it appears that Molycorp has no plans at this time, to produce separated MREOs / HREOs at Mountain Pass, during the first two phases of Project Phoenix.

Now technically, to my knowledge Molycorp has never actually explicitly said that they would produce separated MREOs / HREOs as part of the ramp up to 40,000 t of product, but the company’s assertion that it will produce such elements in “commercially significant quantities”, made in the same “breath” as reference to the others that we know are going to be produced, certainly implied otherwise, and obviously could well have given many in the market the wrong impression, if what the aforementioned official said, is accurate…

One other comment on the call yesterday caught my attention, because I believe it is also misleading. This relates to the assertion that the 30,000 t of rare-earth export quota issued by the Chinese authorities for 2011, is actually equivalent to only 21,000 t of REOs, because of the inclusion of ferroalloys on the list of compounds covered by the quotas. This was the same assertion made by Molycorp in a New York Times article at the end of July 2011.

The article stated:

“Everybody seems to be relaxed because the year-on-year number for 2011 versus 2010 is basically the same amount of materials, roughly 30,000 tons of export quotas,” Molycorp Inc. CEO Mark Smith said in an interview. “The discrepancy is created because China continues to add more products that are covered by the quotas, but we never seem to want to take that into account.”

So far, so good.

Doing an apples-to-apples comparison, Smith says, China’s export quota is really closer to around 20,000 tons. Meanwhile, he predicts the global demand to be much higher.

And here’s the problem – that was NOT an “apples-to-apples comparison”. Apples-to-apples would be directly comparing the 20-22,000 t REO equivalent in 2011 with the 22-24,000 t REO equivalent in 2010 that IMCOA and others estimated on the same basis – the difference being accounted for by the inclusion of ferroalloys this year. The same applies to previous years too, of course.

In the original NYT article, the comparison was instead made between the 30,000 t figure for 2010, and the equivalent of a figure of 21,000 t for 2011. The same (in my mind flawed) logic is contained in the summary comments on the conference call yesterday. In the absence of the fuller comparison described above, using this 21,000 t figure in this way is in my mind potentially misleading, and should be discouraged.

Anyway – that’s it for now. Check out the TMR Web site again soon for more comments and perspective on the rare-earths sector.

UPDATE #1 (11/13/11): Since posting the original piece above, we’ve received unsolicited feedback from recent visitors to the Mountain Pass project, who were apparently told that MREE/HREE-containing concentrates from Phase 1 & 2 processes, would be stockpiled for further processing at some indeterminate point in the future.

Rare Element Resources (RER) (AMEX.REE) today issued a press release that makes very good reading for the American civilian and military industrial manufacturing sector. The company now joins Ucore Rare Metals (Ucore) (TSX.V:UCU) as having a high potential for producing the critical rare earths, dysprosium (Dy), terbium (Tb), europium (Eu), and neodymium (Nd) in commercial quantities. Additionally RER could produce samarium (Sm), gadolinium (Gd), and yttrium (Y) in notable and certainly commercial quantities, thus joining Ucore in that capacity too.

So now there are two potential domestic American heavy rare-earth element (HREE) producers, which I think are viable and have high probabilities of commercial success.

The sole free-market criterion for measuring the value of a company is profitability. “Junior” mining companies are mineral-exploration ventures organized to explore for, and verify, valuable deposits of minerals that can be either developed by the junior or sold by it to a mining company for development as a profitable venture. Profitability in the junior-mining space almost always means the difference between the sale price for the deposit and the cost of getting to the next saleable point.

Thus junior miners are speculative ventures, which, in a fair and balanced world, would be rated as much by their management experience and marketing skills as by the economic value of their deposits.

Unfortunately this is not the case. The measure of success (metric) used in the junior mining world is the previous experience of the particular promoters involved in successful past promotions, especially in gold, the forever fad and, most recently, uranium.

Human nature is to create fads and measure the worth of individuals by their adherence to the particular “narrative” of the latest fad. For the last three years, the promotional aspect of the stock markets based in Vancouver, Toronto, Sydney, Perth, Frankfurt, London and New York have been suucessfully promoting a rare-earth boomlet. Various pundits and money managers have spun stories of the importance of the rare-earth elements (REEs) beyond any recognizable common-sense logic, in order to lower the bar for entry to the rare-earth junior-mining corral.

Some REEs are indeed very important for the maintenance of the mass production of the miniaturized electronic devices, which the younger members of society (and many others) seems to believe have always existed, and have always been available cheaply and abundantly.

The conversion of our technological society’s electric motors and generators to smaller and more powerful versions using rare-earth permanent magnets (REPMs) continues unabated. REPMs, particularly of the neodymium-iron-boron (Nd-Fe-B) type, dominate the market in terms of value, for permanent magnets for all uses.

Interestingly enough, of the small percentage of rare-earth-based magnets, powders and alloys imported into the USA, most is used by high-tech civilian industry, such as that for medical imaging devices. Only a smaller amount of the total is used for significant military devices. For example, just a tiny amount of the REE Sm is imported into the USA, for direct conversion here into samarium cobalt (Sm-Co) alloys for REPMs used extensively for the US military.

I doubt that more than 500 tonnes in total of magnet alloy as raw materials are imported into the USA each year for magnet fabrication, and of that amount, I seriously doubt that more than 100 tonnes is used exclusively for military production.

Over 90% of the world’s REPMs are made in Asia (60% in China and 30% in Japan). The alloys from which they are made are produced almost entirely  in China, from REEs produced domestically there.

Anyone in the USA who is planning to manufacture REPMs from domestically (USA) produced REEs is facing the situation that:

• No rare-earth ores have been mined in North America in the 21st century;

• No American company, using American-developed technology, has produced pure REEs in the USA in the 21st century (do note that I’m referring to metals here, not oxides);

• No American company has made Nd-Fe-B magnets from the individual REEs in the USA since at least 2004. Electron Energy  in Lancaster, Pennsylvania has however been making Sm-Co-based REPMs and alloys for decades. The company has, I believe, recently entered into an off-take with Great Western Minerals Group (GWMG) (TSX.V:GWG) for rare-earth metals to be produced by the latter company’s Less Common Metals subsidiary, which will eventually use feedstock for GWMG’s future mining and refining operations in South Africa;

• Only a small overall tonnage of REPMs are currently produced in the USA, from a rare-earth-metal base, and, critically;

• All of the commercially available Dy used to modify the heat cycle sensitivity of REPMs, which is critical in their largest end-use, “under the hood” applications in the OEM automotive industry, as well as in their military use, is and always has been produced in China.

Just two of the US junior-mining ventures currently in development, Ucore in Alaska and RER in Wyoming, are likely to produce Dy in significant quantities in time for the American military and industrial complexes to free themselves of Chinese monopolizing of the rare-earth space in general, and of the HREEs in particular, before the possible discontinuing of the export of Dy by China by 2015.

America needs between 5,000 and 10,000 tpa of lanthanum (La) (90%) and cerium (Ce) (10%) in order for the fluid cracking catalyst (FCC) manufacturing industry to remain based mainly in the USA. America also needs 4,000 tpa of Nd at most,  to manufacture all of the REPMs used in every application in the USA today, rather than import most of them from China and Japan – this estimate may even be too high -and America needs between 400-1,200 tpa of Dy to modify those magnets so that they can be repeatedly exposed to heating and cooling cycles (such as “under the hood”) and retain their original properties. Also, if America has 100 tpa of domestically produced Tb, it could dominate the world of non-incandescent lighting if it so desired.

Some of the above high-tonnage production is simply not possible in the USA. For critical applications, investors should look first to those who can in fact produce Dy and Tb and, of course, La and Nd.

All of the emphasis so far has been on La, Ce and Nd, but only one of those, Nd, is really a critical metal that I believe is even now in short supply.

The important critical heavy rare-earth metals for America are now Dy and Tb because they are not produced in the USA, but are necessary for the high tech devices of which America is the largest per-capita consumer.

The smart play, is clearly to support those who can produce the most critical of the rare earths, by also buying all of the La, Ce and Nd that they can produce. Rare Element Resources and Ucore Rare Metals should be the choice for end users of magnet materials and of lighting materials and of fluid cracking catalyst materials, because by buying out the production of these two companies in total, American companies can be assured of independence from Chinese decisions on allocation.

I also urge American civilian and military industry to support vertical integration in the REPM and the phosphor industries. America has all of the technology to transform rare-earth-ore conentrates, the first item in the rare-earth end-use product supply chain, into finished magnets and CFLs. Yet we have simply abandoned these industrial steps, all of them, actually, for momentary cheaper prices.

Since neither Ucore nor RER could provide individually or even together enough La and Nd for the American FCC industry, or a revived domestic magnet manufacturing industry, the smart play for end-user procurement is to form a buying group, and to enter into off-take agreements for the entire outputs of these two companies and to divide up the critical materials among themselves

Additional LA, Ce and Nd needed by American industry can be purchased from Molycorp (NYSE:MCP), which can then dedicate the balance of its enormous production of light rare earths to rich overseas markets such as Japan, Korea, India and China itself.

I urge the management of RER and Ucore to determine their actual cost of production of all of the rare-earth metals individually, and then to offer them to a procurement operation at a known level of profit and a predictable cost for the buyer.

The two mining companies should be very profitable, and the end users will continue to be able to utilize rare earths in their products. They will thus compete with Chinese industries that will continue to have easy access to raw materials the prices of which are now climbing within, China along with labor, regulatory, health, and safety costs.

It is obvious that if Molycorp’s projections are accurate, then it will be producing at lower costs than the Chinese. At that point Molycorp can sell its output to the world’s largest growing consumer of its products, China, as well as to Japan, which today sources from China exclusively.

If American self-sufficiency is important, to insure that our civilian and military manufacturing industries retain their market share and can grow, then those sectors of our economy must strike bargains with and buy from Rare Element Resources and Ucore Rare Metals to ensure their own prosperity, as well as that of you and me.

I urge industry, both civilian and military, to grow a pair, work together, and get the ball(s) rolling before America becomes an industrial backwater.

Disclosure: At the time of writing, Jack Lifton is long on Great Western Minerals Group (TSX.V:GWG). He is also a consultant to Rare Element Resources (AMEX:REE) and to Ucore Rare Metals (TSX.V:UCU).

The “horse race” theme that I devised two years ago, with the winner to be the first to produce heavy rare-earth oxides (HREOs) outside of China, is now in the final lap. The smart money is on the smart management of Great Western Minerals Group (GWMG).

GWMG has brought the entire rare-earth junior mining sector outside of China to a turning point, as evidenced by its recent press release. Today is the last day of the hype-based, rare-earth-junior-mining-stock promotional “boomlet”.

In November 2009 at the Hard Assets Conference in San Francisco, I predicted that there was a “horse race” underway to be the first company outside of China to produce HREOs commercially. I also predicted that the winner would be GWMG, because they were the only one at that time, to have taken the first steps to vertical integration, which I think is critical for REO wannabes in the REO business world, as I see and understand it, and have understood it for nearly 5 decades.

At the time I was immediately threatened with no less than three independent legal actions, due to my selections for entrants in the “horse race.” One of the presumptive litigants apparently had a board member present when I made the prediction, and he asked his CEO to sue me for not mentioning their company. The other two were mentioned in the “horse race” but not to win, place, or show. All three had in common that they did not have significant, commercial levels of HREOs in their ore bodies under development, which are critical for the production of, among other things, high-performance  rare-earth permanent magnets. I was threatened by the CEOs of the two that I said would place out of the money, with lawsuits for defamation, for “disparaging their companies.”

I myself attended the University of Detroit School of Law some 40 years ago, so I informed the men who called to threaten me, that I welcomed their actions. I said that I would of course be calling the chairman of a certain well-known investment bank as a witness, to explain why his company dropped out of both of the ventures that were threatening to sue me. “Let’s add that bank to the defamation suit as a party defendant,” I told them.

Unsurprisingly I didn’t hear further from either one.

The proximate cause of the lawsuit threats I just mentioned was that the “horse race” talk was filmed illegally by an attendee, and it went out over the Internet (the rights to the presentation were actually owned jointly by me and Summit Media, the sponsor of the Hard Assets Conferences). One of the aforementioned CEOs told me that this publication of the video was a slander to a third party, or a libel.

Those who threatened to sue me were rather unprofessional. They thought that they could frighten me into silence, or into retracting my prediction from fear, but obviously they were wrong.

The race to be the first to produce commercial quantities of REOs outside of China has entered a new phase today.

I predict again that GWMG will be the first ever junior rare-earth miner outside of China, to become a profitable producer of commercial quantities of heavy rare earth forms, beyond separated purified HREOs.

I note that GWMG’s new partner is an experienced processor, which has been providing GWMG’s Less Common Metals (LCM) subsidiary with pure rare-earth metals, for manufacturing into rare-earth permanent magnet alloys, and other compounds, for LCM’s customers. I further note that among those customers is now to be Japan’s Aichi Steel, a manufacturer of rare-earth permanent magnets so large, as to be able to take all of GWMG’s projected production of relevant rare earths from Steenkampskraal.

Therefore I predict that GWMG will be the target for discussion of a joint venture or even an acquisition, by many good juniors with HREOs in their ore bodies. They will all basically propose that the GWMG rare-earth separation plant be expanded, to accommodate their ores on a partnership basis. This is because the most added values available to rare earths that can be added by a mining company, are done by moving downstream towards the production of pure metals. Up to that point in the value chain, we are speaking of mining engineering and chemical metallurgical engineering. When one reaches the next stage, that of producing magnet alloys and magnets, one has reached the provenance of skilled specialists in materials and physics. Such skill sets are not bought; they are earned with Darwinian ruthlessness, in the real world of high-tech product development and manufacturing.

GW’s primary skill set within its core competency, has now been stated or shown to encompass:

• Mining;

• Ore concentration (mechanically);

• Extraction of metal values;

• Separation of the rare earths from each other and from the radioactive constituents of the ore body;

• The legal and safe disposition of the radioactive residues;

• The production of pure rare-earth metals from the purified chemical forms; and

• The production of specialty alloys of neodymium (Nd), samarium (Sm) and dysprosium (Dy) for use in the production of high quality rare-earth permanent magnets.

I sincerely congratulate Gary Billingsley, the Executive Chairman of GWMG and Jim Engdahl, GWMG’s CEO, for their perseverance in the face of great odds. The first time I ever heard of the “mine-to-market” strategy was when Gary Billingsley told me about it perhaps 2 – 3 years ago. I thought it was a winner then, and I think it’s a winner now. After that time though, GWMG struggled to navigate in the flood of hype and promotion, aided and abetted by pundits and self-appointed experts, who believed that bigger was better, and that since, in their alternate universe, the demand for the rare earths would grow infinitely, then rare-earth mining would be most profitable to those who could mine the most material.

In fact there is no rare-earths market at all; there are markets for some of the rare earths individually, but the cost structure for any rare earth is a function of what it costs to separate and purify it from all of the other rare earths and associated metals. This is a uniquely different problem from that of any other metal.

Few outside of China, have mastered the skills required to produce an entity such as pure Nd or pure Dy chemical compounds. Fewer still, anywhere, have the ability to make pure metals from these compounds, and only a very few have the education, experience, and time-proven skills to produce rare-earth magnet alloys. Although all of this expertise was originated in the West, it is today almost all resident in China or Japan.

If the West wishes to inure its supplies of rare earth metals and alloys independently of production from China, then it can encourage through private-equity business models, such as that of GWMG, or national governments can subsidize such models.

Now that the fog of hype and promotion is clearing a little I urge investors to take note of these facts:

• There is not now, nor will there ever be an open (unlimited) demand for rare earths. Current speculation on this demand is just that, speculation. Ignore it unless it references hard data-in particular data about Chinese and Japanese demand!

• Any planned or projected production levels must be capable of being made profitably, at whatever point in the supply and value chains the mine intends to sell its product. This means that there must be a buyer (or buyers) for all of the production at the lowest profitable selling price.

• At that point the mine must be the low-cost producer if it is operating in the free market, and if it is to be competitive in that market.

• Each step in the supply chain requires a different skill set from managers and engineers than the one preceding it. Such skill sets get rarer as one goes further along the value chain towards the end product. College degrees are nice, successful experience is necessary. In particular, there is today no private jobbing of rare-earth separation outside of China, so no one is going to be able to restart the rare-earth supply chain anywhere, until there comes into existence a rare-earth separation and refining industry with proven capability and demonstrated capacity.

• Marketing is a skill that must be present from the beginning. It is one of the first steps not the last.

• Rare-earth ore concentrates can be produced as byproducts of otherwise profitable operations, such as iron-ore and uranium mining.

• In the above cases it is possible for a miner to be a low-cost producer of rare-earth ore concentrates, and to match much larger, dedicated rare-earth mines in the costs at that point on a per kg basis.

• Rare-earth separation plants can be built with a flow-through capacity of 2,500 tpa year for under $25 million. The scale up is not linear. A 10 ktpa plant cannot automatically be assumed to cost $100 million; it may be much more due to increased process control requirements. Note well, that the largest rare-earth solvent-exchange facility ever built, is in China, and has a yearly flow-through capacity of less than 10 ktpa. Scaling up to this level and beyond has never yet been done, and the impediments are so far unknown and are thought to be challenging.

• Thus it is possible that a relatively small, light-rare-earth mine with predominantly weathered, or easily accessible ores for which the metallurgy is well-known, such as bastnaesite, could make a profit at a much lower level of production than a larger mine, even at the separated REO stage, because of its lower startup and overhead costs.

• It is also possible that a small mine with significant HREOs could be profitable, even if it can only sell the HREOs, and perhaps Nd oxide.

• The market will buy what it needs at the lowest not the highest price.

• Boutique-metals mines based on niobium, tantalum, zirconium, and titanium, for example, individually or in combination, may be able to become profitable because of the now-higher and sustained prices of any or all of certain rare earths that are critical, such as Nd, Dy, terbium, europium and yttrium.

When future bond-rating agencies rate the producing rare-earth mines from the middle of this decade forward, for the purpose of fixing the interest rate on that corporations bonds, they will look at profitability and the ability of management to sustain profitability. Those are their only metrics.

I’m sure that GWMG will be highly rated.

Once again I congratulate the management of GWMG for a job well done. I hope that GWMG is producing metals and alloys vertically within 18 months from now.

Disclosure: At the time of writing, Jack Lifton is long on Great Western Minerals Group (TSX.V:GWG).

A couple of days ago, Seagate Technology PLC (NASDAQ:STX) reported its financial results for its fiscal fourth quarter and year-end 2011. Seagate is one of the world’s leading manufacturers of computer hard drives, and according to the company, in its last fiscal year it shipped over 199 million units worldwide. These shipments generated $11 billion in revenues and net income of $511 million, with a gross margin of 19.6%.

While these numbers are pretty impressive, they would have been otherwise unremarkable to the denizens of the upstream rare-earths sector, if it weren’t for some comments made by Seagate’s CEO, Stephen Luczo, on a conference call with analysts this past Wednesday. According to Barron’s, Mr. Luczo said that

The cost of many upstream materials, especially rare earth elements, which have increased significantly, these cost are expected to adversely impact gross margins by at least 200 basis points. In regards to the increase in cost of upstream materials, Seagate has historically been able to observe these cost increases and insulate our customers. However, the recent increase in the cost of rare-earth elements, combined with the pre-existing upward trend of other commodities, far exceeds our ability to offset cost reductions.

This is just about the first time that I’ve seen a prominent end user within the technology supply chain, actually publicly quantify the effects that increased rare-earth prices have had on their margins. Some commentators have claimed that rising dysprosium (Dy) prices have caused these loss of margins, but this is not so (though not a million miles off the mark).  Let’s take a look at what IS the likely root cause here.

First, let’s ask ourselves a question: just how, exactly, are rare earths used in computer hard drives? The answer is that they are found in two sub-assemblies that contain rare-earth permanent magnets (REPMs), which are critical to the functionality of the hard drive – specifically:

• The spindle motor – this is the sub-assembly that causes the platens within the hard drive, on which the data is stored, to spin at high speeds to enable access;
• The voice-coil actuator – this is another sub-assembly within the hard drive, that moves the read / write head(s) to the correct position.

Both motors and actuators operate on the principle of converting electrical energy into motion, through the manipulation of magnetic fields associated with coils and with permanent magnets. In the case of the spindle motor, the motion is rotary; with the voice-coil actuator, the motion is from side to side. Both sub-assemblies are controlled by sophisticated electronics, which coordinate all movement of sub-assemblies within the hard drive.

As I said, each sub-assembly contains REPMs – however, the magnets in each sub-assembly are distinctly different from each other. Those in the spindle motor are usually so-called polymer-bonded permanent magnets, based on an isotropic (the properties are the same in all directions) compound that principally contains neodymium, iron and boron (the so-called Nd-Fe-B composition).

Compression-molded, polymer-bonded Nd-Fe-B permanent magnets, used in spindle motors. Source: TDK.

These polymer-bonded magnets are made by mixing the Nd-Fe-B powder with a special binder, which allows the magnets to be pressed easily and precisely to a final shape, with little-to-no additional machining required. More specifically, the typical polymer-bonded magnet used in spindle motors is made by magnet manufacturers using powders produced by the Magnequench division of Neo Material Technologies Inc. (TSX:NEM). Magnequench produces a range of different powders for a variety of applications; variations on its MQP powder family, some with additions of cobalt (Co), and occasionally niobium, will be used for these magnets. For those who like to get into the technical nitty gritty, typical magnetic properties of these materials are B_r = 6.5 – 7.5 kG (650 – 740 mT); H_ci = 5 – 9 kOe (415 – 715 kAm^-1;) and BH_max = 8.5 – 11 MGOe (70 – 90 kJm^-3).

You might have noticed that I have yet to mention Dy here. Virtually every man and his dog in the rare-earths sector will tell you that all Nd-Fe-B magnets need Dy as an additive to make them work at higher temperatures. And I’m here to tell you that every man and his dog would be wrong.

Dy is not used in the aforementioned magnet materials found in hard-drive spindle-motor magnets. Instead, improvements in performance of these materials at higher temperatures, come from increasing the Curie temperature of the materials by those additions of Co, which substitutes for some of the Fe present. The Curie temperature is the point at which the magnet will lose all of its magnetism. And since we’re dispelling half-truths here, let’s dispense with another one; again, contrary to popular belief, Dy does NOT raise the Curie temperature of the magnets to which it is added (at least not to any significant degree). Instead, Dy improves the higher temperature characteristics of a magnet, by producing a compound that is more resistant to being demagnetized. A byproduct of this is an increased ability to resist the effects of increased temperature.

The downside to adding Dy to a REPM, however, is that while it increases the resistance to demagnetization, it actually decreases the magnetic output of the magnet, or the so-called residual induction of the magnet. So there is a trade-off in the use of Dy. This is why the second set of magnets in the computer hard drive, those to be found in the voice-coil actuator, generally contain no Dy either. The typical computer hard drive does not use any components that contain heavy rare earths, such as Dy.

Voice-coil actuator magnets (the curved components) - the scale is in cm. Source: TDK.

Because the voice-coil actuator sees very little temperature variation beyond the ambient room temperature, there is no need to add Dy to the permanent magnets used in this sub-assembly. Unlike the spindle motor, the voice-coil actuator uses anisotropic (has a preferred intrinsic orientation) sintered Nd-Fe-B permanent magnets, i.e. they are produced without a binder. The magnet material grade used for these magnets is selected to maximize the residual induction of the magnet, which in turn gives greater sensitivity to the overall functionality of the voice-coil actuator, i.e. to move the read/write heads to precisely the right place at the right time.  Again, for the techies, the typical magnetic properties of these sintered materials are B_r = 14.2 kG (1420 mT); H_ci = 14 kOe (1120 kAm^-1); and BH_max = 50 MGOe (400 kJm^-3).

In some material grades we may see a small amount of the Nd substituted with praseodymium (Pr). This is primarily to allow for the use of didymium (a mixture of Nd and Pr) in the magnet manufacturing process, reducing the price a little. However, anything more than 20-25% substitution and the performance of the Nd-Fe-B-based magnet will degrade – Pr can NOT be used as a full substitute for Nd, for this reason.

Since the escalating price of Dy has nothing to do with the reduction on gross margins for Seagate, and by implication other hard-disk drive manufacturers (since these hard drives don’t contain any Dy), what is causing this effect? The answer of course, lies in the rising costs of the other rare earths present – i.e. Nd, and possibly Pr. More specifically, however, the timing of Seagate’s remarks would perhaps indicate that they are procuring most of their magnets (at least the sintered magnets for the voice-coil actuators) from Chinese magnet manufacturers.

How do we know this? Take a look at the following charts, showing the spot prices of oxides of Pr and Nd over the past 13 months, for both exported and non-exported materials originating in China:

Average spot prices for praseodymium oxide over the past 13 months.Source: Technology Metals Research, metal-pages.com.

Average spot prices for neodymium oxide over the past 13 months.Source: Technology Metals Research, metal-pages.com.

The usual tales of woe concerning price increases for rare earths, center on the export prices for these materials. As we can see from these two charts, the imposition of ever-increasing export quota surcharges by the Chinese traders, caused a significant divergence of pricing between internal and export product. The less-reported detail to this, however, is that for these and other light rare earths, the price in China remained effectively flat until around January or February of 2011. At that point, the price of these materials started to increase, and soon even the Chinese REPM manufacturers began to feel the pain, as did their customers.

Such price increases would have manifested in the associated downstream products after some period of delay. If Seagate has not previously reported challenges with their margins, caused by rare-earth prices, then it is reasonable to assume that they have only recently started to feel the effects, which would strongly indicate that they are sourcing their sintered magnets from China. The cost of the magnet powders for the polymer-bonded spindle-motor magnets has also increased, but it is less clear from where Seagate buys the magnets made from these powders, since Magnequench powder is used by a variety of magnet manufacturers around the world.

In case you’re interested, even though there is pretty much no Dy in computer hard drives, here is a chart showing the recent prices for Dy oxide:

Average spot prices for dysprosium oxide over the past 13 months.Source: Technology Metals Research, metal-pages.com.

Here we can see that the effects of the quota surcharges, while still significant, have not caused as strong a decoupling of the prices associated with internal and exported product. Interestingly, for part of June, the internal price in China appeared to be higher than that of exported materials, though that has since changed.

Finally, it’s an interesting exercise to do a rough calculation to see the quantity of rare earths used in computer hard drives each year. If we focus on the sintered magnets alone, given the fact that such magnets typically weigh around 6 g, and there are two magnets per assembly, and given the fact that Seagate shipped 199 million units in their last fiscal year, that amounts to 199,000,000 x 6 x 2 = approximately 2,388 t of sintered Nd-Fe-B magnets last year. Those magnets would contain approximately 715 t of Nd metal, equivalent to the amount of Nd in 845 t of Nd₂O₃. Recent data-storage industry figures estimate Seagate’s share of the market to be somewhere around 28%, so a rough estimate of total rare-earth usage in sintered magnets for the hard-disk drive industry, would be over 3,000 t of  Nd₂O₃ equivalent, each year. That would account for as much as 12-15% of the currently annual global supply of  Nd₂O₃, a pretty significant fraction – and that’s not even taking into account the Nd content of the spindle motors!

The hard-disk drive industry is therefore an important end-use market for rare-earth materials, and the components which contain them. Both ends of the overall supply chain would do well to keep a closer eye on each other…

Update ( 07/23/11):

As part of a response to a comment below, here is the price chart for samarium oxide:

Average spot prices for samarium oxide over the past 13 months.Source: Technology Metals Research, metal-pages.com.

I note that the Sunday New York Times last weekend, had an article in its business section with the title, “Japan’s Economic Gloom Runs Deeper This Time.” Of particular interest to those of us following the rare-earth-supply issue is the following paragraph in the article (emphasis is mine):

“…since the collapse of the bubble economy of the 1980s …the Nikkei 225 stock index is still three-quarters off its peak. And the economy has been hit by blow after blow, from sagging property prices to mounting debts and intensifying competition from China.”

Nowhere is China’s current stranglehold on the supply of rare earths more deeply felt than in Japan, and nowhere else, I repeat, nowhere else, is obtaining an alternate supply more important than in Japan.

The reason for this is that Japan’s rare-earth permanent-magnet (REPM) industry is considered to be the best on earth. Its largest REPM maker, Hitachi Metals, in fact still holds more active patents in the technology than anyone else in the world.

Japan is very protective of its REPM industry. If a Japanese manufacturer uses a REPM made by Hitachi Metals or which is covered by a Hitachi Metals patent license, then that magnet must have been made in Japan, under the terms of the patent licenses that Hitachi Metals manages.

The Chinese REPM industry, now the world’s largest, and twice the size of Japan’s by volume, considers this system to be a form of Japanese protectionism, and it wants to break into the Japanese market, the world’s largest after China, itself.

I believe that this competition more than any other external factor, is what is driving the current Chinese agenda on limiting the exportation of the rare earths as raw materials. Chinese magnet makers would like to make the magnets for Japanese end users to incorporate into permanent-magnet motors and permanent-magnet generators as well as into speaker magnets. Japanese manufacturers know that if this were to happen, then it would only be a matter of time before China pressured Japanese manufacturers to move all of their subcomponent operations to China in the same manner as they did to American manufacturers and continue to do.

Japan cannot afford the luxury of lower domestic costs disguising the transfer of an industry, its jobs, and its future developments in technology to another country. The Japanese economy simply cannot afford to take such a gamble, and the Japanese look at what happened to the American rare-earth supply chain as an object lesson in sheer short-sighted greed.

I find it intriguing that American investors who know or should know the above facts, even so still believe that a company like Hitachi Metals which is way ahead of any American company in terms of the manufacturing technology for REPMs, would agree to compete with itself, by letting a raw-material supplier become a new Hitachi Metals licensee. I think it is as unlikely that Hitachi would do this with an American supplier, as that it would with a Chinese raw-material supplier. I do believe that Hitachi Metals would like to re-enter the US REPM market by manufacturing in the USA, with American raw materials. Structured carefully as to ownership and control, this would give Hitachi Metals a definite competitive advantage when dealing with the US Defense Department, which now has prohibitions against buying certain types of rare-earth-based magnets, which are made in Japan (and elsewhere).

Japan is a particularly resource-poor country. Its military ruling elite dominated the populace for centuries by, among other things, controlling the production and use of metals such as iron and copper (as bronze). A razor-sharp samurai sword wielded by a man in iron chain mail and bronze armor, was the most effective means of controlling the Japanese peasants until Western “traders” brought firearms, and large quantities of both fabricated and fabricated metals to Japan in the mid-nineteenth century.

Japan’s attempt to create a self-sufficient natural-resource supply by force of arms, failed precisely because its principal enemy had an unlimited (from the Japanese perspective) supply of natural resources, especially of energy and metals. Japan will never again give up any advantage based on natural resources.

Japan won’t give up nuclear-generated electricity for dependence on imported coal and oil, nor will it give up independent technological prowess. Japanese private industry is actively seeking independence in natural resources, and this is evidenced by the activity not only of Hitachi Metals and Toyota, among many others, but also of the giant Japanese trading companies seeking to buy and operate sources of iron, copper, and the rare earths, as well as indium, gallium, and many other technology metals.

The rare earths are a critical component of Japan’s competitive stature in the world of technology.

China isn’t the only game on the planet, and, by the way, South Korea has begun its own quest for technology metals too.

I guess that there’s no need now to worry about the future supply of the rare-earth metals. Earlier today the Wall Street Journal reported, in an article entitled “Rare Earths Grow Less Rare“, that Goldman Sachs says that although supplies will remain tight in 2011 and 2012 and prices will remain high, we can be assured (by Goldman Sachs analysts) that the rare earth supply shortage situation will end in 2013 as new supplies come on stream from outside of China.

I sincerely wonder if this is even good nonsense.

With the exception of the fluid cracking catalyst manufacturing industry, which uses chemical compounds of the rare earths produced early in the rare-earth refining process, the overwhelming majority of end users of the rare earths use and require high-purity metals and alloys of the rare earths for their products.

The only three companies today producing significant quantities outside of China, of high-purity metals or alloys, or both, are:

1. Molycorp, via the recently acquired operations in Estonia (from Silmet) and Arizona (from Santoku America);
2. Great Western Mineral Group, via its wholly owned UK subsidiary, Less Common Metals, Ltd.; and
3. Japan’s Santoku, based in Kobe, Japan.

The feed stock for all of these operations, other than the Estonian one, comes from China. The high-purity-metals and -alloys capacity of all three combined, is less than 5% of the world’s total demand.

A number of junior-mining ventures have announced that they will be producing “rare earths” in 2011-15. The mining analysts do not seem to know or recognize that the production of rare earths is not a well-defined phrase. Mines produce ore concentrates. Most so-called “metal” mines then chemically extract the metal values, as chemical compounds, from the mechanically produced ore concentrates. Different metal miners then traditionally do their own thing, so to speak, with the chemical solutions containing the extracted metals.

Copper miners, for example, typically refine their ore concentrates to the metallic state. The quality (grade) of the copper metal produced is determined by the extent and capability of the processing undertaken by the miner. Even those miners of copper who produce high-purity copper “cathodes” by electro-refining are not normally the producers of the final use products, such as wire rod, sheet, and plate. These are produced, for example in the case of electrical conducting wire, by a specialized industry (for example, a ‘wire’ industry), which itself sells only fabricated copper forms to manufacturers who make such devices as electric motors and generators and wiring harnesses for motor vehicles. I can’t think of a vertically integrated manufacturer,for example, of electric motors, i.e. one that mines copper, refines and purifies it, fabricates industrial forms, and builds electric motors. If a reader knows of one please let me know.

The reason that there are no vertically integrated manufacturers of electric motors is the complexity, the engineering and management skills, and the capital costs that would be required. Traditionally end users of fabricated forms of metals want multiple suppliers to keep the costs down and also want the security of assured supply to be at a maximum.

Analogously, lead miners may smelt the ores they mine and concentrate and produce ingots but they do not make battery alloys, battery plates, or batteries.

Iron miners do not generally produce steel, and even the ones who do that, such as China’s immense Bao Steel, do not produce automobiles, dishwashers, or household tools.

The first rare-earth products that will be produced outside of China will be mechanically concentrated ores, the lowest value sellable product in the supply chain. It will then be necessary, in all cases, to chemically extract the mixed rare earths from the ore concentrates, and by chemical processing isolate the mixed rare earths from any other metals that may be present in the ore. The result will be isolated (but still mixed together) rare earths, either in chemical solution or as chemical solids, typically carbonates, These forms at this early stage of refining are also a selling point in the value chain.

The next step, historically first done commercially in the USA by Molycorp, is to treat the mixed rare earths in chemical form in a solvent exchange “separation plant.” This is an expensive facility to build, as it can easily involve hundreds of repetitive steps taking up to a month to finish a single batch of material, and although batches can be run almost continuously the size of the plant must reflect the optimum large batch size for producing enough volume to make a profit, by selling the resulting commercially pure separated chemical compounds.

Molycorp has said that it plans to ultimately produce up to 50,000 tpa of rare earths, which means, if this means rare-earth metals, its separation plant must be delivering 140 tpd of product and must be processing 4,175 t at any one time. If this is to be done in one separation plant, it will be the largest one in the world. I don’t think that Molycorp will be unable to do this; I only question the amount of time that it will take to construct, prove out, and operate a plant of this size. By the way, if Molycorp is speaking of the production of metals, then the throughput of chemicals will be some 250 tpd with a load of 7,500 t just of product in the system. That’s 15 million pounds of material being processed at any one time.

In any case, whatever the output of the Molycorp separation plant, it will need to be of very high quality (purity) in order to minimize the cost and time required for the next step, the ultra-purification of the rare earths by the method of ion-exchange. The separated, commercially pure rare-earth compounds that are the output of the separation plant are sellable at a higher price than that to be realized either from the ore concentrate or from the sale of the mixed chemically extracted rare earth compounds that were fed into the separation plant.The ultra-purified forms from the ion exchange process are of much higher value yet.

Note that at any step in the purification process, all of the rare earths have to be separated from each other in order to purify them. This means that economically, the very small amounts of the higher atomic-numbered “heavy” rare earths in any deposit, cannot be produced economically, unless as many of the other rare earths present with the “heavies”can also be sold, not just recovered.

This is the dilemma of the deposits of the rare earths that show relatively high values for the heavy rare earths. They cannot possibly be profitably produced just by producing and selling only the heavy rare earths, because their processing will be too expensive to compete for markets for their simultaneously produced light rare earths when up against lower-cost light-rare-earth-producing behemoths such as Molycorp, Lynas, or Bao.

A straightforward solution would be for an end user to buy the critical heavy rare earths, and all of its needs for the light rare earths, from the heavy-rare-earth producer. This might necessitate paying more than the market price for the light rare earths, but it would secure the supply of the critical heavy rare earths, for example, for under the hood applications of rare-earth permanent magnets by an automaker.

In any case, before we make the most important rare-earth product, magnets, we must first be able to make pure metals and pure alloys. The processes for these require tight controls of temperature and pressure and expensive equipment operated by skilled workers.

Rare-earth metals can be produced by reducing a chemical form such as a chloride with high-purity magnesium, calcium, or lithium. They can also be prepared by electrochemical reduction of molten ionic salts of the rare earths. The analyst community writes about these processes as if they are easy to do because others, such as the Chinese, have done them and are doing them, so how hard can it be? I have actually heard it said that if the Chinese can do it then anyone can do it. This is racist sentiment, and is simply not true.

The production of high-purity metals is as much an art as it is science and engineering. It requires diligent attention to operational details and mis-steps that can contaminate, and thus ruin the end product. Continuity of engineering, a practice denigrated by American capitalists, is key to any such project. One learns how to purify metals by doing it, not by reading manuals.

However, that having been said, let’s say that it is now several years from now and we have non-Chinese production of high-purity rare-earth metals. These are very sellable at significant margins over production cost, and, in my opinion, represent the best first selling point in the supply chain for a vertically integrated (from the mine onwards) rare-earth producer. It will not be easy for a miner to become a producer of high-purity rare-earth metals. This challenge will separate the men from the boys immediately.

To make rare-earth permanent magnets, which are the most profitable selling point that any rare-earth vertically integrated producer could hope to reach, requires the skills to make high-purity fabricated forms of neodymium-iron-boron and samarium-cobalt alloys. The knowledge of how to add various other enabling elements such as dysprosium will also be required. Such knowledge today requires access to proprietary information about complex physical and chemical processes that have been developed through man years of research and development and trial and error. These skills CANNOT be learned from a manual or by reading patents.

I am reluctant to believe that junior miners with only, at best, limited knowledge of the chemistry and metallurgy of the rare earths, will even be able to produce separated commercially pure chemical compounds. Yet I am told by analysts that all one has to do is find a rare-earth deposit and the end-use product, the rare-earth permanent magnet, can not only be produced but can be produced easily by the junior miner. Oh, and all of these skills, I am further informed, will be learned and mastered in just a couple of years.

What I think is that of the more than 220 listed rare-earth junior miners outside of China that my colleague Gareth is tracking as of April 2011, there will now be a cull. If rare-earth pricing requires that one must produce high-purity metals to provide a minimum return on the needed investment to develop a mine, then perhaps a dozen of these ventures will survive even until 2013. If it is necessary to produce alloys from which rare-earth permanent magnets can be formed, in order for a rare-earth miner to be profitable, then only at most half a dozen will survive and then only if they can produce the alloys in-house.

There is a caveat. A miner producing rare earths as a byproduct of a profitable operation, such as iron-ore mining or gold mining can, of course, be a profitable rare-earth-ore-concentrate seller, because his overheads are covered by the primary production. I know of one such venture, not yet listed, currently in operation, and I am looking at another two later this summer. I call these boutique metals operations, and, of course, they do not need to produce rare earths to be profitable.

Note that even the above caveat has a caveat. A rare-earth refiner who needs feedstock, such as we are hearing is the case with some of the Chinese rare-earth separation plants, needs a steady high-volume flow to “load”his plant. He cannot be changing the feed chemistry in his process arbitrarily at any time. The minimum requirement will be to load the plant for a process cycle. This means that the refiner needs to only source from fairly large operations, and this minimum size is going to be an issue of long-term capital outlays with a low probability of a competitive return on the investment. For those who will not do their own separation and further refining,  it is a horse race to see which if any of the ore concentrators/chemical extractors can be first to a very limited market.

I do not think that the world demand for high-purity rare-earth metals and alloys, for use outside of China, will be met by non-Chinese production by 2013, because until there is a high rate of production of commercially pure separated rare-earth chemical compounds, there will simply not be enough feedstock to gamble on continuous large-scale production of these high-tech materials, by those who have never before done such high volume processing of such complex materials.

The problem is thus the potential of an export reduction or total cutoff of rare earths contained in finished goods, which is not the case at the moment. This potential Chinese action is a critical issue for the Japanese rare-earth permanent-magnet and battery-alloy manufacturing industry. It is not an issue in the USA or Europe, where neither product type is produced, or has been produced, except in very limited volumes,in more than a decade. It will only be an issue in the USA and Europe, if China cuts off the export of rare earths contained in finished goods such as batteries, lasers, and rare-earth permanent magnets.

I think that Goldman Sach’s analysts are wrong, because they do not understand manufacturing, chemical, or mining engineering, and they do not understand the makeup of the “rare-earths” market; most of all, because they underestimate the power and growing technical and financial skills of China, Inc.

The survivors of the coming rare-earth junior-mining cull will be the earliest to production of commercially useful forms of the rare earths, the high-purity chemicals, metals, and alloys. There will be no large-scale sustained production of any of these forms outside of China, the metals and alloys in particular, for several years yet.

As for the production of high volumes of rare-earth permanent magnets with tightly held specifications, by those not now producing them, I think it will be more than 5 years before we see a new competitor to China and Japan in this category, if ever…

Disclosure: At the time of writing, Jack Lifton is long on Great Western Minerals Group (TSX.V:GWG).

A couple of weeks ago the US Department of Energy (DOE) announced a Request for Information (RFI) on rare-earth metals and other materials used in the energy sector. This follows on from a similar solicitation made last year, that culminated in the publication of the DOE’s Critical Materials Strategy in December 2010.

The DOE says that this second RFI will be used to update the Critical Materials Strategy, and will also cover areas not considered in the original document, such as fluid-cracking catalyst materials for the petroleum refining industry.

The DOE is soliciting information in eight categories:

1. Critical Material Content
2. Supply Chain and Market Projections
3. Financing and Purchasing Transactions
4. Research, Education and Training
5. Energy Technology Transitions and Emerging Technologies
6. Recycling Opportunities
7. Mine and Processing Plant Permitting
8. Additional Information

The deadline for RFI submissions is May 24, 2011 and submissions from the public are welcomed. You can get more information from the DOE Web site.

Chinese domestic demand growth for the rare-earth-permanent-magnet (REPM) metals neodymium (Nd) and dysprosium (Dy) over the next five years, will be strongly influenced and perhaps determined by, the emphasis on industrial policy announced in the new Chinese economic development Five-Year Plan. The general outline of this 12th Plan is reviewed and analyzed in the London Telegraph for March 5, 2011, in an article which is entitled “China’s five-year plan: key points“.

Before we discuss the specific section of the new Five-Year Plan that influences rare-earth-metals demand growth, we first need to understand that China’s industrial economy is centrally planned and rigorously controlled in detail, by the China State Council. This is the executive body of the Chinese Communist Party, which operates in a “King-in-Council” manner similar to the way in which the British government operated when its monarch had actual power centuries ago. In the case of the China State Council, of course, it is the “President” of China who is the head of state while the Prime Minister and State Council members are the daily overseers and rulers of the operations of the government.

It’s not appropriate to refer to the China State Council as equivalent to the Chinese President’s cabinet as many pundits do. The State Council is much more than an advisory group to the President; it is actually operating as the office of the executive branch of the government, and it consists of powerful men, all members of the Communist Party hierarchy, the men who actually rule China. The China State Council does not recommend industrial policy; it defines, organizes, and controls the Chinese economy in order to achieve the goals of the Chinese industrial policy.

The Council sets the goals ahead of time for each five-year period, and it has traditionally done so by asking the permanent civil-service bureaucracy to prepare position papers on their needs and wants, prior to the finalizing of each new Plan. From these studies the China State Council decides on what the goals of the Plan will be, and how the state’s total resources will be allocated to implement it successfully.

The current Plan just officially promulgated is the 12th since the 1949 revolution, which brought the Chinese Communist Party into power. This centralized planning of goals for industry is a legacy of the Soviet Union’s evolution of the economic measures thought to be necessary for the transformation of socialism ultimately into communism. Needless to say, Lenin and Stalin would no longer recognize the policies of the present Chinese Communist Party, as having originated in their own theorizing and economic experimentation, which was finally an unmitigated disaster and eventually brought about the economic and political collapse of the Soviet Union.

Second, you need to understand that the job security of a Chinese manager is a direct function of his or her ability to meet the goals of the Five-Year Plan. Only systemic failure can save a manager who does not meet his assigned goals from disgrace and unemployment. Therefore Chinese managers take their assigned goals very seriously. Plans are made in detail by industry in China, in collaboration with the central and provincial governments,  to allocate the resources of labor, capital, and natural resources necessary and sufficient in the eyes of the planners to meet the industrial goals for production.

Beijing may alter the timing of the execution of any particular aspect of the Five-Year Plan, but local officials have no such power to do so.

Note well that this is the complete opposite of American practice, where legislators, if they bother with this type of planning at all, set over-reaching goals and then leave it to private industry and capital to meet them. Typically when Western politicians simply do not understand a technology, such as vehicle electrification and the production of cost-efficient batteries for such technologies, they then simply set goals to be met after they leave office. They then accept the congratulations of their similarly inclined constituents who like them know nothing of economics, manufacturing engineering, or from where natural resources come and at what rate.

This is not the case in China, where bureaucrats are chosen for specific expertise as well as political reliability.

The punditry usually refers to the Chinese planning as industrial policy, but it is as much direction as it is just simple policy.

The Telegraph article contains the following in its translation of the Five-Year Plan’s key points:

“Introduce targets for energy efficiency and consumption that will see China finding 20pc of its energy from non-fossil fuel sources by 2015. The contribution of coal and oil to fall from its current 90pc to 80pc.”

When I was in Beijing in August 2010, for the 6th Annual Chinese Society of Rare Earths Summit, a speaker representing the Chinese wind-turbine electricity-generation industry told the conference that in the next two Five-Year Plans (the 12th and 13th) beginning in 2011 China, in order to reduce the usage of coal to generate electricity and to improve energy-use efficiency per productive unit of capacity, would add 330 gigawatts of wind-generated electrical power, and that this would require a total of 59,000 metric tons of neodymium.

He said that the wind turbines to be built would use REPM-type generators to save on weight and maintenance. The reaction of the crowd, overwhelmingly made up of Chinese rare-earth miners and refiners, seemed to be one mostly of surprise.

I understood why this was so. The Nd required makes up just 28% of the total typical neodymium-iron-boron (Nd-Fe-B) alloy that comprises a REPM. Yet the spokesman from the Chinese wind-turbine industry had clearly said, and his slide showed, a need for 59,000 tonnes of new, additional, Nd demand that had not before been added to the demand-growth figures anyone had seen.

The Chinese businessman next to me had been busy photographing the wind-industry spokesman’s slides. I asked why he didn’t just request a copy of the presentation. His reply was “You’ll never get a copy from these guys. They’re running trial balloons for the State Council.”

Nd is typically around 20% of the total REEs produced by the Chinese light-rare-earth industry. That total last year, 2010, has been said by Dr Chen of the China Society for Rare Earths to have been just 89,000 tonnes of which 77,000 tonnes, or 86%, were light rare earths. This means that the Chinese production of Nd for 2010 was about 15,000 tonnes.

Of the 12,000 tonnes of heavy rare earths produced in China in 2010, just 7% was reported to be the heavy rare earth Dy, which would mean that 840 tonnes of Dy were produced from the so-called ionic absorption clays in southern China.

A typical Nd-Fe-B-based REPM contains 3-12% of Dy overall – this means that 100 kg of such magnet alloy contains from 3 to 12 kg of Dy as well as around 28 kg of Nd. The OEM automotive industry uses the most Dy loading, as high as 12%, to give their REPM-based motors, sensors, generators and the like, the maximum service life at constant high-temperature use.

Even assuming that the new demand for Nd-Fe-B-based alloy for the Chinese wind-turbine industry uses only 3% of Dy, and even if the 59,000 tonnes of Nd were only 59,000 tonnes in total of magnets, one would still need an additional 1,800 tonnes of Dy just for this project, as well as an additional 18,000 tonnes of Nd! If the demand for new additional Nd for the wind-turbine project is indeed 59,000 tonnes then a minimum demand for Dy could be 6,000 tonnes, which would be, at current production, the total dysprosium produced for the next 7 1/2 years!

These demand-growth figures, assuming that the need is 59,000 tonnes of Nd, would require at least a doubling of current Chinese light-rare-earth-metal production and the total dedication of Dy production to this clean-tech goal for most of the next decade. If there is a further demand growth from the automobile industry, the current largest user of Dy-enhanced Nd-Fe-B-type REPMs, and that growth parallels the increase in motor-vehicle production expected in the next decade then this use alone will add the need for an additional production equal to the entire 2010 production of Nd and Dy.

We would then be looking at a minimum at a torrid 15% a year growth in the demand for Nd and Dy between 2011 and 2020, just from the Chinese domestic-wind-turbine industry, and the global OEM automotive industry.

Such growth may be possible for Nd production; it is unlikely to be achieved for Dy unless there is for the first time development of Dy resources outside of China.

The Chinese have emphasized over the last year that they believe their Dy resources are being exhausted, and that at current rates of production they have only 5-25 years of production remaining.

If the growth of demand for Nd and Dy above are correct, then it is most likely that Dy will be OR IS ALREADY in short supply.

Therefore unless rare-earth mining ventures with commercially significant Dy are now brought into production as soon as possible, then clean-tech growth outside of China will slow down or stop, depending on whether or not the clean-tech manufacturer has a Chinese source for Nd-Fe-B-based-magnet-containing components, and that Chinese source has an export license for rare-earth-containing components.