The majority of the world’s rare earth metals come from China. Countries must act now to make sure geopolitical tensions do not impede the transition to clean energy.
The Russian invasion of Ukraine has highlighted the risk of depending on a single supplier for important commodities. Germany’s overdependence on Russian gas clearly demonstrates this.
A more extreme example is Europe’s dependence on China for supplying 90% of its consumption of rare earth metals – commodities that are essential for our green energy transition. Should China restrict or stop supplying these metals, the impact felt will dwarf that of restricting Russian gas to Europe, and the scale will be truly global. China hasn’t always dominated rare earth production – its dominance is the result of consecutive decisions made by the US from the late 1980s to turn China into the hub of US manufacturing, where regulation was less stringent and wages lower. Shown in the chart below, China’s dominance has become increasingly apparent, with the US taking a back seat having once been in the lead.
Source: US Geographical Survey. © FT
Rare earths are a set of 17 metallic elements that are components of all things electronic. In particular, Neodymium and Praseodymium are essential to produce the magnets found in wind turbine generators and electric vehicle motors – infrastructure that is at the centre of our energy transition. Wind turbines and electric vehicles happen to require far more rare earth metals than their fossil fuel alternatives.
A typical electric vehicle requires six times more mineral resources than a standard vehicle (see chart below) and a wind plant requires nine times more minerals than a gas-fuelled plant. Therefore, with ever-increasing momentum to go green, including the EU’s ambitions to phase out sales of petrol and diesel-powered cars by 2035 and not forgetting Boris Johnson’s promise to turn the UK into the “Saudi Arabia of wind”, the demand for rare earths is set to increase five-fold by 2030.
Source: IEA, J.P.Morgan Asset Management; the intensities are based on NMC 622 cathode and graphite anode. Actual consumption can vary depending on battery technology choice. Data as of 31 December 2021.
Relying on China to meet the rare earths’ surge in demand carries huge geopolitical and economic risk.
The need to diversify supply chains has been apparent ever since China first flexed its economic muscle in 2010 when it placed embargoes on the sales of rare earths to Japan during a diplomatic spat. This need to diversify has been enhanced by China’s recent hints that it may seek to limit exports of rare earths in pursuit of its own green energy transition. This “hint” should be taken at face value given their previous actions and has rightfully awakened the Western World.
Although attempts have been made, progress with diversification has been insignificant. In 2017, a time when China supplied an astounding 98% of Europe’s own rare earth requirements, the EU formed the European Raw Materials Alliance to start diversifying. Five years on, China still provides 90% of rare earths worldwide. But as the scramble to seriously break China’s dominance unveils, the West is realising this isn’t a straightforward task.
Despite their name, rare earths are actually widely distributed throughout the Earth’s crust. You can see this from the chart below where countries such as Brazil and Russia are also fairly rich in reserves.
The rarity comes from the fact that these metals are not readily accessible. They are found in low concentrations and are often combined with each other and other radioactive metals - this makes production of these elements both environmentally and economically expensive. To extract just a small quantity of these metals involves removing tonnes of aggregate and rock - a highly polluting process. Mined ores must then be separated before the metals’ individual properties can be exploited. This process is both difficult and expensive, with China able to offer the final product at a 30% lower cost than anywhere else. To further complicate matters, the extraction process is also hazardous as the metals exist in ores that contain radioactive elements uranium and thorium. Exposure to these has been linked to increased risk of lung and pancreatic cancer. These concerns have deterred other countries from the production of rare earths, unlike China which has historically prioritised economic gain over environmental impact and other hazards.
Source: US Geographical Survey. © FT
Of course, all human development is bound to carry environmental impacts. However, to minimise environmental impact on the route to decarbonisation, policy support for the production of wind turbines and electric vehicles should be combined with other sustainability incentives. For example, the efficient use of rare earths within existing magnet designs should be encouraged and, most importantly, so should the recycling of permanent magnets and the rare earths within them.
Nevertheless, the most pressing concern here is that the very materials which offer optimism for our future could turn the world into a pit of geopolitical tension, with China able to amplify the global divergence in economic fortunes.
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