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The U.S.-China rare earths battle

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In the high desert of Southern California, a vast open pit has become a battleground in the global struggle for industrial supremacy.

Giant yellow trucks are again shuttling ore from the once-defunct Mountain Pass Rare Earth Mine — and the revival is happening with a patriotic twist.

U.S. flag patches adorn workers’ uniforms. The souvenir crystalline chunks of orange rare-earth ore given to visitors proclaim “Made in U.S.A.” on the warranty. A statement on the website of MP Materials, the mine’s owner, reads: “Our Mission is to restore the full rare earth supply chain to the United States of America.”

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The return of rare earths to this venerable mining area pocked with cactuses and Joshua trees is the product of both political and commercial ambition. Mountain Pass is turning out essential minerals for strategic industries from military equipment to the devices that power the green technology revolution.

The mine’s regeneration has received U.S. government backing, including funding from the Department of Defense. It is part of a Washington plan to rebuild American presence in a metals market forfeited to China’s lower-cost production decades ago.

Mountain Pass’ new era is the creation of James Litinsky and Michael Rosenthal, financiers in their mid 40s who have known each other since childhood. Now they are doing international deals to supply companies such as Japan’s Sumitomo Corp., as the worldwide race for rare-earth self-sufficiency intensifies.

“Two hedge fund managers take over a mine — what could go wrong, right?” Litinsky joked to Nikkei Asia. “But I will tell you that from day one, we had a long-term vision. … This was never like, ‘Oh, we’re gonna run this for a few months and then flip it.’ We never had that mentality. From the very beginning, we were thinking about building a great American company from scratch.”

MP Materials’ story highlights the complexities of the U.S.-China relationship and of the mutual dependencies that endure despite growing political tensions. The U.S. company’s main customer — and its fourth-largest shareholder — is China’s state-backed, Shanghai-listed Shenghe Resources Holding, a rare-earth miner and processor.

All this makes the resurrection of MP’s mine in the Mojave sands a microcosm of the world’s central economic rivalry — and of the bigger fight to save the planet.

“Rare earths and many other minerals out there are the foundation of the green transition we are seeing in China, the U.S. and everywhere,” said Subash Chandra, an energy analyst at New York-based investment bank Benchmark Co. “And there is no company you can compare MP Materials to in the U.S.”

Rare-earth minerals increasingly drive the world economy, used in devices from smartphones to fighter jets. The magic of these lustrous but easily tarnished metals is that they can make magnets many times stronger than those traditionally fashioned from iron. Without the rare-earth elements such as neodymium, praseodymium and lanthanum that MP Materials focuses on, electric vehicle motors and computer hard drives would not run.

Despite their name, most rare earths are relatively abundant — although they are not always easy to extract. There are known reserves across the world, from Burundi to Vietnam. Some powerful countries, such as India, have big holdings but barely tapped them last year.

China is now the world’s largest producer of rare earths by far, thanks to its decadeslong effort to develop the industry. Last year it accounted for an estimated 70% of output, according to the United States Geological Survey. China also has the world’s largest reserves, totaling 44 million tonnes of rare-earth-oxide (REO) equivalent — about double those of Vietnam, Brazil or Russia.

The rare-earths story echoes that of chip manufacturing, where Washington is also scrambling to recover lost status. The task is, if anything, even larger, given that the U.S. has always retained significant capacity in advanced chip design. For rare earths, by contrast, there was zero production on U.S. soil as recently as 2017, according to government figures.

By last year, Mountain Pass accounted for the entire 14% U.S. share of world rare-earth output. The scale is still relatively modest: U.S. rare-earth reserves were just over 5% of China’s. The Asian superpower also remains dominant in other aspects of production and processing.

Washington’s hope is that a radical change of policy will supercharge the American rare-earths recovery. In 2021, President Joe Biden ordered government agencies to evaluate the resilience and security of the nation’s critical supply chains and point to weaknesses. They found that U.S. “reliance on China for [rare earth] raw material and magnet production” to be a key strategic vulnerability.

Biden warned Americans last year about “what happens when we become dependent on other countries” for essentials such as computer chips and key minerals.

“The fact is that we can’t build a future that’s made in America if we ourselves are dependent on China for the materials that power the products of today and tomorrow,” he said.

The Mountain Pass mine’s flagship role in the U.S. rare-earths push is the latest episode of an eventful history. The area around it first boomed in the 1860s when a “horde of prospectors swarmed over southern Nevada and southeastern California,” according to an official government account. They found copper, lead, gold, silver and zinc, before production tailed off after World War I.

The place gained a second lease of life after World War II with the discovery of rare-earth oxides. The presence of europium in particular was perfectly timed: The metal’s ability to emit red light made it a crucial ingredient in color televisions. As the visual media age exploded into life, so did the Mountain Pass mineral extraction that fed it.

The result was that the mine became the world’s leading source of rare earths. By 1974, it accounted for 78% of global output. Then, in the mid-1980s, China began to ramp up production. It pulled decisively ahead of the U.S. in the mid-1990s.

Mountain Pass’ decline accelerated when a chemical waste spillage in 2002 forced it to temporarily shut down. It then paused mining new ore because competition from China had made it unprofitable. The mine restarted full operations in the early 2010s but soon suffered another blow when its parent company, Molycorp, filed for bankruptcy. It seemed the U.S. rare-earths dream was over.

Enter the Mountain Pass rescue party: Litinsky and Rosenthal, both Florida-born investors. When they sat in meetings of Molycorp’s creditors in 2014, they did not think it was the start of a journey in which they would swap their suits and ties for a mining kit of dusty helmets, reflective safety vests and heavy boots. Litinsky, who sports cropped brown hair and a look of determination, was running his own hedge fund, JHL Capital Group. Rosenthal, tall and mild-mannered, was covering the global automotive sector and China at New York asset management company QVT Financial.

The pair, who grew up together in Fort Lauderdale, partnered in not just a corporate rescue but a metamorphosis. They won a battle for control of the Mountain Pass operation by paying $20.5 million, with Litinsky and his hedge fund the two largest shareholders. They assembled a board with a strong strategic flavor. It includes Maryanne Lavan, general counsel of Lockheed Martin, the U.S. defense contractor. Another member is retired U.S. Air Force Gen. Richard Myers, a former chairman of the Joint Chiefs of Staff. Myers has said the lack of a sustainable and reliable supply of rare earths in North America would “represent a single point of failure for national and economic security.”

Litinsky, MP’s CEO, said he was always “very bullish on the future of rare earths, for obvious reasons now which weren’t so apparent at the time.”

“I always jokingly say I made the mistake of seeing all the assets because I couldn’t believe that it was just going to be wiped away,” he said. “There was tremendous value there given the national security importance and the commercial importance.”

Mountain Pass is a world apart from the bright lights of Las Vegas, about an hour northeast on the I-15 highway. During a visit on a sunny May day, the mine was surrounded by greenery and colorful flowers thanks to the unusually long rains in California this year. The Stars and Stripes fluttered alongside MP Materials’ flag, on which two curved orange lines evoked the rocky peaks of the facility’s elevated location.

Rosenthal, MP Materials’ chief operating officer, played host. Asked why he and Litinsky chose to leave cushy Wall Street jobs to run a mothballed mine in the sands, he answered pithily: “Because no one else is doing it.”

Disused conveyor tracks and rusty cabins built by previous owners served as a reminder of the difficulties of running a U.S. rare-earth mine. A single bulldozer worked the only pit, which is about 600 feet (183 meters) deep. Piles of reddish broken rocks lay waiting for heavy trucks to collect them and load them into the crusher. They would then be sent to milling and flotation facilities to turn them into powdered concentrate to be shipped for further processing, in China.

“There’s nowhere else to send it,” Litinsky noted. “That’s where it gets refined.”

Litinsky and Rosenthal first hired a management team for Mountain Pass but later decided to run the operation themselves. Employee stock incentives and a safety record that has allowed three years of uninterrupted operations have helped turn a once uneconomic mine around, Litinsky said. In 2022, the company’s revenues rose 59%, to $527.5 million, while net income more than doubled, to $289 million.

Ramping up mine production is just the first step that MP Materials and the U.S. government need to take to achieve their ambitions. The next challenge is much bigger: building capacity to refine rare-earth concentrates and turn them into competitively priced metals and magnets.

“Rare earths themselves are prevalent — they’re not that rare,” said Tom Schneberger, CEO of USA Rare Earth, an Oklahoma-based startup that produces advanced magnets. “But what is difficult is matching up the right technology, extracting them and separating them, turning them into sale-able products that are usable — and doing that cost-effectively.”

The second stage of MP Materials’ strategy has been to build the apparatus to separate and refine some rare earth concentrates at Mountain Pass. The company told Nikkei during the May tour that it would put the new processing capacity into production in the second quarter of this year. It said in late June it would provide an update on progress when it announces its second-quarter results in August.

MP’s stage three project is to build a factory to make refined rare-earth metals and finished magnets. The company broke ground in Texas last year on the project. It is scheduled to start production later this year.

MP Materials’ strategy shows the scale of the task needed for the U.S. to wrestle back control of the rare earths industry. Even more important than China’s majority share of world production is its still greater dominance further down the supply chain. China has about 89% of the world’s separation capacity, 90% of its refining capacity and 92% of global magnet manufacturing, according to a U.S. Department of Energy report published last year.

This near-hegemony has become a potent weapon in China’s diplomatic arsenal. In 2010, it temporarily cut rare-earth exports to Japan after tensions rose over the Senkaku Islands, which are administered by Tokyo but claimed by Beijing. The suspension alarmed Japanese companies and triggered government efforts to reduce the nation’s reliance on China for supplies of the metals.

The threat of rare-earth restrictions reared up again at the height of the U.S.-China trade war in 2019. The Global Times, a Chinese state-run newspaper, called the U.S. reliance on the minerals “an ace in China’s hand.” It said the dependence could be used to pressure then-U.S. President Donald Trump.

Beijing has lately stepped up efforts to preserve its dominant position in the face of U.S. moves to rev up its own rare-earth industry. In April, China’s commerce and technology ministries proposed a ban on exports of some rare-earth magnet-making technologies.

China also said this week that it would restrict exports of gallium and germanium, two non-rare-earth elements crucial for making semiconductors and other electronics.

MP Materials’ Litinsky claims not to be too worried about the possibility of Chinese curbs on rare-earth-related exports. His company has “purposely avoided major buys of equipment and technology from China for our Texas facility for this express reason,” he told an earnings call in May.

Strained U.S.-China relations are far from the only difficulty facing MP Materials. For one, scaling up the various elements of rare-earth processing and magnet-making will be a big technical challenge, analysts warn.

“Techniques like fractional extraction require longtime tests and experience,” said Leslie Liang, senior consultant at Wood Mackenzie, a global energy and natural resources consultancy. “[And] any further process like metalization cannot be established overnight.”

Competing on price with China is a further conundrum. Wages, machinery and permits all tend to be more expensive in the U.S. China’s rare-earths industry has also become more efficient over the years by automating refinery lines and improving operational management, according to Wood Mackenzie’s Liang.

“The problem is mining and processing is a very low margin commodity [business],” said Pat Wilson, commissioner of the Department of Economic Development in the U.S. state of Georgia, which is trying to develop its own rare-earths industry. “So you have this huge upfront cost and you don’t make it back very quickly.”

Washington is trying to tilt the balance through financial aid. In 2020, MP Materials received a $9.6 million grant from the Department of Defense to build its light rare-earth elements separation facilities at Mountain Pass.

Then, under a 2021 Biden administration executive order, the Department of Defense in 2022 awarded MP Materials a further $35 million. This was to help the company’s efforts to construct second-stage processing facilities such as drying and roasting machines for ore at Mountain Pass. The Pentagon is interested because heavy rare earth elements are critical for weapons and vehicles such as missiles and submarines. The Department of Defense did not respond to a request for comment on this story.

More U.S. government financial support for MP Materials is potentially in the pipeline. A bill on rare earths is being discussed by Congress and receiving bipartisan support. The law would create a production tax credit of $20 per kilogram or more for rare-earth magnets made in the U.S.

MP Materials insists there is no conflict between the U.S. government’s strategic policy aims and the company’s commercial goals. It says it would be profitable even without Washington’s help.

“This is a shareholder-driven public company,” Litinsky said. “This is not a government solution. We’ve said to investors from the beginning that we really view ourselves as country-first capitalists or patriotic capitalists.”

But company officials acknowledge that Washington’s support has been very useful — and not just financially. The Pentagon interest helped MP Materials build the stage two facilities in 18 months during pandemic labor shortages that caused construction delays across the country.

“The benefits of having a Department of Defense-sponsored project is they help with the supply chain,” said Matt Sloustcher, MP Materials’ senior vice president of communications and policy. He added that the Mountain Pass site is frequently visited by government officials and that “one of [their] most asked questions is: How can they help?”

The tussle for rare-earths ascendancy is much more than a U.S.-China affair. MP Materials is seeking to deepen international supply networks, notably across the Pacific. In February, it announced a partnership with Sumitomo Corp., the Japanese trading house in which Warren Buffett’s Berkshire Hathaway has been increasing its stake toward a maximum 9.9%. Under the agreement with MP, Sumitomo would become the company’s exclusive distributor in the country, as Tokyo looks to reduce its dependency on China.

“Outside the major rare earth producing countries, there are very few companies with a track record of rare-earth production,” a Sumitomo spokesperson told Nikkei. “As we looked for a business partner, we evaluated companies based on criteria including scale of operations. MP Materials was at the top of the candidate list.”

Sumitomo currently relies on Chinese smelters to extract rare-earth elements. Under the new arrangement, MP Materials will handle not only mining but also the smelting of ores and the separation of various elements from them. Refined metals will be sold to Japanese magnet makers. The deal will supply Japan with roughly 30% of the neodymium and praseodymium it needs. Sumitomo is currently considering whether to partner with MP Materials on its stage three project to produce finished rare-earth metals and magnets.

The Sumitomo deal shows the limits as well as the possibilities of the U.S. strategy to build its own rare-earth networks. It will be hard, if not impossible, to completely eliminate China from supply chains. In 2019, Japan bought 36% of China’s rare-earth exports, with the U.S. taking a further 33.4%, according to the Center for Strategic and International Studies, citing Chinese customs data.

That fundamental reliance is reflected in MP Materials’ own China connections. The main buyer of its unrefined rare earth concentrate products is Shenghe Resources, a smelting and separation company that supplies domestic refiners. Shenghe and its affiliates also own a stake of almost 8% in MP Materials. Shenghe did not respond to a request for comment.

MP’s Litinsky said there was no contradiction between Shenghe’s shareholding and his business’s aims — or those of the U.S. government.

“If you are a publicly traded company, in the United States of America, anyone can buy your stock, anyone can own your stock,” he said. “We do have an important mission. But you know, we are a shareholder-driven, owner-operator culture company where we want to make money for investors.”

The U.S. and its allies face additional obstacles in their attempts to build their own rare earth supply chains. One is the industry’s environmental impact, a point highlighted by the recent experience of Australia’s Lynas Rare Earths. Lynas is the only large-scale producer of separated rare-earth materials outside China — it accounts for 11% of the global market, according to Wood Mackenzie.

Lynas is urgently setting up a plant in the Western Australian gold mining town of Kalgoorlie to carry out separation. The company is racing to complete the facility, which was first announced in 2019. The need is pressing because of a Malaysian government ruling in February that the company should stop key activities at its facility in the country. Kuala Lumpur cited concerns about radiation levels in Lynas’ cracking and leaching operations. The company said independent scientific reviews had found its operations there to be “low risk and compliant with regulations.”

Lynas insists the Kalgoorlie plant was always intended to “complement not replace” its Malaysian operations, which exported to countries including Japan and the U.S. But it admits the cost of operating in Australia will be much higher. It said on June 19 that labor shortages were hindering its efforts to finish the Western Australia facility.

Despite the disruption, Lynas has said the new plant should open up new opportunities to serve countries seeking great supply chain security. In May, the U.S. and Australian governments announced they would team up to manage resources of rare earths and other critical minerals. The Quad — a grouping of those two countries plus India and Japan — has been discussing similar cooperation.

“If we put aside geopolitical issues, even the pandemic has demonstrated that single-sourced supply can be a risk in any area,” said Amanda Lacaze, Lynas’ chief executive officer. “A singular supply chain for rare earths is problematic, particularly in a supply chain where the material is critical for success.”

Other fundamental commercial and political uncertainties cloud the rare-earth industry — and these have manifested themselves in the metals’ price volatility. Large untapped reserves of the minerals around the world remain to be exploited. Technological advances add to the unpredictability of supply and demand: In March, Tesla said it would eliminate rare earths from its next-generation electric vehicles. Apple aims to use entirely recycled rare-earth elements by 2025.

Back at Mountain Pass, not even the management who returned the mine to life think the U.S. will regain rare-earth hegemony any time soon. As with efforts to bring chip supply chains back onshore, Washington and its allies face a long hard quest to recover lost strategic ground.

“Let’s be clear that China dominates the rare earth supply chain,” Litinsky said, “and that they will dominate it for many, many years to come.”

 

Source: Nikkei Asia

 

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