Politics and Economics of the Rare Earths Industry

Rare earth elements (REEs) are critical enablers to our modern life. Anyone who uses a cell phone, laptop, iPad, watches TV, drives a hybrid, uses batteries, has gotten an x-ray, or has light fixtures at home, is using REEs. REEs are mostly irreplaceable in maintaining and improving many aspects of modern life, and there currently exist no reliable substitutes for these elements in many applications. Although REEs comprise a relatively small industry – slightly more than US$3 billion in 2010 – this industry is now making headlines because the risk of REE supply disruption is high. REEs mainly come from one source –China –and the supply chain is opaque and ill-understood, making it difficult to track how REEs move from the mine to the end-products. REE mining and processing is also extremely toxic, making it socially costly to ramp up production. The team was tasked to conduct research and write a comprehensive report that would shed light on this inefficient market for inclusion in Citigroup’s publication and distribution to its research readership, clientele, and the broader public.

China will continue to dominate the REE industry in the short to medium term, and rebuilding non-Chinese REE supply chains may take up to fifteen years. The most significant barrier to entry in this industry is the high capital costs needed to establish REE mining and processing facilities, including environmental compliance. REE extraction and processing is extremely capital intensive, and it can take seven to fifteen years to bring a REE project into production phase. The processing of REE is complex and is still not well-understood outside of China, which has been investing in and incubating this industry, and accumulating industrial intellectual capital and expertise, since the 1970s. Demand for REEs is expected to remain robust in the medium term, driven by growing consumption of consumer electronics and clean energy. Hence, REE prices will likely remain strong in the short to long run.