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FAR AND WIDE

Japan’s global rare earths quest holds lessons for the US and Europe

Wheel loader at Mountain Pass rare earths mine
Reuters/Steve Marcus
A well-grounded plan.
  • Mary Hui
By Mary Hui

Reporter

Published

In 2010, the Japanese government had a rude wakeup call: Beijing had abruptly cut off all rare earth exports to Japan over a fishing trawler dispute. Tokyo was almost entirely dependent on China for the critical metals, and the embargo exposed this acute vulnerability.

The silver lining to this incident, which sent global rare earth prices skyrocketing before they crashed down as the speculative bubble popped, is that it forced Japan to rethink its critical raw materials policy. A decade on, it has significantly reduced its dependance on China for rare earths, and continues to diversify its supply chain by investing in projects around the world. Its model may have lessons for the US, which desperately wants to break China’s rare earths monopoly. Rare earths are a group of 17 metals that are crucial in the manufacturing of high-tech products.

“Japan experienced what the US faces now: a political conflict with China, in which China seems to be willing to exploit its dominance in the [rare earths] market,” wrote Marc Schmid, who researches rare earths at the Martin Luther University Halle-Wittenberg. “The US appears to be in a similar vulnerable position as Japan was about a decade ago.”

A state-led, global quest

Central to Japan’s rare earths procurement strategy is the Japan Oil, Gas and Metals National Corporation, or Jogmec, a state-backed company governed by the ministry of economy, trade, and industry. Though Jogmec was established in 2004 through the merger of two decades-old oil and metals mining entities, it was only after China’s embargo that it turned its attention to rare earths, said Nabeel Mancheri, secretary-general of the Brussels-based Rare Earth Industry Association: “The focus started from the 2010 crisis.”

A key prong of Jogmec’s strategy was to diversify Japan’s supplies. That meant investing in and partnering with rare earths companies around the world starting soon after the Chinese embargo, including rescuing Australia’s Lynas from collapse, in order to build a wider portfolio of suppliers. It also supports efforts to recycle rare earths, as well as research to develop rare earth substitutes. That strategy has been largely successful: Japan slashed rare earth supplies from China from over 90% of imports to 58% within a decade, according to UN Comtrade data. It aims to bring that below 50% by 2025.

As the global shift to electric vehicles and renewable energy is expected to drive a surge in rare earth demand, Japan is set to further increase funding for the exploration and mining of rare earths, according to Nikkei. One consideration is to lift the current 50% cap on state funding for resource exploration projects, which could ease the private sector’s financial burden in inherently risky mining projects.

Industry experts say Japan’s example illustrates the importance of targeted state-led investment in the rare earths sector. Through Jogmec, Japan could direct substantial government funds to support different mining projects, and secure rights to a certain amount of rare earths in what’s known as offtake agreements. Often, that means Japan is able to lock in a specified quantity of rare earth imports over a designated time frame. That also stabilizes the volume and price of supplies, which is important for the sustainability of downstream manufacturers that use rare earth materials to produce batteries and magnets that go into things like electric vehicles and wind turbines.

For instance, Jogmec and top Japanese trading firm Sojitz invested $250 million in Lynas in 2011 in return for a steady supply of rare earths. The loan terms were restructured in 2016 to keep the ailing Lynas from going bust, and restructured again in 2019 to ensure Japan gets “priority supply” of its rare earths through 2038.

Elsewhere, Jogmec recently deepened its investment in a joint venture with Canada-headquartered Namibia Critical Metals on the Lofdal rare earths mining project in Namibia. Jogmec has already invested millions to finance exploration and development into Lofdal, and could pour in (pdf) another $10 million. The Lofdal project holds particular significance because it is rich in heavy rare earths.

“Light” and “heavy” rare earths refer to their atomic number. Lynas is more focused on the former, while China currently dominates global supplies of the latter. The most widely used rare earth permanent magnet, neodymium-iron-boron or NdFeB, uses the light rare earths neodymium and paseodymium. Adding a heavy rare earth like dysprosium and sometimes terbium makes the magnet more temperature stable, and suitable for use in offshore wind turbines where maintenance costs are high.

One reason why the US and Europe have not been as active in providing significant state support to the rare earths sector is that those governments are just not set up for the task, said Kotaro Shimizu, chief analyst at Mitsubishi UFJ Research and Consulting. While the US Geological Survey works on rare earths issues, it’s fundamentally a research organization and doesn’t have a financing function, he said. Similarly, the European Commission has an innovation council, but it too is centered around research rather than financing.

For now, the most recent US federal funding for rare earths projects have come from the defense department. Meanwhile, a body modeled after Jogmec was actually proposed by the European Commission in 2015, though the idea hasn’t taken shape.

Japan’s lessons for the US and Europe

As the US and Europe seek to secure their rare earths supply chains and limit reliance on China, Japan’s model may offer some guidance.

One key difference is that while Japan is scarce in mineral resources, the US and Europe have sizable rare earth reserves. The problem, in the case of the US, is that it ceded its mining and processing capabilities to China over the past decades, and must now rebuild the industry at a time when China is already deeply embedded in global rare earth supply chains.

“Japan and Australia have definitely led the way in terms of how the US government should approach [securing rare earths supplies],” but it’s “not necessarily a cut-and-paste” job for Washington in terms of emulating specific policies, said Pini Althaus, CEO of USA Rare Earth, which is developing a mine in Texas and establishing a domestic processing facility in Colorado. It is expecting to go public in a New York listing this year.

For example, the US could use existing federal legislation to build up its national defense stockpile of rare earths by committing to buying rare earths from domestic producers over a certain number of years, and within a certain price band, explained Dan McGroarty, advisory board member of USA Rare Earth.

That would, in effect, be an offtake agreement much like those of Jogmec with various rare earths producers. And the US government, by committing to buying from a particular domestic producer, would send a strong signal to capital markets, said McGroarty. This would also avoid “picking winners and losers,” which direct federal grants to specific companies would entail, possibly at the expense of driving private capital away from other firms.

Experts also caution that rare earth mines only represent the upstream part of the supply chain concerned with getting the ores out of the ground. Processing those ores into high-purity rare earth metals, then using them to manufacture magnets and batteries, is just as crucial.

“A hundred new mines can open around the world with generous public support, but without investing in value-added processing and manufacturing, the rest of the world will continue to remain dependent on China for refined rare earths and rare earth-bearing technologies,” said Julie Klinger, assistant professor in geography at the University of Delaware.

The nitty-gritty of rare earth procurement policies aside, there’s one key takeaway from Japan’s relative success, said the Rare Earth Industry Association’s Mancheri: “It’s that now to have your own value chain, government support is required. The market cannot bring back the industry that you lost.”

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