The rare earth industry is drawing supply chain lessons from the semiconductor shortage

Chain effect.
Chain effect.
Image: Reuters/Steve Marcus
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The global computer chips shortage that began worsening late last year has disrupted supply chains around the world, snarling production of everything from cars to phones to household appliances. And the rare earth industry is watching closely.

Both chips and rare earths form critical supply chains that power the high-tech economy, and are the subject of intense scrutiny by governments looking to shore up supplies as a matter of national security. Rare earths are a group of 17 metals crucial to the manufacturing of high-tech products.

At MP Materials, the operator of the only active rare earths mine in the US, executives and staffers are carefully studying the company’s own supply chain for weaknesses and chokepoints, in part motivated by the situation surrounding the prolonged chips shortfall. If a lack of chips has idled auto plants from India to Canada, what can be done to minimize the risk that a dearth of rare earth products will disrupt wind turbine and electric vehicle battery manufacturers?

Ryan Corbett, CFO of MP, said the chips crunch has prompted major manufacturers to rethink “the last 50 years of just-in-time manufacturing.”

The drawbacks of “just in time”

That just-in-time approach kept costs low by spreading out the supply chain globally and placing orders on an as-needed basis rather than stocking a large inventory. But it presents its own risks. That’s especially so when faced with an unprecedented crisis like a once-in-a-century pandemic, as the Covid-exacerbated chip shortage has illustrated. When the pandemic brought about a sudden swing in demand, with consumer spending first tanking before ramping up soon after, it set in motion the bullwhip effect up and down the supply chain. Now, the chips shortage is expected to last through at least the end of 2021.

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Similarly, a shortage of rare earth magnets, would risk throwing manufacturing processes of critical components of climate economy products like electric vehicles and wind turbines into disarray.

And even if supply disruptions were temporary—say, a short-term export ban or a months-long shutdown of a major rare earths mine and processing facility due to financial constraints—the impact on prices, demand, production, and capacity could extend years beyond the actual period of disruption. That’s according to a study published in January by researchers from the US Department of Energy’s Argonne National Laboratory, who modeled the effects of different disruptions like mine closures and natural disasters on the global rare earth market.

Though the researchers focused on modeling hypothetical disruptions in the rare earth industry, there are certain parallels with the ongoing turmoil in the semiconductor sector.

“The semiconductor supply chain is very complex, which presents difficulties in responding to demand changes”—and similar challenges play out in the rare earth market, said Allison Bennett Irion, study co-author and chair of Argonne’s supply chain security research. “An increase in demand can be difficult to absorb relative to a complex industry.”

China, the linchpin of the rare earth supply chain

Just last year, the pandemic caused major disruptions in China’s rare earth sector, with overall rare earth exports down nearly 20% last January and February compared to the same period a year earlier, subsequently causing product shortages as the effects of shutdowns filtered down the supply chain.

While there are some overlaps and similarities to the risks that semiconductor and rare earths supply chains face, the challenges aren’t identical.

For one, the semiconductor industry’s supply chains are comparatively more diversified geographically, though manufacturing is dominated by three countries. By contrast, rare earth supply chains have a higher degree of concentration. For instance, China is responsible for nearly 90% of all rare earth processing. It also accounts for 87% of global rare earth magnet production, according to 2018 figures from Ping An Securities.

Still, some of the events that have spurred and exacerbated the chip shortage—a spike in demand followed by severe weather that disrupted major manufacturers—are things that the rare earth industry can be vulnerable to as well.

“A [rare earth] magnet could be 100 bucks, but if you don’t have them…you’re going to have shutdowns in your factories, as you do today,” said Corbett, of MP.

Meanwhile, ramping up production of both chips and rare earths is a long and costly process. It can take two years to build and equip a semiconductor fabrication plant, at a cost of up to billions of dollars. Similarly, fully getting a rare earth mine up and running can take years of exploration and permitting processes, and may get hindered by political changes. And a high degree of price volatility could mean that by the time a mine is up and running, rare earth prices have dropped to a point where it’s not economically viable to actually operate the mine.

“There certainly could be concerns if the market conditions change that Mountain Pass could run into some of those troubles,” said Matthew Riddle, another co-author of the Argonne study, referring to MP’s mine while noting that specific scenario was not explored in the study.”If you start up a mine when conditions are right for it, when things change that may not be able to last.”

Give the heavy investment and long runway time required for rare earths development, some experts suggest other countries could take a cue from Japan’s strategy, where government investment and long-term contracts have helped mitigate some volatility.

The industry has also been working to diversify its supply chains. MP, for example, is working to establish domestic separation and processing capacities to produce high-purity rare earth oxides. (MP currently sends its rare earth concentrates to China for processing; as of March 31, the Chinese company Shenghe Resources accounted for over 90% of MP’s product sales.) Another firm, USA Rare Earth, is developing a mine in Texas and is working on setting up processing and magnet-making facilities. Meanwhile, two North American companies are building a US-Europe rare earth supply chain.

“The real key to this is the recognition from industry that a single point of failure should not be tolerated, and the way to maximize value is not to focus 100% on cost but to really have a recognition of the provenance of your materials, where they’re coming from, how secure are they?” said Corbett, of MP Materials. “And I think that’s already happening.”