Procurement Strategy:Rare Earth Metals

Abstract:

The rare earth elements (REE) are 17 metallic elements, including fifteen lanthanides in the periodic table and scandium and yttrium. REE are necessary components of more than 200 products across a wide range of applications, especially high-tech consumer products such as cellular telephones, computer hard drives, electric and hybrid vehicles, and flat-screen monitors and televisions. Significant defense applications include electronic displays, guidance systems, lasers, and radar and sonar systems. Although the amount of REE used in a product may not be a significant portion of that product by weight, value, or volume, the REE can be necessary for the device to function.

The 17 rare-earth elements are cerium (Ce), dysprosium (Dy), erbium (Er), europium (Eu), gadolinium (Gd), holmium (Ho), lanthanum (La), lutetium (Lu), neodymium (Nd), praseodymium (Pr), promethium (Pm), samarium (Sm), scandium (Sc), terbium (Tb), thulium (Tm), ytterbium (Yb), and yttrium (Y)

Introduction

The global REE market was estimated at 145,000 MT in 2018, driven by the demand for magnets in automobiles and energy generation—sectors that significantly contribute to the growth of this market during the forecast period. Although global consumption increased, prices for yttrium metal and oxide remained nearly unchanged in 2018 given an abundance of supply.

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• Inconsistencies in rare earth metal supply and demand are significant restraints to the growth of the global rare earth metals market during the forecast period. Because the majority of the global rare earth production capacity is in China, it is becoming difficult for other countries to rely more on China, causing huge trading disturbances.
• As the future structure of the REE industry becomes clearer largely because of Chinese reforms, the demand outlook is becoming increasingly strong. Demand growth is underpinned by government policies (notably of China and India) that are pushing to reduce the pollution associated with carbon emissions and that are promoting clean, energy-efficient technology.
• In China, consolidation efforts at midyear to stem illegal production activity were reported to have bolstered the prices of some rare-earth materials; however, by year end, producers in China were suspending production and lowering prices given low demand.
• Rare earths are relatively abundant in the Earth’s crust, but minable concentrations are less common than for most other ores. The resources are primarily in four geologic environments: carbonatites and monazite-xenotime-bearing placer deposits (sources of production for LREM), alkaline igneous systems, and ion-adsorption clay deposits.

Rare Earth Metals – Market Outlook

Demand for rare earth magnets is high in Asia Pacific given the rise in demand for high earth magnets in manufacturing industries such as automotive and electronics. In addition to China, demand for rare earth magnets is also high in other Asia Pacific countries given the expansion of the wind power industry. However, demand for rare earth magnets in other regions, such as North America, is saturated because of the nonavailability of REE and a ban on their export from China.

During the forecast period, magnets held the dominant market share for both volume and revenue. This segment grows at a cumulative average growth rate of more than 8.2 percent for revenue and 7.2 percent for market volume. The catalysts application segment has the second-largest market share in the global rare earth metals market for both volume and revenue. In 2016, the catalysts application segment contributed more than a 23-percent share of the global rare earth metals market.

The leading end uses of yttrium are in ceramics, metallurgy, and phosphors. In ceramic applications, yttrium compounds are used in abrasives, bearings and seals, high-temperature refractories for continuous-casting nozzles, jet-engine coatings, oxygen sensors in automobile engines, and wear-resistant and corrosion-resistant cutting tools.

In metallurgical applications, yttrium is used as a grain-refining additive and deoxidizer. Yttrium is also used in heating-element alloys, high-temperature superconductors, and superalloys. In electronics, yttrium-iron garnets are components in microwave radar and control high-frequency signals, among others.

The expanding use of europium in the production of blue and red phosphors, broadly used in all smartphones, televisions, and flat displays, is anticipated to boost demand for the product during the forecast period. Catalysts and permanent magnet application sections are likewise anticipated to witness quick development attributable to expanding applications in automotive and semiconductors.

Price Outlook

Of the 17 REE, some have proven to be rarer than others. Neodymium and praseodymium (NdPr)—two metals that are instrumental to the rapidly expanding green energy and electric vehicle (EV) sectors—saw the largest demand and price movements in 2018. Demand for the metals, which are used to make high-strength magnets for wind turbines and EV engines, are expected to grow as more EVs are manufactured and as clean-energy strategies are adopted.

Increased demand has understandably raised interest in these metals, creating a number of significant developments in 2018. These developments include a boost in production and exploration, output halts, REE recycling, potential tariffs, and political tensions.

Sourcing Practices and Contract Model

Most of the supply of rare earth elements is from authorized and third-party distributors through short- and medium-term contracts.  Entering into short-term contracts is advised when buying metals because prices are volatile and, hence, consumers can take advantage of price declines to schedule large purchases and build inventories.

Types of Contracts

• Short-term contracts usually range from spot purchases to contract terms up to two to three months for lower volumes.
• Long-term contracts are 6–24 months in duration with fixed and hedged metal prices for larger volumes. Price clauses are provided in the contract to offset price fluctuations.
• Authorized dealers and distributors of rare earth markers distribute to customers for low volume on short- and medium-term bases.
• Authorized dealers and distributors: ~50–70 percent of the supply
• Third-party distributors with warehouses have varieties of grades of different markers to cater to various end users on spot and short-term contract bases.
• Third-party distributors: ~20–30 percent of the supply
• End users with large requirements buy directly from rare earth metals markers through long-term contracts and have price clauses to offset price fluctuations.
• Direct supply to end users: ~10–20 percent of the supply
• End users with low metal volumes procure from authorized and third-party distributors.

Procurement Strategies

Contract and Payment Terms

Conclusion

• Global contracts with third-party distributors – Low volume buyers are advised to focus on sourcing from third-party distributors and not direct sourcing or authorized distributors. Engaging with third-party distributors may increase the scope for discounts and a steady supply.
• Negotiation power is low – Negotiation power is low for both large- and small-volume buyers. Large-volume buyers prefer to engage with tier 2 suppliers to optimize their buying power.
• Long term contracts are preferred – Long-term contracts (longer than two years) are preferred because of an anticipated scenario of high volatility of supply. Long-term forward contracts may increase the scope for discounts relative to spot and short-term contracts.