RARE EARTHS: An Overview of Supply Chain Issues & U.S

November 4, 2011

RARE EARTHS: An Overview of Supply Chain Issues & U.S. Government Responses

All original material is the property of J. A. Green &

Company and further reproduction is given through

written permission only. Violators are subject to

prosecution.

Rare Earths: An Overview of Supply Chain Issues & U.S. Government Responses

Table of Contents

All original material is the property of J. A. Green & Company and further reproduction is given

through written permission only. Violators are subject to

prosecution.

November 4, 2011

Introduction to Rare Earths

U.S. Government Actions

Planning Ahead: Obstacles & Opportunities

Conclusions

• Total Global Output• REs and the Defense Supply Chain• RE Metals, Alloys, and Powders Supply Chain• Concerns for U.S. Customers

Introduction to Rare Earths

©2011

©2011Introduction to Rare Earths (REs)

17 total Scandium Light Medium Heavy

“Rare” is a misnomer To economically

process is “rare”

Radioactivity typical around deposits (Thorium)

Source: INDUSTRIAL MINERALS COMPANY AUSTRALIA

©2011REO World Output in 2010

Malaysia0.3%

China97.0%

India2.2%

Brazil0.5%

124,000 metric tons of contained rare-earth oxide (REO)

Source: USGS Reports

REE Energy & Defense Applications

F-35 JDAM Javelin Missile

Global Hawk UAV Defense Satellite Communications System: DSCS III

M1A1 Abrams

©2011

©2011

RE Manufacture &the Defense Supply Chain

Magnet Manu-facturer

AlloyMetalOxideConcen-trateOre

Explor-ation / Mining

Magnet Distributor / Fabricator

Major Subcontractor OEM / Prime US Military

Customer

RE Magnet Supply Chain Systems Integration

Magnet Picture: ELECTRON ENERGY CORPORATION

≈100% Global

Production

97% Global

Production

Only 2 US Producers Only 2 US

SmCoProducers

0 US NdFeB

Producers

Ore Concen-trate Oxide Metal Alloy


RE Magnets

©2011







Customer




Chinese Export Products

CHINESE EXPORT QUOTA SYSTEM: Source, USGS Reports

China has reduced export licenses by 53% (domestic producers) & 25% (joint

ventures) since 2006

China has issued export restrictions by product

to encourage high value downstream production

since 2006

Toyota, Nissan, Honda, & GM have moved R&D and

RE-intensive electric vehicle engine production facilities

to China since 2011

? ?

RE Magnets

©2011







Customer




GAO estimates 15 years, the expiration of certain patents, and significant financing are required to rebuild the US

RE supply chain

China has issued export restrictions by product

to encourage high value downstream production

since 2006

Toyota, Nissan, Honda, & GM have moved R&D and

RE-intensive electric vehicle engine production facilities

to China since 2011

? ?

China has reduced export licenses by 53% (domestic producers) & 25% (joint

ventures) since 2006

CHINESE EXPORT QUOTA SYSTEM: Source, USGS Reports

RE Magnets

©2011

Rare Earth Metals, Alloys, and Powders Supply Chain

Oxides

Lynas

Molycorp

Great Western

Japan Oil, Gas, & Metals

Sichuan Mianning Mining

Jiangxi Copper

Baotou Steel Rare Earth

Sichuan HanxinMining Industrial

Metals, Alloys, Powders

Great Western Technologies / Less Common

Metals

Shin Etsu

Molycorp Metals and Alloys

Magnaquench

CAS Key Laboratory of

Rare Earth Chemistry and

PhysicsZhe Jian Zhao-Ri-Ke Magnet

Industries

Aichi Steel

Showa Denko

Santoku Corpl97% of Global Production

Under Construction, Permitted, &

Financed

Appx. $500 million financing required to refine

RE oxides

©2011NdFeB Magnet Supply Chain

Oxides

Metals, Alloys,

Powders

NdFeBMagnet

Manufacturer

Hitachi Metals

Vacuumschmelze GmbH

Beigin JingciMagnetism Technology

Zhejiang Tinnau

Ningbo Co-Star Material High

TechAdvanced

Technology & Materials

San Huan New Mateial High-

Tech

Thinova

Ningbo Yunshen

Shin Etsu

TDK

Thomas & Skinner

Arnold Magnetic

Molycorp

NdFeBMagnet

Distributor & Fabricator

Dexter Magnetic

TechnologiesForce Field

KJ Magnetics

Allstar

Quadrant

Adams

Bunting

Magnetic Component Engineering

Magnet Sales

Stanford Magnetics

Dure MagneticIntegrated Magnetics

Ningbo LihePermanent Magnetic Materials

NningboXionghai

Magnetics

Compass Magnets &

Components

Proposed Production

US C

ustom

er

Sales from Distributors

or Manufacturer

-direct

©2011SmCo Magnet Supply Chain

Oxides

Metals, Alloys,

Powders

SmCo Magnet

Manufacturer

Electron Energy Corp

Chengdu Magnetic Material

Science & Technology

Zhejiang Tinnau

Ningbo Co-Star Material High Tech

Nanjing ChuangkenMagnetism

Ningbo Ninggang

Perm. Magnetic Materials

Shin Etsu

Vacuumschmelze GmbH

Arnold Magnetic

SmCo Magnet

Distributor & Fabricator

Integrated Magnets

Dexter Magnetic

Technologies

Quadrant

Magnetic Component Engineering

Bunting

Adams

Magnet Sales

Stanford Magnetics

Dure Magnetic

Applied Magnets

Ningbo LihePermanent Magnetic Materials

Ningbo Xionghai

MagneticsCompass

Magnets & Components

s

US C

ustom

erSales from Distributors

or Manufacturer

-direct

©2011

REE Facility & Systems Integration Migration

1949: Large Amounts of Light REE found at Mountain Pass

1965-1985: U.S. performs all stages of REE processing

All data from USGS Report 2011-1042; ∆ arrows are proportional to percentage change.

©2011


1985-1999: China Floods the Global Market

1998: Mountain Pass separation plant closes

1990: China declares Rare Earths a protected & strategic material; any RE operations must occur in a PRC-company joint venture or buy from PRC traders & producers


©2011


1985-1999: China Floods the Global Market 1999: China initiates export quotas (47,000t)

1990: China declares Rare Earths a protected & strategic material; any RE operations must occur in a PRC-company joint venture or buy from PRC traders & producers


2002: Mountain Pass suspends operations

1998: Mountain Pass separation plant closes

©2011


2003: Magnequench (NdFeB) closes plant & moves to China

Vacuumschmelze (NdFeB) closes KY plant

China exports contract 14.89% (-7,000 t) from 2000


2005: Hitachi Magnetics (NdFeB) closes MI plant

©2011


2005: First PRC-private joint venture export quotas recorded (17,570t)

CNOOC attempt to purchase UNOCAL, which owned Mountain Pass


2006: Littelfuse moves semiconductor wafer production to China

©2011


2005: First PRC-private joint venture export quotas recorded (17,570t)

CNOOC attempt to purchase UNOCAL, which owned Mountain Pass


2006: Littelfuse moves semiconductor wafer production to China

2008: China exports contract 23.77% (-11,080 t) from 2005

©2011



2009: China attempts to buy Lynas (Mt. Weld)

2010: China plans RE stockpile

De facto embargo of Japan after SenkakuIslands incident

China exports contract 39.47% (-19,732 t) from 2008

©2011



2011: Nissan & Toyota indicate they will move some electric motor and battery manufacture for hybrid vehicles to China

Showa Denko & Hitachi Magnetics move increasing magnet production to China

2011: GM agrees to expand research, design, and development of electric vehicles with Chinese partner SAIC

Honda plans to move battery & electric motor manufacture for hybrid vehicles to China

©2011Concerns for U.S. Consumers

2 U.S. manufacturer of SmCo magnets

0 U.S. manufacturers of NdFeB magnets

2 U.S. alloy makers (2-3% global magnet alloy capacity)

0 U.S. commercial bulk metal manufacturers(co-reduction capacity)

• Legislative Branch• Executive Branch

U.S. Government Actions

©2011

©2011

Overview of U.S. Government Action 2010-2011

Legislative Branch

Executive Branch

©2011Overview of Executive Actions

OSTP Interagency Working Group DOC, DOD, DOE, DOS, EPA, JCS, OSTP, USGS, etc NSTC Subcommittee on strategic materials established

Department of Energy Critical Materials Strategy issued in December 2010 Identifies as critical Dy, Ne, Tb, Eu and Y

Second RFI closed in May 2011 ~$20M earmarked for “Rare Earth Energy Hub” in FY 12

budget - http://www.slideshare.net/energy/secretary-chus-fy-2012-budget-briefing

©2011Overview of Executive Actions

Department of Defense Industrial Policy report indefinitely delayed Sec. 843 defense supply-demand assessment due in July 2011 Urged rebuilding the REO supply chain in the Annual Industrial

Capabilities Report

Department of Commerce 2009 Rare Earth Materials Roundtable

US Geological Survey 18% budget cuts to MRP proposed in 2012

©2011

DoD: Annual Industrial Capabilities Report

“It is essential that a stable non-Chinese source of REO be established so that the U.S. RE supply chain is no longer solely dependent on China’s RE exports.”

Recommends:1. DLA should develop & implement risk mitigation steps for heavy REs (Dy,

Y, Nd, Pr)2. DoD should identify & prioritize RE uses to minimize supply disruption3. DoD should implement a communications plan for industry so defense

products receive higher priority than commercial products4. DoD should partner with domestic RE companies to determine requisite

assistance to retain/obtain RE processing capability (ex. Defense Production Act, Title III)

5. DoD should continually monitor health of domestic RE companies

• Lessons Learned: 2008-09 Financial Crisis• Theoretical v. Networked Supply Chain

Solutions

Planning Ahead: Obstacles & Opportunities

Lessons Learned: 2008-09 Financial Crisis

Ob

serv

atio

ns

Consumption of REEs declined dramatically during the last financial crisis

China maintains pricing advantages in lower labor costs and less developed environmental regulations

Foreign companies continue to shift manufacturing to coastal and especially inland China to further cut costs This move bypasses export quota pricing

Chinese SOEs have periodically ceased production & bought-back REOs at above market prices to “protect resources and maintain market stability”

©2011

Lessons Learned: 2008-09 Financial Crisis

Fu

ture

Ris

ks Another recession would dramatically increase pressure on

firms to cut costs Accelerating the relocation of the REE supply chain to China

Growing Chinese demand for REOs and finished products further encourages movement to higher-profit & less costly production in China Chinese policy also usually requires tech transfer with such

moves

Chinese REO stockpile could be released to lower prices & put small, non-PRC mines out of business High start-up costs historically have discouraged new entrants

Chinese attempts to purchase foreign REE mines and manufacturers continue Magnaquench Redux?

©2011

©2011

Practical Limitations to US-only Vertical Integration

Ore (US) Concentrate (US) Oxide

(US)

Co-located Metal

Production (US)

Alloy (US)

Separate Magnet

Facility (EU, Japan, China)

In-house Magnet

Production

Separate US Magnet

Production

Misc. other nations

offtake & export

Metal

Alloy

EU offtake & export

MetalAlloy

EU offtake & export

Oxide

Misc. other nations

offtake & export

Oxide

US C

ustom

er

“Vertical Integration”

Separate, “outsourced” supply chain

Does not exist in US

Failure, slowdown, or inefficiency at any juncture will disrupt the whole US supply chain

©2011Networked Supply Chain Solutions

Ore Concentrate Oxide

Ore Concentrate Oxide

Ore Concentrate Oxide Metal Alloy

Metal Alloy

Metal Alloy

US Magnet Manufacturer



US Magnet Manufacturer U

S Cu

stomer

Separate, non-PRC Companies

Redundancy reduces the overall risk throughout the supply chain and to the end-user

©2011Planning Ahead: Opportunities

Establish a baseline—studies by DOD, DOE, GAO

Defense Stockpile — DLA procurements

Ensure fair trade — USTR

DOE led grant and loan guarantee for downstream manufacturing processes (i.e. oxide to metal/metal to magnet manufacturing)

Defense critical components support — Defense Production Act programs

Innovation, training and workforce development

Conclusions

©2011

©2011Supply-Chain Conclusions

There is no panacea

Government focused on traditional solutions (R&D, RRRS, SBIR, Studies)

Chicken and egg problem in N. America

U.S. industry may not obtain 100% of its requirements, but they can buy insurance

©2011Summary

Rare earth materials are critical to energy and defense applications

Congress has recognized the need for a domestic supply chain

Several government agencies are working to address rare earths supply issues and future prospects but industrial solutions are lacking

The United State Government and industry need a comprehensive strategic materials strategy for the entire value chain

Contact Information

Jeff Green

J.A. Green & Company

Email: [email protected]: (202) 546-0388

Website: www.jagreenandco.com

©2011

Documents

RARE EARTHS: An Overview of Supply Chain Issues & U.S