Rare earth element (REE) supply chain localization grows in key demand markets to respond to growing permanent magnet needs for the EV and wind industries, but reliance on China for the supply of materials and magnets remains high through 2035.

Analysis

Manager, Clean Energy & Transport

Janire Riobello

<p>The global energy transition is increasingly tightening the supply/demand balance of rare earth elements (REEs) vital to the development of multiple clean technology applications, including wind turbines and electric vehicles (EVs). EV and wind applications currently account for a comparatively minor share of global REE demand, however as both industries grow REE demand for clean technologies could increase four-fold by 2035.&nbsp;While REE volumes in EVs are considerably below the quantities of other critical raw materials needed for battery cathodes and anodes, the high reliance on permanent magnet motors of EV manufacturers, paired with the exponential surge in EV sales, is expected to significantly increase REE demand from the EV industry. REEs are however more critical for wind turbines, particularly as offshore applications grow and an increasing number of onshore turbines switch to direct drive generators. With EV and wind power thus driving the bulk of growth in overall REE demand, high-value REE consumption including neodymium and&nbsp;dysprosium used for NdFeB magnets is thus expected to increase exponentially, though these products usually account for less than 15% of total global REE mine output in mixed REE deposits.</p>
<p>Besides the physical constraints of ramping up high-value REE output in the short-to-medium term, global REE supply is highly dependent on China, which in 2022 accounted for about 70% of global mine production and over 82% of refined product supply.&nbsp;In terms of mined supply, China&rsquo;s market share grew considerably in 2022 compared to 2021 due to the country&rsquo;s 25% increase in its annual domestic production quota, with ROW production actually declining in 2022. This decline is largely attributable to falling output from mining operations in Burundi, Brazil, and Madagascar, offsetting gains from other markets including Thailand and the US.</p>
<p>Against the backdrop of high geographical concentration of supply, investment in rare earth production outside of China is growing considerably, though project feasibility is uncertain due to China&rsquo;s control on global REE prices, which can significantly hamper the cost-competitiveness and profitability of REE upstream and refining projects elsewhere. However, China is expected to retain its dominance in global REE mine supply beyond 2030, supplying almost half of total global volumes by 2035. The REE industry outside of China is still at its infancy compared with EV and wind developments, but geopolitical interest will likely spur some growth in supply chain localization in the medium term. To compete against the hegemony of Chinese supply and China&rsquo;s control on REE prices, key demand markets like the US and the EU are already introducing major policies to increase their self-sufficiency, including subsidies and domestic manufacturing requirements. While this should create a strong incentive for domestic investment, announced projects outside of China are still at a very early stage of development and, even if fully implemented, are unlikely to satisfy booming regional EV and wind power demand &ndash; though they have the potential to displace a significant portion of current Chinese supply.</p>
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Magnet Requirements for EV and Wind Power Drive Ex-China Rare Earth Supply Growth, but China's Hegemony Persists

<p>The global energy transition is increasingly tightening the supply/demand balance of rare earth elements (REEs) vital to the development of multiple clean technology applications, including wind turbines and electric vehicles (EVs). REEs consist of 17 elements (yttrium, scandium, and 15 lanthanide elements) co-produced from the same deposits and possess exceptional magnetic and conductive properties; notably, REEs are often used for the creation of NdFeB magnets (neodymium, iron, and boron alloys) deployed in permanent-magnet synchronous motors as well as in wind turbine generators. This makes neodymium an extremely high-value product, although NdFeB magnets usually contain other REE alloys as well to reduce costs, including praseodymium, dysprosium, and terbium. EV and wind applications currently account for a comparatively minor share of global REE demand, however as both industries grow REE demand for clean technologies could increase four-fold by 2035, significantly tightening global supply.</p>
<p>While REE volumes in EVs are considerably below the quantities of other critical raw materials needed for battery cathodes and anodes, an EV with a permanent-magnet drivetrain typically contains about 1 kg of REE, though this can slightly vary depending on engine type and design. REEs are however more critical for wind turbines, where 1 MW of capacity may require up to 250 kg of REE depending on turbine size and type. In fact, the offshore wind industry is increasingly relying on direct-drive synchronous generators due to their higher efficiency and lower weight, which however require larger amounts of REE than other wind turbine configurations. Less mineral-intense gearbox double-fed induction drivetrains are the preferred option for onshore wind applications, though the onshore industry is also gradually shifting towards direct-drive generators to improve the efficiency of ever-larger turbines. In contrast, REE demand for solar photovoltaics (PV) and battery applications remains minor, with nickel-metal hybrid battery (NiMH) anodes containing only a small portion of lanthanum.</p>
<p>Primarily driven by EV sales and wind power growth, permanent magnet demand has been growing steadily in recent years to absorb about 23% of total REE demand in 2022, with EV and wind applications accounting for a minor portion of the global REE market at a share of 4.7% and 2.8%, respectively. These figures depict a moderate increase compared to 2021 due to delays in wind project implementation and modest EV-based sales growth as a result of global supply chain disruptions. However, EVs and wind turbines make up almost one-third of total permanent magnet REE demand at a share of 20.5% and 11.7% respectively. With neodymium making up about a quarter of the REE content of permanent magnets, EV and wind demand for this metal is estimated to have reached a combined volume of 5 KT rare earth oxide (REO) equivalent. Assuming that dysprosium makes up another 5% to 5.5% of the REE weight content in magnets, dysprosium demand from EV and wind applications amounted to roughly 1.1 KT REO equivalent in 2022.</p>
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<p>As EV sales quadruple, the EV share of total magnet REE demand is expected to increase to 30% by 2035, reaching a volume of some 47.3 KT REO equivalent. This growth projection takes into account a declining REE intensity in EV motors, which are assumed to witness a partial shift to other technologies to reduce reliance on REE. However, while high-efficiency motors with no REE content are still limited to prototypes, induction and wound rotor technologies used in some EV models are generally unable to compete with the performance of permanent magnet motors. As a result, Stratas Advisors expects a majority of EVs to continue to rely on permanent magnet technologies, though these could see REE content fall as material efficiency is improved. EV REE demand is expected to ultimately register a CAGR of 11.1% from 2022 to 2035, or a three-fold increase overall.</p>
<p>Unlike EVs, REE demand from wind power is projected to see an exponential growth throughout the entire forecast period as direct drive usage gains ground. This is mainly fueled by offshore wind additions, set to more than quadruple by 2030 and beyond as large-scale projects are developed in Europe, North America, and China, but also in fast-growing renewables markets such as Brazil and Southeast Asia. Assuming that virtually all offshore applications continue to rely on direct-drive synchronous generators, and that an increasing number of onshore turbines shift to direct drive to improve efficiency, REE demand from the wind industry could reach 54 KT REO equivalent by 2035, or a six-fold increase compared to current levels after registering a CAGR of 16.5% from 2022 to 2035. Beyond 2035, a possible solution to the wind industry&rsquo;s high reliance on REEs is the increased usage of high-temperature superconductors in direct-drive turbines, though this technology is still niche and is hence not expected to have an impact on REE demand for at least the next ten years.</p>
<p>Due to this exponential growth in REE demand from both EVs and wind turbines, the share of permanent magnets in overall REE demand is expected to grow from 23% in 2022 to 46% by 2035, significantly displacing REE demand from other applications, and in particular demand from cracking catalysts as oil product consumption shrinks. With permanent magnet compositions remaining relatively unchanged, neodymium and dysprosium demand are projected to reach 44 KT and 9.7 KT REO equivalent by 2035, respectively, up from 15.9 KT and 3.5 KT in 2022. While a significant share of REE demand for the production of permanent magnets is set to remain linked to non-EV and non-wind applications including electronics and robotics, an increasing share of permanent magnet supply will be targeting the EV and wind markets. By 2035, the wind industry is in fact expected to absorb the bulk of REE demand for NdFeB magnets at a share of 30.6%, with EVs accounting for another 28.5%.</p>
<p>The exponential growth in the demand for certain REEs (i.e., neodymium) however is not fully replicated in overall REE consumption, although this growth is expected to significantly tighten global supply/demand balances for permanent magnet REEs &ndash; while surpluses will continue to be produced for more abundant REEs such as cerium and lanthanum. Oversupplied cerium and lanthanum currently account for over 60% of total REE supply, yet they contain the lowest value among all REEs. On the other hand, the REO content of high-value products such as neodymium in mixed REE deposits usually does not exceed 15% on average. Besides the physical constraints of ramping up neodymium output in the short-to-medium term, global REE supply is highly dependent on China, which in 2022 accounted for about 70% of global mine production and over 82% of refined product supply. China is also virtually the sole buyer of Myanmar&rsquo;s raw REE supply, which in 2022 was estimated at 12 KT REO equivalent.</p>
<p>After countries like the US halted domestic REE mining and processing to relocate production to China in the 1990s, from 2010 onwards China began implementing REE production quotas to respond to booming domestic demand &ndash; while limiting volumes available for the global export market. China&rsquo;s grip on REE output is further strengthened through the rationalization of domestic companies to reduce the number of agents involved in REE exploration and mining in the country. Since the creation of China Rare Earth Group in 2021, which merged major companies active in REE production including China Minmetals, China Southern Rare Earth, and Chinalco, China&rsquo;s REE quotas apply only to four state-owned companies: China Rare Earth Group, China Northern Rare Earth Group, Guangdong Rising Nonferrous, and Xiamen Tungsten. Besides its dominance in primary supply, China built a well-structured REE supply chain domestically to account for over 90% of REE permanent magnet output globally.</p>
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<p>In terms of mined supply, China&rsquo;s market share grew considerably in 2022 compared to 2021 due to the country&rsquo;s 25% increase in its annual domestic production quota, with ROW production actually declining in 2022. This decline is largely attributable to falling output from mining operations in Burundi, Brazil, and Madagascar, offsetting gains from other markets including Thailand and the US.</p>
<p>Against the backdrop of high geographical concentration of supply, investment in rare earth production outside of China is growing considerably, though project feasibility is uncertain due to China&rsquo;s control on global REE prices, which can significantly hamper the cost-competitiveness and profitability of REE upstream and refining projects elsewhere. Following the re-commissioning of MP Materials&rsquo; Mountain Pass mine in California, the US is poised to remain the second-largest producer of raw REEs until the early 2030s. North American mine supply also sees modest growth from Canadian resources, which in 2021 began REE production of Vital Metals&rsquo; Nechalacho mine in the Northwestern Territories. Over the next 12 years however, both the US and Canada plan to focus on REE refining to add some 41.5 KT REO equivalent of refined product supply thanks to major refining projects led by MP Materials and Lynas Corporation, among others. North American REE expansion is spurred by massive regional growth in green investments fueled mainly by the US Inflation Reduction Act (IRA), which extends the 10% Advanced Manufacturing Production Credit to critical REEs such as neodymium. In 2021, the US also proposed the extension of tax credits to domestically produced NdFeB magnets, ranging from US$20/kg to US$30/kg based on raw material origin, although no further developments have been made in this respect.</p>
<p>Europe is also expected to remain strong in terms of REE refining, but the European REE upstream sector faces multiple challenges: on the one hand, recently discovered REE deposits in Sweden are not expected to begin production for at least the next ten years; on the other, Greenland&rsquo;s restrictions on uranium mining have already halted the exploration of the island&rsquo;s largest REE deposit, and include prescriptions to potentially restrict mining of other radioactive minerals including thorium, which is found in most REE mixed deposits. Estonia, however, remains one of the world&rsquo;s top producers of refined REEs outside of China, and expects to commission a new refining facility in the Ida-Viru region by 2025 provided that Neo Performance Materials&rsquo; planned mining asset in Greenland is not delayed or canceled. The UK also plans to support its domestic wind and EV industries through the development of Pensana&rsquo;s REE refinery in Saltend, scheduled for commissioning in 2024.</p>
<p>In the longer term, Australia is poised to see the strongest growth in terms of mine supply to reach a market share of 11.4% by 2035, up from 6% in 2022. Australia also plans to increase its domestic REE refining capabilities through the development of Iluka&rsquo;s and Hastings&rsquo; plants in Western Australia, which could produce some 27.5 KT REO equivalent of refined products from locally-sourced REE ores. Southern Africa also has the potential to displace a significant volume of Chinese primary supply through the development of key mining assets in Angola, Malawi, Namibia, South Africa, and Tanzania, which plan to add a combined volume of 41.4 KT REO equivalent to the global market.</p>
<p>Despite these developments, China is expected to retain its dominance in global REE mine supply beyond 2030, supplying almost half of total global volumes by 2035. However, China&rsquo;s market position highly depends on its production quotas; based on the annual increase stipulated in 2022, China&rsquo;s quotas could continue to see an average 20-25% annual growth rate in the early forecast years, then stabilizing as supply grows elsewhere. If that were the case, Chinese mine production could exceed 63% of global volumes by 2035. China&rsquo;s dominance is even more accentuated in the refining market despite its projected market share loss, where it is expected to still account for over 59% of global volumes by 2035. NdFeB magnet production grows outside of China too, but the pace of growth is unable to keep up with China&rsquo;s well-established production base, which is expected to retain its undisputed dominance throughout the entire forecast period at a market share of 85.6% by 2035.</p>
<p>The REE industry outside of China is still at its infancy compared with EV and wind developments, but geopolitical interest will likely spur some growth in supply chain localization in the medium term. To compete against the hegemony of Chinese supply and China&rsquo;s control on REE prices, key demand markets like the US and the EU are already introducing major policies to increase their self-sufficiency, including subsidies and domestic manufacturing requirements. While this should create a strong incentive for domestic investment, announced projects outside of China are still at a very early stage of development and, even if fully implemented, are unlikely to satisfy booming regional EV and wind power demand &ndash; though they have the potential to displace a significant portion of current Chinese supply.</p>

<p>The global energy transition is increasingly tightening the supply/demand balance of rare earth elements (REEs) vital to the development of multiple clean technology applications, including wind turbines and electric vehicles (EVs). EV and wind applications currently account for a comparatively minor share of global REE demand, however as both industries grow REE demand for clean technologies could increase four-fold by 2035.&nbsp;While REE volumes in EVs are considerably below the quantities of other critical raw materials needed for battery cathodes and anodes, the high reliance on permanent magnet motors of EV manufacturers, paired with the exponential surge in EV sales, is expected to significantly increase REE demand from the EV industry. REEs are however more critical for wind turbines, particularly as offshore applications grow and an increasing number of onshore turbines switch to direct drive generators. With EV and wind power thus driving the bulk of growth in overall REE demand, high-value REE consumption including neodymium and&nbsp;dysprosium used for NdFeB magnets is thus expected to increase exponentially, though these products usually account for less than 15% of total global REE mine output in mixed REE deposits.</p>
<p>Besides the physical constraints of ramping up high-value REE output in the short-to-medium term, global REE supply is highly dependent on China, which in 2022 accounted for about 70% of global mine production and over 82% of refined product supply.&nbsp;In terms of mined supply, China&rsquo;s market share grew considerably in 2022 compared to 2021 due to the country&rsquo;s 25% increase in its annual domestic production quota, with ROW production actually declining in 2022. This decline is largely attributable to falling output from mining operations in Burundi, Brazil, and Madagascar, offsetting gains from other markets including Thailand and the US.</p>
<p>Against the backdrop of high geographical concentration of supply, investment in rare earth production outside of China is growing considerably, though project feasibility is uncertain due to China&rsquo;s control on global REE prices, which can significantly hamper the cost-competitiveness and profitability of REE upstream and refining projects elsewhere. However, China is expected to retain its dominance in global REE mine supply beyond 2030, supplying almost half of total global volumes by 2035. The REE industry outside of China is still at its infancy compared with EV and wind developments, but geopolitical interest will likely spur some growth in supply chain localization in the medium term. To compete against the hegemony of Chinese supply and China&rsquo;s control on REE prices, key demand markets like the US and the EU are already introducing major policies to increase their self-sufficiency, including subsidies and domestic manufacturing requirements. While this should create a strong incentive for domestic investment, announced projects outside of China are still at a very early stage of development and, even if fully implemented, are unlikely to satisfy booming regional EV and wind power demand &ndash; though they have the potential to displace a significant portion of current Chinese supply.</p>
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