The Race Is On to Produce Increased Volumes of Rare Earth Metals

DETROIT () -- This has been a major, even an astonishing, week for news that will directly affect the demand for light rare earth metals in the near future; the lack of analytical reporting on this news is even more astounding and should be a wake-up call for those investors who say "I only know what I read in the papers."

Toyota the world's largest profitable mass producer of automobiles has made a seminal decision on the future of battery systems for mass producible hybrid vehicles. It has announced that it will invest between nearly two-thirds of a billion dollars to:

  1. Increase the production capacity of its existing plant in Japan for manufacturing vehicle size nickel metal hydride, NiMH, batteries;
  2. Build a new, additional, high volume plant, also in Japan, to produce vehicle size NiMH batteries;
  3. Build a new specialized plant in Japan to make vehicle size lithium-ion batteries.

The key information contained in the announcement is that when all three projects are completed by the end of 2010, Toyota will have an in-house capacity to build one million NiMH vehicle batteries a year and several tens of thousands of lithium-ion vehicle sized batteries per year.

Clearly Toyota has now made the decision to go with NiMH battery technology for its mass produced hybrids. I believe that the relatively small number of lithium-ion batteries the company intends to be able to produce is a strong indication that such batteries will be only used on plug-in hybrids; the type of vehicle that the much hyped Chevrolet Volt is to be, and that the small number tells us that Toyota believes that such vehicles, plug-in hybrids, are at best a marginal and therefore small market.

Honda, as I wrote here a , has made essentially the same decision with regard to NiMH batteries; it has announced that in its opinion the lithium-ion vehicle size battery is "not ready for mass production" and therefore Honda will produce its Prius fighter small hybrid, to be priced under the Prius, with NiMH batteries. Since Honda has announced that its goal is to be able to produce and sell 200,000 units of just the Prius fighter a year, we are looking at a production capacity of, conservatively, 1.5 million NiMH vehicle sized batteries a year only just counting the combined capacities, in-house, in Japan, of Toyota and Honda by 2011.

Forget the fact that almost all of the world's mass production OEM automotive companies also produce some hybrid vehicles and that today essentially all of them utilize NiMH batteries made in Japan. As of now none of them have any chance of continuing to make or sell NiMH equipped hybrids unless Toyota and Honda allow them to do so by selling them batteries, or, in fact, power trains.

Forget also any idea you have of OEM automotive mass producers delivering competitively free market priced, i.e., non-subsidized either directly or by tax reductions, hybrid vehicles using lithium ion batteries. Lithium batteries are too expensive, because their construction is not lending itself to automation, and, in addition to their being 'hand made,' their lifetimes, reliability and recyclability are completely unknown. As I have said before, such characteristics as lifetime, reliability and recyclability cannot be determined by accelerated testing as every lithium battery developer and car company contemplating their use says they can.

Even if you believe, or were to assume, that each of the car companies have, as of now, decided on one, and only one, lithium-ion battery technology, the real time testing of the vehicle sized batteries mass produced, when that occurs, because it has not yet, from these technologies could and should take a decade!

Nickel metal hydride vehicle size batteries have been in mass production for a decade and the low failure rate of those of them made in Japan is becoming legendary. Most of the NiMH batteries installed in Priuses since 1999 are still in service even though they were originally warranted for only eight years or 100,000 miles! Note for comparative purposes that lead-acid, SLI use, batteries for vehicles, which have been mass produced, now by the billions, for more than 100 years, are warranted for three years when you read about how rapidly long life lithium-ion batteries will be brought to the market.

Note also for comparison that last year, by contrast, the failure rate of the NiMH batteries made for GM by COBASYS, Inc. was so high that GM recalled all 9,000 of the 2007 model year hybrids it sold to replace the American made NiMH batteries. Incredibly GM has just now announced that it may buy the now moribund, and deeply in debt, company that couldn't make NiMH batteries that worked, and that it will award that company a contract to test and quality control another supplier's lithium-ion batteries intended for the Chevrolet Volt. One cannot say that GM isn't consistent in making poor decisions.

I believe that GM hypes the lithium powered Chevrolet Volt, and, along with Ford, talks about fuel cell powered, hydrogen powered and ethanol or biofuel using 'flex-fuel' cars, because both companies have simply dropped the ball on hybrids and for reasons I will now discuss cannot get it back easily, if at all.

The OEM automotive companies outside of China, which do not wish to produce in China the NiMH batteries for use in hybrid vehicles, such as Toyota, and I think also both Honda and Nissan, are driven to this decision by their fear of losing control of proprietary technologies developed in house for making, especially in the case of Toyota, far better NiMH batteries than have been produced up until now.

A current model Prius equipped with a NiMH battery pack made today by Toyota in Japan gets the equivalent of 46 miles per gallon of gasoline. It is rumoured that Priuses equipped with a 'next generation' NiMH battery to be produced in Toyota's new plants in Japan will get considerably better fuel economy than even that number without sacrificing range or performance.

Honda is believed also to be ready to use a next generation NiMH battery in its smaller, cheaper, so Honda says, Prius fighter due on the American market within 18 months. American OEM auto makers are rushing to get small fuel efficient cars into their showrooms in the same time period but they will not be able to even come close to the fuel efficiency or low emissions of the Japanese hybrids. I am certain that only for this reason we stand a good chance of losing Chrysler or Ford by 2013 at the latest.

Now let's talk about the coming supply crisis in light rare earth elements, because Toyota and Honda, alone, are going to add to the market by 2011 the capacity to produce for themselves alone nearly three times as many vehicle size NiMH batteries as there was capacity for, or were produced or sold, in 2007.

This will represent a total new demand capacity principally for the light rare earths lanthanum and neodymium of 12,000 metric tonnes. Toyota and Honda are convinced that their sales of NiMH equipped hybrid vehicles will reach a combined total of more than 1 million units a year in the early 2010's. The total global sales of NiMH equipped hybrids in 2007 were 429,000 units.

I know that I keep asking you to do so, but please look again at the chart below:

Source: Great Western Mineral Group,

When you are looking at the above chart just in reference to the new demand for light rare earths keep in mind that essentially no rare earths used in the production of vehicle size NiMH batteries are currently recycled. The long lifetimes of the batteries coupled with the lack of proven recycling technologies and dedicated facilities for recycling means that at this time an increase in supply can only come from new mining.

Another factor not shown in the above chart is that a combination of an official Chinese government slowdown in production due to concerns for the environment may well have, it is believed, actually reduced the production of rare earths for 2008. There are rumours coming out of China of a mad scramble for supplies of neodymium, for example, due to restrictions on mining imposed this year.

Some believe that the dramatic decrease in allowed exports of rare earths, up to 50% less than 2007 for 2008, announced in January may be due only to a short-term slowdown mandated to reduce pollution for the Olympic Games, but others believe that it is due to a general desire on the part of the central government not only to reduce pollution temporarily but also to consolidate the industry to make permanent reductions in pollution generation. In either case China has slowed down exports of rare earth elements at exactly the same time as Toyota and Honda are committed to ramping up dramatically their production of NiMH batteries, which critically depend on light rare earths for their operation.

The result is that China's production, which is essentially all of the world's current production of rare earth elements, is now less than the chart above shows for 2008 while the demand from outside China for use outside of China is now to grow more steeply than the chart shows just due to the ramping up of demand from Toyota and Honda.

It is most likely that Toyota and Honda have their rare earth raw material needs in hand at the moment, but by their own decisions, especially on the part of Toyota to ramp up production, they have created a seller's market for the light rare earths.

Those who want to produce or increase the production of safe reliable hybrid vehicles utilizing NiMH batteries and the investors in the production of rare earth elements (REEs) outside of China have no more time to waste. Toyota, in particular, and Honda have committed to steady and steep increases in the production of nickel metal hydride batteries so that by 2011 they can together have the capacity to produce more than 1.5 million NiMH battery equipped vehicles per year.

There is not now sufficient Chinese production, if it were to grow at the rate projected in the chart above, to meet the projected increased needs even of just Toyota and Honda by the early 2010s. Not only is there not likely to be enough Chinese production, or projected increase in production, of REEs to meet this new demand but Chinese REE production itself is rumored to be in disarray as discussed above.

Toyota and Honda are well known for, and respected for, making long term plans to insure themselves against the risk of non-supply of critical raw materials. A million and a half NiMH powered hybrids a year represents $40 billion dollars a year of product a year. For less money than it is now spending on building the plants to make a million NiMH batteries a year Toyota, for example, could fund all the way to full production Great Western Mineral Group [TSX-V:GWG], Avalon Ventures [TSX-V:AVL], Lynas [ASX:LYC] and Arafura [ASX:ARU]; it would thus assure itself of a non-Chinese supply of light rare earths which would make the company not only self-sufficient but able to ramp up production, using internal supplies, to the 2 million hybrids a year projected, by GM, to be the total global market for such vehicles in 2014.

If all of the projections of the four companies named above are true then they would be able in 2014, if the work were started now, to be able to produce enough light rare earth metals so that they could also meet the domestic demands of the Chinese and Indian markets, which it is projected that China alone will not be able to fill by 2014 or 2015.

Toyota and Honda are not run by short sighted managers who care only about lining their own pockets. They are run by long-term planners.

Isn't it obvious that Toyota and Honda wouldn't be investing in NiMH batteries if they didn't have a plan to address the looming shortfall in light rare earth metal supplies? Isn't it obvious that the world needs non-Chinese sources of rare earth metals to insure against the catastrophic effect on our economy and way of life that Chinese supply restrictions could have on critical components, such as permanent magnets, for the everyday necessities of our civilian standards of living as well as for military needs and for improving the environment through reduced emissions and a lessening dependence on imported fuel?

An investment in a rare earth production opportunity in North America is, I believe, now becoming a sure thing; since Toyota and Honda will need to cover everyone's bet. Gentlemen, the race to rare earth production is on. Get your checkbooks ready.

About the Author
Jack Lifton

Jack Lifton is a leading authority on the sourcing and end use trends of rare and strategic metals. He is a founding principal of Technology Metals Research LLC and president of Jack Lifton LLC, consulting for institutional investors doing due diligence on metal- and material-related opportunities.

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