The outlook for rare earths consumers outside China is suddenly quite different following last week's decision by Molycorp Inc. to double planned production from its Mountain Pass mine in California.
Production is now planned to be as much as 40,000 tons/year of rare earth oxides (REO) by the end of 2013 by implementing a second phase of the mine's in-progress ramp up. The anticipated cost of the expansion is envisioned at $250 million.
The company initially had planned to ramp up to full production at a level of slightly less than 20,000 tons/year of REOs at some point in 2012. Pre-stripping began last month, with the first newly mined material expected to reach the market by late this year or early next year.
If successful, Molycorp could easily be in solid control of non-Chinese rare earths supply, at least for several years, and possibly longer.
Demand for REOs by industries outside China is estimated at 55,000 to 60,000 tons for 2010 but Chinese exports were thought to be only 23,000 to 24,000 tons for the year, based on remarks by Molycorp CEO Mark Smith last month.
This implies a REOs supply deficit for consumers outside China of 20,000 to 28,000 tons, based on current non-Chinese production estimates of only 9,000 to 11,000 tons/year.
While Smith did not explicitly state that his company is maneuvering toward a dominant position in non-Chinese REOs production, the picture is clear. A 40,000-ton/year production rate would be equivalent to two-thirds or more of non-Chinese REOs demand (in 2010). Further, based on 2010 levels, the expanded output figure would constitute a significant surplus in the ex-Chinese supply picture.
That said, non-Chinese REOs demand is expected to grow significantly, even as China is obliged to further constrict exports due to its own burgeoning internal demand. Even assuming that Molycorp can achieve its output goals within the stated timeline, demand could equal or surpass available non-Chinese supply within three years.
In fact, most industry observers appear to assume that China will have to halt all rare earths exports at some point in the next few years.
Some industry observers have indicated that Molycorp's sizable production expansion presents barriers to other near-term rare earths projects, notably in Australia and Canada. Others note that supply uncertainties are causing some rare earths consumers to move toward alternative materials. This might work for Japanese automaker Toyota, which is now looking at battery technology for its hybrid vehicles that does not rely on rare earths. On the other hand, there currently are no viable substitutes for rare earths in many applications.
Molycorp's Achilles heel is that the deposit, while it hosts high ore grades, contains quite high percentages of the most common REOs, cerium and lanthanum, but smaller-than-usual amounts of the rarest REOs, the so-called heavy rare earths.
This factor, combined with rapidly increasing global demand, means there will likely be plenty of need for other near-term projects, all of which boast significantly higher percentages of heavy REOs than Molycorp's Mountain Pass mine.
Brett Hartke is a contributor to ResourceInvestor.com who has more than 20 years of experience researching and writing about commodities and the metals markets.