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Rare earth metals – How to limit the impact of the clean energy transition?

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BNP Paribas Asset Management
 

With demand for rare earth metals set to skyrocket to support new energy technologies, how can the world transition to sustainable energy sustainably?

Rare earth elements are a group of 17 metals commonly used for their optical and magnetic properties in, for example, lighting, medical radiographs and catalytic converters.

To meet the goals of the Paris Agreement, the European Commission has recently highlighted the substantial amounts of neodymium and dysprosium, alongside metals such as graphite and nickel, needed for renewables and e-mobility by 2050, its target date for net zero emissions in the bloc.[1]

Because of the transition to low-carbon technologies, demand for rare earths is expected to shoot up. More and more, rare earth metals are being used in sustainable energy applications such as wind power generation and electric vehicles, via permanent magnets containing the metals.

Wind turbines with a direct drive permanent magnet synchronous generator (DD-PMSG) are efficient at low wind-speed sites, are lighter and cheaper to maintain. In EV powertrains, the PM technology leads to compact sizes and greater efficiency, which has sparked a surge in demand. In 2019, 82% of all EV powertrains used PM technology compared to 79% in 2015. [2]

Environmental and social issues

While end products using rare earths will help lower greenhouse gas emissions through cleaner energy production and use, there are environmental and social issues that need to be addressed. These include the poor geographical distribution of extraction locations. They are currently mainly in China.

China is by far the leading producer of rare earth metals, producing over six times more than the runner-up Australia. It is also the leading consumer and the owner of the largest store of reserves. This prominent position has led the European Commission to draft a list of raw materials most exposed to supply chain risk, headed by rare earth elements (see Exhibit 1).

Exhibit 1: Flows of materials and their current supply risks

rare earths exhibit 1

Source: European Commission, Joint Research Centre

Separately, there are environmental concerns. Many rare earth ore deposits contain radioactive elements, making extraction and processing harmful to the soil, water and human health. Moreover, the chemicals required to either remove the metals from the topsoil or in mines cause air pollution and can leach into the groundwater.

Spotlight on China

Research has found that the environmental cost of rare earth metal mining in China outweighs the benefits, particularly because of illegal mining. In response, the authorities have taken measures, including instituting new regulations.

In light of the increasing incidence of lung and brain cancer, and respiratory and cardiovascular diseases, [3] the authorities have begun to address water, air and soil pollution. Calls by the authorities for the rare earths industry, companies and consumers to share in the clean-up cost might result in remedial measures driving up market prices.

If supply is affected, this could lead to substantial market volatility – as was the case in 2011 when a dispute between China and Japan saw the price of some elements rise thirty-fold.

Against this backdrop, some countries have sought to reduce their dependence on Chinese supplies. A mining site in West Texas could offer the US a 130-year supply of 15 of the 17 rare earth elements. Japan has invested in an Australian site with significant deposits.

Beyond mining, China dominates in processing, accounting for about 85% of the capacity. Metals mined elsewhere are likely to be sent to China, giving Beijing leverage, as was the case after the US sold arms to Taiwan in October and China threatened to restrict imports into the country for processing. This highlights another dependency on the Asian superpower.

Sustainable alternatives?

Such concerns have prompted the search for alternatives. Researchers are investigating extraction methods that use less-harmful chemicals, as well as bacteria and other non-chemical materials, and even means of extracting rare earths from waste coal ash.

Replacing, reducing or recycling rare earth metals can lower the impact of using these elements. Alternatives exist in the wind industry such as superconducting generators. These use a fraction of the rare earth in the widely use PM turbines.

Electric vehicle makers are looking to reduce or eliminate the use of rare earths, for example by replacing magnets with copper windings or using motors that do not require magnets.

Less than 1% of rare earth elements are currently recycled given the difficulty of separating these elements from existing alloys. We should bear in mind that skyrocketing demand will limit the ability of recycled rare earths to meet the expected short and medium-term needs.

Diversifying supply sources can help deal with the social and governance concerns, but this should not come at the expense of the environment – potential mining sites often overlap with biodiversity hotspots.

Japan recently discovered a huge supply of rare earth elements, but there is one issue – it’s underwater. Deep-sea mining is being explored as a further means of diversifying supply, although environmentalists argue that even low-impact extraction methods could cause damage that lasts decades.

Vulnerabilities

Looking at the EV and wind turbine supply chains, research has found that the current rate of consumption of rare earth elements in the EV industry is unsustainable. The wind turbine sector however is less exposed to supply risk. This is mainly because the rate of growth in the wind industry at 9.2% a year is much slower than that of electric vehicles, which exceeds 30%, while the market share of PM generators is smaller (23.2% vs. > 80%). [4]

The high vulnerability of the EV industry could raise doubts over the feasibility of decarbonisation efforts given the envisaged role of electric vehicles in carbon reduction.

Beyond EVs and wind turbines, these metals are used in strategic sectors such as defence (drones for instance) and digital technologies (see Exhibit 2). The omnipresence of digital technologies could make the world economy even more dependent on these critical metals. Addressing this is a challenge as big as sourcing sustainable energy for the transition to net zero.

Exhibit 2: Critical raw materials in digital technologies

rare earths exhibit 2

Source: European Commission, Joint Research Centre

[1] See Critical raw materials for strategic technologies and sectors in the EU on https://ec.europa.eu/docsroom/documents/42882

[2] See Materials for Electric Vehicles 2020-2030 on http://www.idtechex.com/fr/research-report/materials-for-electric-vehicles-electric-motors-battery-cells-and-packs-hv-cabling-2020-2030/770

[3]  https://www.iisd.org/story/green-conflict-minerals/#group-Rare-Earths-Th6mnSYCaC

[4] B. Balinger et al, The vulnerability of electric-vehicle and wind-turbine supply chains to the supply of rare-earth elements in a 2-degree scenario, Feb. 2020

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