Podcast Transcript — Rare Earths: More Crucial to the Global Economy Than Ever
On Monday, July 14, the Association of Foreign Press Correspondents in the United States (AFPC) recorded a Foreign Press USA podcast episode in partnership with the Hinrich Foundation that focused on rare earth minerals and the crucial role they play in the global economy, where China dominates.
The interview was conducted by Adam Creighton, the chief economist at the Institute of Public Affairs in Australia and a former foreign correspondent previously based in Washington, DC. He spoke with Naoise McDonagh, a senior lecturer in trade and geopolitics at Edith Cowan University. McDonagh is also a director of the MBA program at that university's School of Business and Law.
This podcast episode was produced in partnership with the Hinrich Foundation. AFPC-USA is solely responsible for the content of this episode. The learning takeaways for this podcast episode are available HERE.
Adam Creighton: Welcome to the Foreign Press Podcast. My name is Adam Creighton. I am the chief economist at the Institute of Public Affairs in Australia. Until earlier this year, I was actually a foreign correspondent in Washington, DC, for four years where I covered the Biden administration and the election of Trump last year.
In this episode, we'll be discussing the fascinating topic of rare earths with Naoise McDonagh. He is a senior lecturer in trade and geopolitics at Edith Cowan University. He's also a director of the MBA program at that university's School of Business and Law. Before that he taught at the University of Adelaide and he was awarded his PhD at the University of Auckland in New Zealand. And as you'll hear from his charming accent, he's originally from Ireland. He is very much an expert in rare earths. He's written numerous articles just in the past year alone on that topic. Now, before we get underway, I just want to give a special welcome to the foreign press correspondents out there in the US and globally who are listening.
I also want to stress that this podcast is a partnership of the Association of Foreign Press Correspondents in the US and also the Hinrich Foundation. The Association is solely responsible for the development and the content of this podcast. So with all that, welcome Naoise.
Naoise McDonagh: Thank you, Adam. It’s a great pleasure to be here today.
AC: Great. So, rare earths. We all hear that phrase in the press now. We've been hearing it more and more I would say, but I sense that a lot of people, including educated people, don't really know what they are. Can you just give us a rundown on what are these rare earths and why they are so important?
NM: Yeah, so look, Adam, these are basically crucial inputs for everything in advanced manufacturing in [the] economy today. Some of the things that these rare earth elements are crucial for producing [is] permanent magnets. So these include super magnets as they're known. These have really strong magnetic power and also they can operate at very high temperatures. So these are crucial across a range of inputs from EVs to the military. In the future, there'll be critical inputs for the growing robotics sector. Also, the rare earth elements go into things like electric motors, high-end metal alloys, aerospace, across a whole plethora of consumer electronics, and particularly high-end stuff right here - computing equipment, the batteries that go into EVs and batteries more broadly that are going to backstop, or renewable energy for example. Then in things that are - people would be more familiar with - catalytic converters which are cleaning the fumes in your car.
They're also important for petroleum refining, medical imaging, and ceramics. And look, the list keeps going on. They're everywhere as inputs to advanced industrial activities. And then if you also connect that to defense; so defense is a very important sector for governments, particularly in an era of rising geopolitical tensions. In defense, again, there's obviously a lot of dual use technology today in defense, so high-end consumer electronics, etc., are also technologies that are critical in defense. Also, a lot of defense technologies feed back into the private sector. So it's flowing back and forth. And so defense is heavily reliant on these for a lot of goods that we just discussed, but also things like laser night vision equipment, targeting systems, and so on. So again, these are really crucial inputs that underpin modern life in many ways.
AC: We also hear a lot about critical minerals. In fact, I think President Trump said critical earths recently in a press conference and got them confused. So is one a subset of the other? What's the difference between these two things we hear all about?
NM: So look, the concept of a critical mineral – there's no such natural occurring critical mineral. Minerals only become critical to humans when we need them for certain types of activities. So, a critical mineral and a critical mineral list is basically a political designation. It's what a government decides on, but they decide this obviously on empirical grounds. Normally that's what you would hope government policy is built on, at least. And so in this instance, it is - the critical minerals are basically defined as any mineral that's essential to economic or national security of a country. And that has a high risk of supply chain disruption if you need to import that for your industry to use. So this is the crucial component here of the critical mineral list. This really only makes sense in a globalized world economy where supply chains are very long, where often we don't know where every part of that supply chain is coming before we get a final good and where countries and governments and their industries are heavily dependent on third parties to actually supply those minerals.
Adam Creighton
And if there's a high risk of supply chain disruption, that's when a mineral becomes a critical mineral from a government perspective. And then, so, the key characteristics for most governments would be things that are vital to your manufacturing sector, your defense or your clean energy high tech. Again, if there's limited production, if there's geopolitical concentration, if that supply is concentrated in a country of origin that's of high geopolitical risk of restricting supply or any other type of trade restriction or the lack of substitutes, that's when you're really vulnerable. And then also [there’s] time sensitivity. So, do you have big stockpiles of that mineral? If you don't, you're very sensitive to vulnerabilities over a short period of time. Now, the most recent round of Chinese export controls on light and heavy rare earths this year almost had the auto industries in North America, Europe, Japan and South Korea shutting down because - this is time sensitivity. They were cut off from supply.They're private businesses that don't like to hold onto large amounts of stock. They don't have a lot of redundancy in their supply chains. This is again, a shift in thinking that needs to occur, but they were highly vulnerable to this disruption. They were about to shut down. And actually, if we look at the ongoing US-China negotiations, that shutting off of those rare earths this year had a massive impact and the US had to back off a bit on its tariffs and so forth with China. So, yeah, that's really the essence of critical designation. So rare earths are just a subset of burgeoning lists globally that governments are creating of critical minerals, and rare earths are particularly critical in the sense of what I already discussed, but also that they're very dominated by a single country of origin. And that's China – 90%.
AC: Yes. Well, let's talk about China now, which you just mentioned. How is it that China became so dominant in this field, which now it seems every country wants to have a piece of?
NM: Yeah, look, that's an important question and it also lends itself towards understanding the big difference between China's economy and western free market-led economy. So, China has a state-led, state-dominated economy where there's no rule of law. There's rule bylaw in a rule bylaw system. The government, the party in this instance, is not constricted by the laws, but they utilize laws for governance, but they can actually breach any law and make laws up as it requires them. So that's an important difference. There's no separation then on that system between private sector and public sector really, because the government can intervene in the economy to any extent, at any time, whenever it so wishes. Also, in China's system, they like to have the state owning very significant amounts of the economy. It's still partially a Soviet-command style economy, but also has ferocious elements of market competition and market activity.
In that sense, China's mixing up both domains. Now if we take that framework, Adam, we can think about how it became so dominant in rare earths. So this goes back to the 1970s. So in 1975, actually, the state council first establishes a national rare earth development and application leading group. So already they're starting to see this as maybe a strategic resource, and this is mainly about research and development. By 1990, China's starting with [its] opening up phase. So it's starting to let markets in and external foreign investment and so forth and really starting to emerge. Rare earth elements are classified as a protected and strategic mineral. What this means in practice is that foreign firms are fully excluded from mining rare earth elements. They can only process those elements in joint ventures with either state-owned or other Chinese parties. And this is all subject to government approval during the 1990s.
They expand on this idea of licensing control. State owned enterprises now are given access, special access to the ionic clays where the rare earths are mined. By the 2000s, the growing restrictions on production, on export licensing, and also the government starts to promote downstream use of these rare earths, particularly magnet production, which is a very important element of all of this. Monopoly control over global supply starts to grow at this point in time. Between 2010, the export quarter gets halved, right? So they're starting to constrict global supply. 2010 to 2015 - [there’s] massive industry consolidation. So the mines get reduced from 123 to 10, the big ones. Processing plants are reduced from 73 to 20, and then they form six massive rare earth element industrial groups and they integrate the mining enterprises and the processing enterprises. So by the mid 2010s, you effectively have massive state-owned enterprises who are increasingly controlling global supply.
They developed this further on in the late 2010s and early 2020s, and export regimes started using it strategically, tactically - that actually, tactical control goes back to 2010 when they first applied export controls directly to Japan over a dispute over the Senkaku Islands, which is a territorial dispute. And so from that point on, they start realizing they have this very powerful control. Now that's on the Chinese side, Adam, on the liberal market side and the world economy side, we're in full on globalization. Everyone wants cheap access to these rare earth elements. Nobody really wants to deal with the pollution. It's a very polluting process to mine them and process them, particularly out of ionic clays. China was happy to do that and the rest of the world was happy to [say], "You do that. We get cheap, relatively cheap, rare earths." There's no strategic issues at the moment. There's no major geopolitical tensions. So those two things combined led to China coming out today with 90% of process rare earth dominance and 60% of all mining.
AC: Wow, that's extraordinary. And so just to clarify, the rare earths themselves, at least geologically, aren't particularly rare, right. It's just that the mining of them is something people don't want to do, at least until now, because it takes up a lot of space, it's very polluting, etc. So that's why they're rare in a sense. No one else wanted to get involved, but they are now having to.
NM: Yeah, they're geologically dispersed as well often. So it's actually very uneconomical to try and mine them, because it’s over [a] wide area of land. And so there's a lot higher cost in it to be able to concentrate them. But what we're starting to realize now is that a lot of the previously mining operations for other metals and minerals, and there's leftover material and it's already concentrated. A lot of that can actually now be mined for rare earths. And so that's what some of the contemporary operations are actually just… and a look of resources in WA [Western Australia] will do that. They'll start mining pre-existing material from previous mining operations. But it's dirty business no matter what, and it's expensive. And actually the processing, Adam, is really challenging. It's not like iron ore or gold where there's a few steps to get your final product. There can be hundreds if not up to a thousand chemical processes and steps. And it's really challenging and difficult. And again, China's the only country really that's fully up to speed and has not just true practice, but also thorough R&D. They've been researching it for decades now, and they've been doing it in practice where you do a lot more learning. So, theoretical knowledge is great, but you need to have practical experience as well, and the trade secrets and the IP, which China dominates.
AC: You mentioned a really interesting point before just with the recent trade spat between the US and China, both sides escalated massively and then the US pulled back as you referred to, and you kind of implied that the US pulled back because they kind of turned off the heavy rare earths. Is that your view that was kind of critical to the US back down?
NM: Yeah, I think that's a major part of it. There's a couple of elements here. I mean the trade relationship with the US and China is still massive to this day. It's in the hundreds of billions. So the US was already starting to experience pain and disruption from the breadth of those tariff rates and the high tariff rates, even though some of them had been postponed, and it's all very messy. But the rare earths, really that was what we might say in Trumpian language, that was China's “big card”. So China has serious cards to play against the US and they were holding off on this big one, the rare earths, for quite some time because again, going back to that concept of time sensitivity and their sheer dominance of that, it's a complete choke point. And when they choke off that point of supply, there is no quick way to resolve that. Companies don't have a big storage because that's the company philosophy in the modern era. It's just in time production, it's efficiencies. You don't want the cost of redundancy. And so the US automakers and the EU and Japan - they were all in it. But in the American context, all those CEOs are coming, knocking on Trump's door and saying, "We're about to have to shut off production. You need to do something about this, because it’s a disaster in the making." And so that was a very significant moment in the trade war.
AC: Yeah. So is there a scramble in the US, Australia and Japan to mine rare earths at home, like domestically or not?
NM: Yeah, look, it's an interesting one, right? Currently there is, because this year has been so disruptive and China played its card so well, but this has been building up for a long period of time. China has been utilizing its strategic control over rare earths for a long period of time, not just cutting off Japan, which it did twice. But also what it would do, and this is typical monopoly strategy, private firms actually perfected these techniques, Adam, during the 20th century, once the big corporate monopolies developed, particularly in the US, right? Standard Oil and the like. So, if you're a major monopoly power and you're dominating the market, you've built up a lot of capital, you have funds for rainy days, etc. If you have a new entrant trying to enter the market, even if they have a better product, etc, as a new entrant, they normally won't have the long-term funding in place. They'll be more vulnerable. And you can just crash your price. You can take a loss for one year, two years that you must, because you've got your big economic mode to protect you. And so you drive the new entrants out of the market, or if they enter, you kill them within a year. And then over time what happens is that investors say, you know what? We're not even trying this market because we know what will happen. Not only are we not playing a fair economic game, but we're actually playing against the government of the biggest - our second biggest and biggest by purchasing power parity economy in the world. And that government doesn't care about commercial losses if there's a big enough strategic gain to be had. And so private investors have not invested in that market, and the governments haven't done much despite the fact that this was on the cards, what happened this year. They've been very lethargic around doing anything significant that would bring investors in. That's changing this year, Adam, and we can go into that a little bit if you wish.
AC: Yes, yes. No, I mean I noticed in the press recently that the Pentagon actually took a stake in a US rare earths company, I think, MP Materials it was called. And I think I was also shocked to read that it was the only US rare earths company or they only mine or something, which is pretty extraordinary.
NM: So look, it is extraordinary. Outside of China for heavy and light rare earths – so the light rare earths are neodymium and praseodymium. They're crucial inputs for permanent magnets. And then, for the high-strength permanent magnets, you need terbium and dysprosium. There's only one company outside of China that has significant supply, and that's Lynas Resources, right? That's an Australian firm. And the only reason that Lynas exists today is because the Japanese stepped in and started supporting them around 2012- 13. First, they backed them with debt packaging. So I'll give them the debt because investors weren't stepping in and they actually pretty much bailed them out around 2016, again, because the market was - there's such fluctuations in these rare earths with Chinese supply going up, going down, crashing the market. Lynas were about to collapse. But the Japanese had learned their lesson from the two episodes - 2010 and 2012, where they had been cut off where their industry was being affected.
And so they've supported Lynas and they reduced their dependency from around the same as everyone at the 90% markdown to about 60% today. So that's much more flexibility, and that's mainly true through their work with Lynas, right? So you have Lynas, okay, they're going well, they've just started doing terbium and dysprosium as well. The big news at the moment – so Australia, the Australian federal government has a major strategy here, and that's at the heart of that paper that I recently wrote for the Hinrich Foundation. It's titled, "Australia's Rare Earths Lie Between Economic Security and Liberal Markets." And so Australia has a position to, has a lot of these rare earths, has got the land space, and it has got the mining expertise. And so it could offer the world a new source of ex-China supply. So one of these, there's two big bets at the moment here.
Naoise McDonagh
Iluka has already gotten originally a $1.2 billion financing package support from the government, and that's been topped up by another $400 million. That plant is under construction in Western Australia. And Arafura is the other big bet. So both of those are going to do neodymium and praseodymium. Iluka is going to do some of the heavy rare earths as well. And so Arafura is getting over a billion as well; $200 million in equity investment recently announced by the federal government here in Australia. So, this is a big shift. The government's really stepping up in what is traditionally in the contemporary area, been a very liberal market economy and wanting the government to actually privatize anti-public assets. So now we're kind of changing that up. So you've got those two companies, and the big news in the last two weeks was MP Materials, Pentagon dealers, you mentioned 400 million in equity. That's USD, 10-year off tech and a price floor. And those are critical components to this.
AC: Just on what the Australian government's doing, I mean, if the sales of these rare earths can be so profitable, then why do these projects need government support? Why can't private lenders lend and also provide equity?
NM: So, they haven't been so profitable and that's why Lynas nearly collapsed because going back to that earlier point, the reason why investors won't come in, you cannot solve the rare earths issue through markets because it's not a market. It's a straight dominated global monopoly by one single entity. And so that's just like if you're a utilities company and the state owns all the utilities, you can't have a free market. And so China dominates that and they play for strategic gains, not just commercial gains. So they're willing to bear a loss over long periods of time to maintain their monopoly. And so investors just have completely shied away from doing anything in the rare earth element space. They know it's too risky and they know it won't be profitable. There's massive fluctuations in global supply from the Chinese which crashes the market regularly, and so they haven't entered the market.
And so you need to actually have some government backed support if you're going to stand up ex-China supply. Now, the risk there, there's multiple risks to that strategy, Adam. First of all, does that mean the public purse is going to continually have to prop these companies up? Because if they're competing against China, you have to put a price floor in to guarantee their ongoing operations or else you're going to have to do offtake. Now, if you're doing offtake as the government, and this gets us towards a strategic reserve idea, that means the public purse is funding the initial or concessional debt packages and equity for the initial production, and then the public purse is paying for the uptake as well. And that seems high risk to me. I think what governments internationally need to do, and so let's go back to the American example, they've put in a price floor - the Pentagon - which is double the current Chinese price in and around, and this price floor now is actually profitable, will be profitable for the Australian firms that are trying to get up and running as well.
And for others, there's some French operations getting up and running, but who's going to keep – in the American case, it's only MP Materials that is getting that guaranteed price floor, but that might now set a benchmark for an ex-China market supply. But then how do you maintain the price? I think one way you do that is you have to actually have a protected market where you use tariffs in this sense strategically to adjust Chinese supply to the floor price that you want, and then you actually get the market to fund everything. And within that protected market, you let the Americans, the Australians, and the French just go, whoever's competitive and efficient. So you wouldn't have the public purse backing that market the whole time. But we're not there yet. But I think this MP Materials deal is very prescient or maybe presents a new floor for an ex-China supply.
AC: So in terms of the size of that American firm MP Materials, say compared to Lynas, so they're kind of similarly sized companies?
NM: Yeah, they'd be similar. Quite similar in size, yeah.
AC: Just in terms of the skills required to mine rare earths, I mean obviously Australia has a very advanced mining sector in general. We're very known for that. It's one of our biggest exports of course. Is it easy for the BHPs or the Rios of the world just to shift into rare earths, or it's a totally different sort of skillset?
NM: Yeah, not at all. It's not easy for anyone. It's going to be a major challenge. And when these operations are up and running, we'll see how efficient they are, how effective they are. We just don't really know that yet. Lynas obviously is up and running for over a decade. They know what they're doing. But, for everyone else, this is incredibly challenging. It's nothing like… I mean, a lot of mining operations in Australia are, “Dig it up and ship it out.” They don't do the value add and they're not even making steel out of iron ore for example, which is fairly basic, because t is not cost effective and sensible to do that. So, a lot of this will be big learning. So Australia has a lot of experience in general mining and being effective [in] automation and the big project side of things, but there's a lot more technical expertise required in the processing. So much so that in the last two years, in 2023, China first did this, they realized, "Okay, one of the ways others will catch up with us or one of the ways we protect our lead, and this is what the Americans are doing with technology, is we put export controls on technology and human expertise even, right?" So they're registering who are all our experts in processing in China. hey won't let them out of the country or they're tracking their movement. They want to know what countries they've been in, and I assume they won't let them out if they think they're high value targets for other countries to get IP transfer. So it's not like you can just set up shop and start processing these rare earth elements. It is one of the most difficult types of metallurgies that you can do.
AC: So how many years away would it be, say for Australia or the US or France, you mentioned earlier to have the same level of sophistication as China? I mean I assume very many years.
NM: Yeah, I mean the first question is - can you even get an operation up and running? Can you get the mining and the processing permits? In the Western world, anywhere between 10 to 20 years, you can be waiting to get a big mining operation up, and these are even more polluting. So it's going to be more challenging. There's going to be stakeholders who are going to challenge it, there's going to be nimbyism, etc. So first of all, can you even get your operations up and running? That's not a question that we can just jump aside. In Australia's case, the permitting is in place. Iluka is already under construction, right? Arafura has all the permitting in place. They're just waiting to get final offtake arrangements. They want to have 80% offtake in place to de-risk the whole operation. And if they say that if they got that this year they're at 63% offtake arrangements, if they get to 80%, they'll start building immediately and that'll take them three years. That's what they're saying.
Now, the second step then is you're up and running, okay, there's a lot of R&D out there. You can check up on a lot of that research and access it, but having research and actually implementing are two different things. So those new processing plants will take time to learn by doing to become more efficient, become more effective. So there'll probably be a lot behind the benchmark leaders in China at that level. But look, certainly in Australia we can and are getting these up and running. Lynas has expertise as well, well established for other countries. MP Materials has some background in this, but elsewhere, there'll be big challenges. The French Solvay, they've done this before, they can get up and running, but everywhere else, if you're starting fresh, I mean it's a Herculean task really to catch up.
AC: So what would China make of all this? It's obviously observing that the US and Australia are trying to become more advanced. In rare earths, are they going to try to retaliate or stop it in some way?
NM: Yeah, so the things they've already done around the technology export controls, that's their main initial response thus far. So again, they're mimicking a lot of the type of controls the US has put on generative AI and semiconductors to prevent technology leakage to China. China's now doing that in reverse because it's a technology leader as well in a lot of areas. So I think that's the main one. They'll also try and manipulate market prices to impact new entrants. So again, the MP Materials deal with a price floor and an offtake. So let's go through both of those. The offtake agreement is that the Pentagon guarantees MP Materials that every year they'll buy X amount of product for 10 years. On top of that, it's not even saying, we'll buy that at market prices. We'll buy that at a fixed minimum price. So we'll buy at double the current market price.
So MP Materials can say, and its investors can say, "Okay, we've got 10 years, we have this amount of income, we've guaranteed, we know it's very stable. We can invest, we can make the leap." So China can't manipulate prices to impact MP Materials. They're well protected now. In Arafura, in Iluka's case, they're more susceptible to that type of response, which has been used historically. My concern for those two businesses is when they get up and running, what happens if the market crashes? They have to sell at that market prices, the government thing, the government kind of nearly has that. They've put so much into it already. It becomes a “too big to fail” type thing. You think about the banks in 2008, it'd be something similar. Can you let these projects fail? And if you can't, are you then implicitly implying you're going to move to a price floor yourself, which would have to match the MP Materials deal.
AC: And so is the Australian government doing the same thing with that price floor for our producers, or is it kind of globally? Does the American one help us?
NM: It won't help directly. I think indirectly it may create the conditions for an agreed type of price floor for ex-China supply, and that wouldn't be something in like a security partnership - a security trade relationship where you have that protected market that you can supply. So I think that's the main help at the moment. The government is talking about a strategic reserve here in Australia, and if they do a strategic reserve that would involve long-term offtake agreements with Iluka and with Arafura, you would presume. So that would give those, both of those firms some sort of long-term selling assurances, but it doesn't give them the price floor at the moment. There's been no talk of that here. The other thing to note then as well, Adam, going back to what China's doing about this. So the Foreign Investment Review board in Australia has tightened a lot up on investment review overall.
All countries are doing that because of the geopolitical tensions, but also they're targeting the rare earth sector because they want to actually ensure there's not - [that] Chinese investors aren't taking premium rare earth resources that the Australian government wants to actually use to help itself and allies to have a secure ex-China supply. That's creating a lot of tensions in the bilateral relationship. Even though things have improved a lot in the last few years, there's continual noise from the Chinese side about how they want fair treatment for their firms and for investment in Australia. And in particular, they're pointing to these types of foreign investment review screenings that are targeting Chinese firms, even though obviously they're never said to target a specific country. So that creates tensions bilaterally, for sure.
AC: Yeah, so with the rare earths that Australia would mine, would we still export them to the US, say for processing, or will we try to do it ourselves?
NM: So that brings us to another interesting part of this whole equation, right. So solving the supply of rare earths… By providing ex-China supply, you might think, "Oh, look, we've solved that issue," but actually what you've done is moved the problem further down the supply chain, because there's not that big of a market in the US for Australian rare earths. Actually, a big demand will mainly be in China at the moment still because China has the world's biggest manufacturing sector. It also is dominant completely in sectors that are massive demanders for rare earths, which is electric vehicle production, which is solar panels, permanent magnets [90% of that market], wind turbines, everything to do with electrification. So, the challenge for firms such as Arafura to get offtake arrangements is that if you're not selling to China, which they're not meant to have based on their lender agreements. The lender agreements want sales to go to export credit agencies of supportive countries - that's a polite way of saying - not to China. And eventually, the market outside of China is a lot smaller. So you struggle to get your offtake in place if you're not selling to China. China is something akin to a monopsony position for buying all these processed rares, because it's about 33% of global manufacturing at the moment, heading towards 40% by 2030 on current trends. It's the world's manufacturing superpower. So, that brings us to the ecosystem dimension of this whole issue. You have to think about the whole supply chain, not just parts of it.
AC: Yeah, it's quite interesting. So even if we can get these mines up and running, you haven't really solved the vulnerability to China problem. If you can't process them, you've got to export them to China.
NM: And even the processed ones, that's the point, the ore for sure has gone to China. But even when you start processing them… he biggest solar market is China. So you have your processing up and running. You're still struggling maybe to sell it globally because most of the demand is in China, but you have conditions attached to your financing from [the] government and from other export agencies such as the Canadian one [which] have a debt package involvement and German development bank, South Korea - are all supporting the Arafura package, for example. So yeah, even when you're processing them, it's going to be a struggle. So this is where the whole competition from manufacturing actually takes a bigger geo-economic lens on it because if China continues to keep growing its world share of manufacturing, then these problems actually become even greater and de-risking becomes even tougher and more costly.
AC: Just thinking outside the box a bit, I mean, Australia's manufacturing sector as you well know, is one of the smallest in the developed world. We've let it shrink greatly. So is our role in this rare earths business really just to help the US to export to them, to help their manufacturing sector - they still have a manufacturing sector of a certain size because does it matter if Australia doesn't manufacture anything? I mean, of course I think it does, but some people would say, it doesn't matter. Let's just buy everything from China.
NM: Yeah, look, I think that perspective has very much fallen down in its credibility, right, over the last number of years. So that was the view in global – peak globalization was that it doesn't matter where you get your stuff from, you just get the cheapest. And that's market efficiency. Now, if we lived in an ideal world where all countries were rational economic agents, that'd be fine. We don't though, we live in a strategic world where many goals are non-commercial, right? And we know that now today. So geoeconomics, power politics by economic means, that's going to characterize the coming decades of Cold War-esque tensions between the US and China, between Europe and China, Japan and China. So I think having some sovereign manufacturing capability for any country of a significant economic size, from middle-power economy upwards, I think that is absolutely on the carriage you need.
But you need to be careful on where you kind of place your bets. What's the things that are closest to your own strategic comparative advantages? So the government today does want to have a sovereign manufacturing capacity, Adam, the Future Made in Australia Act. But even if that's incredibly successful, Australian industries, and gets a lot bigger relative to the country's economy, it's still going to be tiny in global terms no matter what. So the domestic manufacturing sector here will never be a major source of demand for what the country could produce in processed rare earths. So it has to be the EU, it has to be the US, and it has to be Japan and South Korea. They're the big major like-minded partners with major industry. So that's essentially where you have to go.
AC: So that's what that strategic reserve that was promised at the last election, that would be to help the US, Japan, and the EU mainly if we built up this pile of rare earths?
NM: Yeah, that's the kind of conceptual idea. Look, I'm a little bit worried that in Australia's case, that particular policy won't work and that should focus on building up supply. And the reason I would say that is that other countries that do have a strategic rare earths stockpile is the US, is Japan. The EU is thinking about one, they have a Critical Raw Materials Act, but then the big industries that they need to supply in a crisis right. Australia doesn't really have that. And if they're already producing some domestically, they'll have their own sources of supply. And so what I foresee happening instead is that businesses get stood up in North America, in the EU and in Australia, and so the global supply of non-Chinese critical minerals goes up, [which] are rare earths, and suddenly the government in Australia is sitting on this stockpile when there's, already North America - it’s a lot better and it's a lot functioning a lot better.
So the government has a stockpile, it's competing to sell onto the market, and it costs a lot of money to actually maintain that stockpile. Some of these rare earths will actually oxidate, go off over a certain period of time unless you store them in very specific and costly ways. So I think there's a high risk that you get this wide elephant strategic stockpile that doesn't really have a clear use case compared to say Japan, which can say, "Well, we have a massive auto industry. We have this stockpile." Same in the EU, same in the US. So I think that should be considered a bit more and weighed off against where they're focusing on getting very efficient comparatively. Ex-China supply up and running is not the better use of resources.
AC: The one thing that's surprised me is why haven't the US or big American companies, big mining companies, tried to mine these rare earths in Africa where the labor is cheap, where there are no environmental standards of comparison, and presumably they have them in great quantities too?
NM: Well, it's the same. It's similar to a lot of the reasons why the African continent, obviously, and there's many countries there, so there's differences across that. But the continent as a whole has struggled to grow economically mainly often to do [with] political instability, political risk for investments, all that sort of stuff. And so these types of mining investments are the most susceptible to political risks because they're over 10, 20, 30 year lifespans, often a 30 year lifespan for a big mine. Then you have the human capital required for high-end expertise. So that type of product and investment just doesn't go well under conditions of low economic growth, political instability, and also they wouldn't be near the big manufacturing sources. So there's all those reasons I think would come into the African question, Adam.
AC: And just a question on Japan too, obviously there's been a lot of historical enmity between China and Japan, and of course Japan has a huge manufacturing sector, advanced sector. Do they have any homegrown rare earths or they're totally dependent on China basically for their manufacturing sector?
NM: No. So they've diversified with Lynas primarily. So in Japan's case, it's a relatively small mountainous island compared to the population. So mining rare earths would be challenging. In Japan, as I best understand it, there's not a lot of easily accessible resources, which is why, for instance, they've been developing technology to mine the seabed, and they're looking at that very seriously. But they have diversified, they're more diversified than most other economies because they've used Lynas to help them diversify. They've put in a few other initiatives. So they moved down to about 60% dependence, which is a lot lower than 90 and gives you a lot more flexibility. And they have a stock, a reserve of critical minerals as well kept for that proverbial rainy day, which we had quite a few of those this year.
AC: Yes. Yeah. You mentioned the volatility of prices, and of course that's partly due to the fact that China can effectively set the price or at least has been able to set the price. What sort of range are we talking about in the volatility of these minerals? I mean, how high has it been per unit and how low has it been per unit for whatever reason?
NM: Yeah, so look at the moment, it's about, so NdPr, which is a very heavily traded one, the neodymium, praseodymium for the permanent magnets and EVs, that's around $50 USD per kilogram at the moment. That can, that's kind of one of the lower ends, and then it can go up to double or triple that. When we had that EV boom or there was kind of belief that we were in the opening innings of an EV boom and the lithium prices went crazy, that also was a period of time when the likes of NdPr massive went up much higher again than historical levels and then has dropped back. But look at the $50 USD per kilogram. That's a big challenge for non-Chinese firms to do that profitably because they have much higher ESG standards, they have much higher labor standards, and they don't have the incentives or didn't previously anyway of cheaper subsidized loans, cheaper subsidized land or free land, cheap and subsidized electricity. And the whole Chinese economy has a layer of subsidies in all the strategic sectors that far surpasses anything in the West. So yeah, that's the range and that's the challenge, is that ability to work at a loss that Chinese firms take on.
AC: So, some people talk about Australia one day being a rare earth superpower or whatever, but I mean, is the market ever going to be as large or profitable for Australia as say iron ore or coal? Could it be that big?
NM: No, not by any means. Look, somewhat, the interesting thing about the rare earths elements, even though they go into everything, it's very in small, usually in very small amounts. So it's kind of a niche product. And just to give you some comparisons on that, so we were thinking about the trade value of rare earth elements in 2023. So cross border trade, that's about $10 billion worth between the ore, the basic ore, and then the processed minerals as well now. So $10 billion, you think something like copper ore – that was $90 billion in 2023, iron ore would be higher again, right. So the market is a fraction of that by value and by volume. So copper ore, we'd be looking at 55 million tons a year at the moment currently. NdPr oxides [are] about 40,000 tons, so much smaller.
But if we think about price per ton, so copper in 2023, about $1,600, whereas NdPr you're looking at 70,000, right? It's that kind of per ton. So it's a niche product, but it's a critical product, right, to go back to that designation. Now, it can be a reasonably good sized opportunity for Australia, but not at the level of iron ore, coal, liquified natural gas, those ones, the sheer bulk and volume of those, it'll never compete. But there's another element then, Adam, is the advanced manufacturing and just moving into the downstream. So doing more value add – if that's part of what the country wants to do and needs to do, which I would agree it is. Doing that helps move into downstream in the rare earths. It also builds out technical expertise. And I think this was often missed in criticisms of industrial policy. There's a lot of knowledge transfer that feeds out into other sectors of the economy. The whole economy lifts up when you've got areas of expertise and quality and brings up the technical expertise and feeds into other sectors. And so there's a general uplift that you don't get if you're offshoring everything. And so now because there's a geostrategic imperative that's more recognized, but development economists would often claim there were bigger picture reasons to do more industrial policy than countries did in the 2000s and 2010s.
AC: And just in terms of the global demand or global production, I mean, I realize you might not have these figures at your fingertips, but I mean, what has the growth been, say, over the last decade in terms of production or demand for these rare earths?
NM: Yeah, so the compound annual growth rate has been anywhere between 8% and 12%, and that's how it's predicted over the next five to 10 years. So look, the market is growing fast, and the wild card here is robotics. How quickly do robotics scale out right? The humanoid robotics and so forth because, and some predictions, and Elon Musk is obviously a great advocate of this, believes that this is going to be the next biggest wave of industrialization. The market could grow much faster then because you'll need a hell of a lot of magnets - permanent magnets for all those type of things. And you'll need the other inputs of the whole range of rare earth elements and other critical minerals. So the market's growing at a healthy rate, it could be from 10 billion today up to - it could double or triple in the next five to 10 years - is a few different factors. So it's a healthy market, there's no doubt about that. It's just not as big as some of the other globally traded commodities.
AC: And those growth forecasts, they're not just based on various net zero policies around the world. It's also robotics, as you said, it's other digital products.
NM: Yeah, absolutely. Yeah. So, certainly renewables and EVs and how much government support or don't support them will impact the market, there's no doubt about that. But look, they're broad industrial input to all, pretty much all advanced manufacturing. So the market will grow at a reasonable rate, whatever. And then if some of these other factors play out in a good way, the market could grow quite a bit quicker.
AC: Just to wind up with some big picture questions, I mean, you kind of imply that the Chinese system, at least in this area, has had much greater foresight, more than the market system. I mean, do you think it's been a big mistake of Western countries to not think more strategically or not to at least modify their free market system in some way?
NM: Yeah, look, it's always great in hindsight to look back and say, absolutely, but we have to be fair and remember, there's two things. China already, even taking out the geostrategic aspects, China has a state-dominated economy and there's a massive state intervention for things that might need even just for its own use. So already that would be the case. But obviously in the West and liberal democracies, the free market democracies, the 2000s were a heady era of the end of history, Francis' famous thesis that everyone was becoming a free American liberal democracy eventually because it was such a good system, produced the goods, the wealth, the satisfying life, and we were all going there one way or another. And so, the offshoring thesis is great because that's a one world economy that was so dominant in political circles in the general milieu, the cultural era.
And so I think the strategic argument wasn't that well listened to or listened to at all, and offshoring happened. The big corporates were told, “Go out, go forth, and prosper in this one world economy.” And they did. They went to the most efficient places or else they didn't do some things if it was too dirty, etc. And so we offshored and we lost a lot of our geoeconomic muscle through that process. And now we're in an era where economic security is national security and vice versa, and we see the error of that, the naivety of that kind of viewpoint. But as I said, many a great mind was caught up in that milieu and the idea behind it.
AC: And look, if it was, just imagine it's 2035, 10 years ahead, do you think China will have lost its dominance in this market or not?
NM: Look, I think we're probably heading towards geopolitically separated ecosystems. So in that sense, China will have lost its hold over the US, the EU and its partner countries. They're already working to change that. It will take time, but absolutely there's going to be separate. The most strategic markets are heading for separate geostrategic ecosystems, right? We're seeing that in semiconductors and the machine tools for semiconductors and rare earth elements. Defense has always been like that. Think about the defense markets. All the strategic markets are going to start developing like that where there's heavy dual use and where leadership in those markets gives you a significant advantage relative to other countries geostrategically, economically, and technologically.
AC: Well, thank you so much, Naoise, for that fascinating overview. We could talk about this for another hour. I'm sure I've learned a lot, and I hope our listeners have learned a lot as well. So thank you Naoise McDonough from Edith Cowan University, and you've been listening to the Foreign Press Podcast.
NM: Thank you, Adam. Great pleasure to be here today.
