Geopolitics at play over rare earths

It's not easy going green. Nor is it cheap, as investors and Australian governments are discovering, and households will eventually learn.

Nickel, a metal favoured for its future-facing qualities, including use in the batteries of electric vehicles, has become a disaster for everyone involved, with governments (taxpayers) being called on to mount a rescue mission.

Rare earths – another green favourite because of their use in the permanent magnets of wind turbines and other technologies – could be heading the same way.

In both cases, what’s happening is that someone else is producing metals cheaper than can be done in Western Australia. In normal circumstances this would mean a loss for investors and limited costs for taxpayers.

Nickel’s problem is that Indonesia, using technology developed in China, can produce metal at a substantially lower cost than Australia, and appears able to continue doing so for at least the next five years.

Very few Australian nickel mines will be able to compete with Indonesia, even with the government financial assistance being offered. In this respect, the sector is facing the same fate as Australia’s textile, clothing and footwear industries, which were killed off in the 1980s by cheap Asian imports and the removal of protective tariffs.

Until recently, rare earths were seen as a different case. Prices were high and expected to stay high, while European and US customers were demanding non-Chinese material to meet the needs of their green energy industries.

But the rare earths business is also changing as prices for the most widely traded materials (neodymium and praseodymium) fall faster than nickel.

During the past 12 months, as nickel was falling by 40 per cent and WA mines closing, neodymium was falling by 45 per cent, heaping pressure on all producers of the exotic metal and emerging producers such as local mineral sands miner Iluka Resources.

A combination of last year’s high prices, customer enquiries, and government assistance aimed at breaking the Chinese stranglehold on rare earths encouraged Iluka to start building a rare earths processing plant at Eneabba. The initial cost estimate was between $1 billion and $1.2 billion.

Today, the cost estimate is $1.7 billion to $1.8 billion, with the Australian government being asked to meet part of the cost blowout.

However, even as Iluka and the government work out a new budget and revised funding, there are hints a rare earths discovery in the US might do to Iluka what Indonesia has done to nickel: pile pressure on prices.

A low-profile Australian explorer called American Rare Earths has made what appears to be a significant discovery at Halleck Creek in Wyoming.

Hints of something big have sparked interest in the stock, which has rocketed up by 200 per cent (from 14 cents to 42 cents) since the start of the year, powered by high grades from drilling and a whopping resource of 2.34 billion tonnes of material.

Not yet big news in Australia, Halleck Creek is making headlines in the US because rare earths are a geopolitical friction point with China.

Last month, Halleck Creek was described as having the potential to make the US “the world’s indispensable” supplier of rare earths.

That claim was not made by the Australian company but rather by highly regarded academic Michael Auslin, currently at Stanford University’s Hoover Institution but previously at Yale and Tokyo universities.

Writing in The Wall Street Journal newspaper, Dr Auslin said Halleck Creek, if exploited wisely, would give the US an unparalleled economic and geopolitical advantage over China and Russia for the foreseeable future.

Not asked, of course, was why the US would need to buy Australian material if it could produce its own rare earths?

The nickel and rare earths situations are examples of how quickly business conditions can change and why governments should be wary of trying to pick winners.

Chasing a green future will produce other examples of bright ideas being squashed by competition, but it will also raise the critical question of the real costs of going green.

Olivier Blanchard, former chief economist at the International Monetary Fund, didn’t have a number when he spoke to the British government earlier this month, but he did say that going green “will be much more expensive than people imagine”.

“The public does not believe or hasn’t been made to understand that it is going to be costly for them. It is going to be costly, and that message has to be sent out,” Dr Blanchard said.