Rare-Earth Metals Shortage - BCG

16/10/2023, 16:53 Five Steps for Solving the Rare-Earth Metals Shortage | BCG
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Five Steps for Solving the Rare-Earth

Metals Shortage
JULY 06, 2023
By Emile Detry, Antoine Gauduel, Frédéric Geurts, Lisa Ivers, Michael McAdoo, Tycho Möncks,
and Tom Butler
READING TIME: 15 MIN
Key Takeaways
The global 2050 carbon emissions targets may be eclipsed by a rare-earth supply-demand imbalance—unless
governments, investors, and companies take swift, aggressive, and purposeful action.
• The global demand for rare earths is expected to reach 466 kilotons by 2035, up from 170 kilotons in
2022, an 8% compound annual growth rate.
• Upstream mining operations should be initiated immediately because of the long lead times required for
development. Quasi-government and multilateral entities could be effective vehicles for funding these
rare-earth mines. About $30 billion is needed from 2022 through 2035.
• Collaboration—public-private groups, regional and private partnerships, and industry consortia—is key to
improving transparency and sharing the effort and risk that development requires. There is only so much
that countries and companies can do alone.
The energy transition is an historic pivot from an insatiable thirst for oil to a soaring reliance on
minerals. Lithium, cobalt, and the so-called rare-earth elements (or rare earths), among other
metals, are essential in the production of most green devices and equipment, including electric
vehicles, windmills, and solar panels. These minerals will therefore be needed in huge volumes
to meet aggressive global carbon-emissions targets by 2050. But as mineral demand rises to
levels beyond any seen before, supply shortfalls are looming. In particular, an alarming shortage
of rare earths is impending.
Fearing potentially large capacity gaps, mining industry players are revisiting rare-earth mining
practices and strategies. At the same time, many inside and outside the industry are exploring
pressing questions: What will it take to have enough capacity to meet forecasted demand? How
are today’s opportunities, which stem from lagging supplies, shaping the future of the industry?
What does winning look like in this environment? What role should government play to ensure
the availability of minerals necessary for the energy transition? How will shortages define the
geopolitics of mining?
At the heart of the impending rare-earth deficit is yet another illustration of what is known as
the tragedy of the horizon: a significant problem that today’s leaders show little urgency to
address because its impact will mostly be felt by future generations. In this case, the dire
outcome of a rare-earth shortage—worsening climate change—is given short shrift, in large part
because rare-earth projects seemingly fail to meet the short-term financial-return objectives of
investors. Meanwhile, governments are of little help because they often lack the political will or
the policy savvy to jump-start these difficult mining operations, despite rare earths’ potential
contribution to meeting climate change objectives. To be fair, though, some of the hesitancy to
back mining projects is because of environmental concerns about the projects themselves.
The Depth of the Shortfall

Rare-earth elements are so named only because it is difficult to find them in a pure form, but
there are untapped deposits all over the world. Together, rare earths comprise 17 different
metals, but four—neodymium, praseodymium, dysprosium, and terbium—account for about
90% of the market value of rare earths. These are the so-called magnet rare-earth elements,
which are essential to produce the high-performance permanent magnets that are used in
electric vehicles and wind turbines, as well as in more everyday items, such as hard drives and
smartphones. Given that orders from automotive and wind energy companies are accelerating,
the global demand for magnet rare earths is expected to reach 466 kilotons by 2035, up from
170 kilotons in 2022, a threefold increase that amounts to an 8% compound annual growth rate.
The rare-earth industry can be divided into three stages: upstream, or the mining of elements;
midstream, the processing of elements into separate oxides; and downstream, the
manufacturing of permanent magnets and other components made with rare earths.
Making rare earths globally available starts in the upstream stage. To avoid a shortage of rare
earths by 2030, more than 20 new rare-earth projects would need to be launched between now
and then, with an additional 10 projects needed by 2035. (See Exhibit 1.)
We arrived at this conclusion after examining the likely output of 30 large, credible projects that
have been proposed or that are underway. (See the sidebar “Analyzing Rare-Earth Projects.”) We
found that even these projects will fall short of meeting demand by the end of the decade. This
is because most are just completing their feasibility studies and have not yet secured funding,
which is proving difficult given current market conditions. And even the projects that will be
eventually greenlighted are still seven to ten years from beginning their development. In
addition to these 30 significant rare-earth projects, hundreds of small-to-midsize projects are in
various stages of planning or construction. But many of them will not produce the required ore
grade and magnet rare-earth content to be viable for the largest demand pools.

ANALYZING RARE-EARTH PROJECTS
To determine whether the upstream pipeline of rare-earth projects will be sufficient

to meet demand into the next decade, we began by sifting through various academic
and scientific sources to assess deposit locations and grades, as well as to estimate
maturity. Starting with more than 4,000 deposits, as reported in the US Geological
Survey database, we narrowed the list down to 60 projects that had publicly reported
feasibility studies. We then created a short list of 30 projects, choosing those that had
published recent reports indicating some progress, even if they were in the early
planning stages, and that appeared to be competitive from a cost perspective.
We then assessed each project’s likelihood through a series of interviews with BCG
and non-BCG experts, and a systematic analysis of such criteria as competitiveness,
development stage, and the ability to obtain funding.
We also assigned probabilities according to projects’ likelihood (80% for probable

projects, 50% for potential projects, and 30% for the least-probable ones) to come up
with a probability-weighted total rare-earth capacity output from these projects: a
likely additional supply as well as an unlikely additional supply. We determined the
timeline for ramping up capacity output by the current development stage of each
project and a set of assumptions about the duration of each step of the process (for
example, three years for construction, two years to secure funding and commercial
agreements, one-and-a-half to three years to complete feasibility studies, one year to
complete scoping and prefeasibility studies, and one-and-a-half years for advanced
exploration and reserve development).
At this point, the rare-earth project landscape is constrained by a lack of regional diversity—and
looking at the potential upcoming projects, this situation doesn’t appear likely to change. (See
Exhibit 2.) Currently, from upstream to downstream, most of these projects are in China; indeed,
only two non-Chinese companies—MP Materials in the US and Lynas Rare Earths in Australia
—are active players in the upstream stage. But their current mining capacity and recoverable
reserves are too limited to match expected demand growth outside of China.
Rare-Earth Market Challenges
As the need grows for permanent magnets to support energy transition technologies and other
critical uses, including defense systems, countries will seek to develop rare-earth supply chains
either domestically or through international alliances that can be sheltered from geopolitical
dynamics. Indeed, it is increasingly clear that more and more nations and regional powers view
access to rare earths to be a matter of domestic economic and national security. But to establish
these supply chains, a series of barriers must be overcome, including technical and revenue
obstacles, as well as capital shortfalls.
Technical and Revenue Obstacles. The biggest technical challenges involve midstream and
downstream activities. In the midstream stage, creating a pure oxide form of each rare-earth
element is extremely complex and time consuming, because each element has to be separated
from surrounding materials and from other elements that have similar chemical properties.
Upskilling or recruiting staff who are already capable in midstream activities can be expensive
and only incrementally successful, which is why only two non-Chinese companies have been
willing to try to make inroads into the processing market.
In the downstream stage, Japan’s Hitachi and certain Chinese producers dominate the
manufacturing of permanent magnets. Their advanced patented technologies give them a
significant competitive edge, effectively occupying about 90% of the permanent magnet market,
leaving the rest available to a handful of small international companies.
The extent of these technical issues—and the amount of effort and resources required to
overcome them—has deterred investments in rare-earth projects, particularly as prices for the
elements have consistently failed to rise above the breakeven target for mining them. For
instance, neodymium oxide would have to be priced at roughly $150 per kilogram for a
midstream project to be profitable. Yet, over the past decade, neodymium oxide has never
exceeded this threshold for any significant period. (See Exhibit 3.)
Looking ahead, it is likely that neodymium oxide prices will more often settle above the
breakeven threshold as demand for permanent magnets rises. But at the same time, significant
questions remain about how the market will evolve. For instance, prices could be depressed by
the lower-than-expected growth of electric vehicle sales and market penetration of wind power
or by technology shifts that reduce the use of permanent magnets. In addition, rare-earth
project returns could be weakened by bottlenecks that occur in the rare-earth supply chain. For
example, if midstream and downstream capacity to absorb upstream flows is not addressed
quickly enough, revenue at every level of rare-earth development will suffer.
Given the uncertainties surrounding the viability and potential returns of rare-earth projects, the
major mining players have generally avoided these efforts. Instead, the bulk of development
outside China is led by smaller companies, with less financial and technical capacity. Having
limited resources explains why most of the 30 sizable potential projects that we examined have
been put on hold at the prefeasibility stage.
Capital Shortfalls. Currently, there are few signs that larger asset investors and mining
companies will overcome their risk aversion and tilt their funding strategies toward rare-earth
ventures. Capital for less attractive projects is getting tighter in a period of rising interest rates
and global economic uncertainty. Also, some top-tier investors are increasingly wary of backing
projects with potentially problematic environmental footprints. Rare-earth projects use large
quantities of water, placing significant pressure on local resources, and many have historically
been designed with few environmental guardrails.
Offering incentives to improve midstream and

downstream capacities won’t increase the
volume of rare earths quickly enough.
By our reckoning, from 2022 through 2035, about $100 billion in investments in the rare-earth
value chain will be needed to keep pace with demand, particularly for the four magnet
elements. The upstream stage alone may require as much as $30 billion. However, currently
planned and committed investments for new or ongoing projects stand at roughly $5 billion. In
addition, many of the capital incentives that are being offered by policymakers for rare-earth
projects target improving midstream and downstream capacities, hoping that this will jump-start
upstream projects. But that approach will be too slow to sufficiently increase the volume of rare
earths.
Five Steps to an Efficient Market
Addressing the challenges and developing a thriving rare-earth marketplace outside of China
will require a diligent, coordinated effort among government entities, investors, and the private
sector. For this joint effort to succeed, stakeholders may have to make decisions that go beyond
pure economic logic and address strategic and environmentally sound needs.
Five actions should be taken immediately to stave off an impending and troubling supply and
demand imbalance. Governments will initially have to play the most prominent role, because
rightsizing the rare-earth market will not occur naturally—that is, without regulations, policies,
and financing from the public sector. Indeed, governments have a vested interest in making sure
that domestic rare-earth projects are well supported whenever possible, chiefly to minimize
their nation’s dependence on foreign countries for these critical minerals, which are about to
become even more valuable. But the private sector will quickly have to show leadership for the
global market to develop in a coherent fashion. (See Exhibit 4.)
Create enabling conditions to foster the development of new mines. To varying degrees,
governments are already taking action. For instance, the US, through the Inflation Reduction Act
of 2022 and other measures, is offering fiscal incentives, such as tax credits, to develop domestic
supply chains of critical minerals. However, these incentives are primarily directed toward
midstream and downstream operations—those that manufacture made-in-USA permanent
magnets and electric vehicle equipment, for example. That approach leaves open the possibility
of having to continue to source rare-earth ore abroad, which may stymie attempts to create an
integrated supply chain in the US.
For its part, Canada is focusing on its regulatory framework in the upstream area. The
government recently pledged to review the permit process for rare-earth mines so as to reduce
the time it takes for companies to get approval to operate. Among the key aspects of this effort
would be seeking the consent of indigenous peoples early—when a company is proposing to
mine rare earths in a community. The Canadian government has set aside as much as $3 billion
to facilitate and support new mine applications and development.
In emerging regions such as Africa, it is crucial for governments to take similar actions. While
Africa has significant amounts of critical minerals, it is the second-least-attractive region for
mining investment (after Asia) because of a multitude of local policies and rules that can make
it very difficult to get projects off the ground. African governments should take steps to create a
better environment for new exploration and investment in downstream operations by designing
consistent rules for the mineral-rights application process that cannot be easily confounded by
local bureaucracies. For example, there have been instances of local authorities rescinding
mining permits well after projects were underway and millions of dollars were spent. In addition,
considering the global need for rare-earth reserves, African governments could seek support
from international agencies for geo-mapping remote areas to uncover potentially viable
locations for mining.
In Europe, new mining projects must undergo increasingly extensive environmental impact
assessments. However, for rare-earth production to be widely adopted in these and other
developed economies, governments should implement regulatory frameworks that guarantee
minimal environmental impact to overcome local populations’ opposition to mining. Techniques
that minimize damage to the environment include using a renewable source for onsite energy,
implementing water recycling and reclamation, and strictly containing and disposing of toxic
waste, such as the tailings from rare-earth extraction.
Finally, governments will have to invest in education and training to develop workforces with the
high level of geological and chemical processing skills and expertise necessary for rare-earth
projects. Funding for infrastructure improvements—building reliable roads, constructing power
grids, and sourcing energy—is also essential.
Target investments directly toward upstream rare-earth mining. Because of long lead times
—up to five years—to develop a rare-earth mine, upstream operations should be initiated
immediately. China, of course, has a robust rare-earth sector, but in Europe and North America,
progress toward upstream mining has been slow. For its part, the European Union recently put
forward a set of actions under the Critical Raw Materials Act that would accelerate critical
mining activities in the EU. Under the proposed rules, at least 10% of the EU’s annual
consumption of critical raw materials would be met by domestic extraction, and “not more than
65% of the Union’s annual consumption of each strategic raw material at any relevant stage of
processing [could come] from a single third country.”
While that legislation may close the rare-earth supply gap a bit, EU financing regulations that
govern the types of projects that can be called environmentally friendly do not help because
they omit mining. As a result, green investors will be reluctant to put their money in rare-earth
efforts, even though it is essential for EU countries to open new mines to source rare earths for
the wind turbines and electric vehicles that are required for the EU’s energy transition
ambitions.
Quasi-government and multilateral entities

could use their lending arms to provide
investments, loans, or guaranties to new
projects.
Public-private partnerships could be perfect vehicles for funding rare-earth mines. Quasi-
government and multilateral entities—including development banks (such as the IFC and the
European Bank for Reconstruction and Development) and development agencies (such as the
German Agency for International Cooperation)—could use their lending arms to provide
investments, loans, or guaranties to new projects.
Perhaps the most effective example of a public-private partnership took place in Japan in 2010
when a political dispute with China threatened Japan’s supply of rare earths. To protect against
this potential shortfall, the Japan Organization for Metals and Energy Security, an independent
administrative unit of the government, extended a low-interest loan to Australia’s Lynas Rare
Earths, which was relatively new in rare-earth mining at the time. Within three years, Lynas had
overcome technical problems and was routinely producing rare-earth metals in its Malaysian
facility. This financial agreement effectively helped Japan to shore up its supply of rare earths.
Improve transparency in the rare-earth mining sector to catalyze commercial

opportunities. The recently created French Observatory of Mineral Resources for Industrial
Sectors is a public-private group charged with developing technical, economic, and strategic
analyses pertaining to critical raw materials. These assessments are intended to provide various
levels of the French government and organizations in the industrial sector with sufficient
information to make decisions, including ones about planning new mining ventures and
adjusting supply and demand.
Similar ventures are needed in other global economies. By collaborating, members in a public-
private group could monitor and chart both the production of critical-mineral projects at various
stages of development and the downstream companies that may buy the elements. Members
could also match possible commercial partners to codevelop mining projects, create
communities for knowledge sharing, and encourage research and development in best practices,
including ones for environmentally sound approaches. In addition, members could draw up
business models and strategies and lay out roadmaps for investing in rare-earth mines.
At the international level, global economies should create a multilateral agency like the
International Energy Agency. Focused on critical raw materials, the agency would create more
global transparency about supply and demand, the status of new and existing projects, and
supply chain effectiveness.
Governments and public-private consortia

should spawn regional alliances to ensure
global cooperation and share risk.
Forge regional and private partnerships to share the effort and the risk. There is only so
much that countries can do alone. It is important for governments and public-private consortia
to spawn regional alliances to support rare-earth sector growth, ensure global cooperation, and
share risk. For instance, a multinational consortium could establish a mine in Australia,
processing capabilities in Europe, and downstream production in the US—with financing and
output equally divided among the participants. Such a broad alliance could collaborate in
setting goals for the project’s environmental benchmarks, inter-regional trade, and sharing R&D
and market expertise—all facets that need to be standardized globally to expand activity and
performance in the rare-earth sector.
Companies can create individual partnerships as well. Downstream companies need to be

certain that they have reliable rare-earth supplies to manufacture their components, and
upstream players must be assured of outlets for their mining output. Locking in critical-metal
sources now, even before demand has evolved but anticipating future market growth, would
boost new mining projects and close the supply gap that will otherwise develop over the next
decade. For example, General Motors and General Electric have a joint arrangement to purchase
rare earths in the coming years from Australia’s Arafura Rare Earths. Despite this agreement,
both GM and GE do not yet have capabilities to create permanent magnets from the metals, but
they want to assure supply availability for strategic initiatives pivotal to their growth.
Develop recycling programs for rare-earth elements. Creating reuse programs for rare earths
in end-of-life products is imperative. Recycling can increase the amount of rare earths available
for manufacturing permanent magnets and create a new source of supply of these scarce
commodities. Currently, there are no at-scale recycling programs that separate out rare-earth
metals, although some IT equipment, large appliances, and electric vehicle components with
permanent magnets are repurposed.
To make sure that the rare earths are isolated and recycled, governments need to establish
standards to ensure that manufacturers design their products to facilitate reuse. Governments
also need to create incentives to trigger investments in recycling facilities. Rare-earth recycling
is in its early stages, and financial support or tax deductions will be needed to encourage
companies to get into an energy-intensive and, therefore, costly endeavor with only limited
amounts of minerals available for recycling. The incentives would ideally catalyze collaboration
among midstream and downstream rare-earth players to develop the recycling market in a way
that builds efficiency into the process; reduces costs for both the recycler purchasing the end-of-
life products and the manufacturer buying the recycled minerals; and allows for a pricing
structure that generates consistent profits.
It is unrealistic to think that the development of downstream rare-earth demand alone will drive
ample growth in upstream capacity. To close the supply gap, aggressive and purposeful action
will be necessary. In particular, governments will have to show leadership and provide sufficient
support to kick-start desperately needed rare-earth initiatives—and, in turn, public-private
coalitions involving all parts of the value chain must more aggressively develop new projects
and accelerate existing ones. The rare-earth shortage may not be uppermost in people’s minds
now, but it must be resolved—or it will become a bottleneck, significantly limiting the world’s
chances to meet its carbon emissions goals.
Authors
Emile Detry
PARTNER
Casablanca
Antoine Gauduel
PROJECT LEADER
Casablanca
Frédéric Geurts
MANAGING DIRECTOR & SENIOR PARTNER
Brussels
Lisa Ivers
MANAGING DIRECTOR AND SENIOR PARTNER; HEAD OF AFRICA
Casablanca
Michael McAdoo
PARTNER & DIRECTOR, GLOBAL TRADE & INVESTMENT
Montreal
Tycho Möncks
MANAGING DIRECTOR & PARTNER
Johannesburg
Tom Butler
SENIOR ADVISOR
London
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16/10/2023, 16:53 Five Steps for Solving the Rare-Earth Metals Shortage | BCG

Five Steps for Solving the Rare-Earth

READING TIME: 15 MIN

The Depth of the Shortfall

To determine whether the upstream pipeline of rare-earth projects will be sufficient

We also assigned probabilities according to projects’ likelihood (80% for probable

Rare-Earth Market Challenges

Offering incentives to improve midstream and

Five Steps to an Efficient Market

Quasi-government and multilateral entities

Improve transparency in the rare-earth mining sector to catalyze commercial

Governments and public-private consortia

Companies can create individual partnerships as well. Downstream companies need to be

ABOUT BOSTON CONSULTING GROUP

Boston Consulting Group partners with leaders in business and society to

© Boston Consulting Group 2023. All rights reserved.

For information or permission to reprint, please contact BCG at

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