Rare Earths' Futures. An Assessment Using a Partial Equilibrium Model

Rare Earths are a group of 17 metals which were presumably unknown to the vast majority of people until very recently. The combination of growing demand and tightened export restriction by China, which holds almost monopolistic power in their supply, has led to massive price increase in 2011. That created a lot of flurry in media, business, and policy surrounding these metals serving as important inputs to many high tech applications. Economics can contribute to this discussion by quantitatively analyse the markets and their potential developments in the future using transparent methodology. To do so, I develop a partial equilibrium model for metals and calibrate it for Rare Earths. I then apply the model to answer two adjunctive questions. How can a plausible development of Rare Earths markets look like? And how do theoretically plausible drivers of resource markets influence this development. This paper is based on substantially revised work I presented at last year’s EcoMod. The model is a dynamic partial equilibrium model. It encompasses the world in a regionally disaggregated manner. The whole life cycle of the metals is covered. Starting point are the deposits of Rare Earths. These are potentially extracted by mines that have to build up capacities and then can extract the resources. Mines are modeled as small profit-maximizing firms. In every region, a trading sector buys domestic and foreign Rare Earths and sells them to industries. Demand consists of seven sectors consuming rare earths and processing them into products. When these products reach the end of their useful lifetime, they are either recycled and sold to the trading sector or disposed and the Rare Earths are thereby lost economically. Data from several sources is used to calibrate the model. The most important source is industry feasibility studies used to quantify resources, investment and extraction costs and other parameters for non-Chinese mines. Other sources of data include demand projections by (Kingsnorth, 2012) and price data from asianmetal.com. Calculations show that Chinese market power will be vanishing due to high prices incentivizing investments in mining abroad. The speed of this development differs between specific Rare Earths. Chinas monopolistic power will vanish for some of them in the near future already, for others it can remain till the end of the decade. China can increase the gap between domestic and foreign prices by either increasing its extraction of Rare Earths (when having constant and binding export quotas) or by tightening the export quotas. Higher quotas incentivize more investment in mining capacities in the rest of the world, while the production increase works conversely. The rest of the world can decrease its dependency and its prices for Rare Earths by using them more efficiently. Recycling products containing Rare Earths works similarly. This additional supply decreases prices and less mining capacity is necessary. Since not all Rare Earths are contained in the recycled products, those metals that are not have a smaller supply and higher prices. Subsidies on mines are ineffective and have a high potential for windfall profits if the policy can’t specifically target the marginal mine. Lags in opening up new mines can drive up prices significantly compared to the base case. The model indicates that will China lose its market power for some rare Earths soon and for others only in some years. The question then arises, if and how a temporary gap between prices inside and outside China affects Rare Earth dependent downstream industries.