I got something special for your inbox today. Here’s another fantastic edition of Transmission, a twice-weekly newsletter assembled to chronicle the seismic shift in auto supplier networks as the industry goes cross-border and electric.
Mountain Pass deposit (hopefully) loosens grip on China’s rare earth metal markets
Automakers have put a high priority on EVs as the world shifts to cleaner modes of transportation. With demand for EVs forecasted to rise, the demand for rare earth metals used in both EV drivetrains and batteries will definitely be on the rise as well.
China has a near monopoly on these rare metals, owning 80% of the global supply chain even though it’s home to just a third of reserves. According to the U.S. Department of Energy, the U.S. imported $2.6 trillion of finished rare earth products in 2018, including $306 billion for the vehicle sector — the bulk of which comes from China. More than 90% of electric vehicles and hybrids rely on magnet motors, the majority of which are produced in China.
Here’s the odd thing: the U.S. owns one of the largest rare earth metal deposits in the world, so what advantage does China possess? Processing.
“The processing has always been the gap through which China has been able to kind of come to dominate rare earth metal production,” said Felix K. Chang, a senior fellow at the Foreign Policy Research Institute. Processing presents several problems, one of which is the release of toxic waste. China’s rare earth metal industry has been known for its non-sustainable practices and unsafe working conditions, which is why it has the upper hand. It’s ironic that resources used for sustainable advancements are being extracted and mined unsustainably.
However, there is some light at the end of the tunnel. In 1949, the Mountain Pass deposit, located in California’s Mojave Desert, was discovered, providing more than half the world’s needs for rare earth metals at the time. The deposit holds a variety of rare earth metals, including neodymium (used in batteries) and cerium (part of the catalyst in catalytic converters). But processing capacity was lost to China and now Mountain Pass has essentially strengthened China’s rare earth metal industry by becoming a supplier. On Nov. 17, the Department of Defense awarded three companies grants to “strengthen the domestic rare earths supply chain.” MP Materials, one of the companies awarded grants and owner of the largest rare earth mining operation outside of China, has been tasked with “adding value-add processing and separation capabilities to the Mountain Pass operations.”
China could still end up benefiting from this since Shenghe Resources Holdings owns about 10% of MP Materials. “According to a U.S. Securities and Exchange Commission filing,” Voice of America News (VOA) reports, “one of the MP Materials’ businesses is to “sell its rare earth concentrate products to Shenghe for further distribution to various downstream refiners in China.”
The Gist: The investment in reviving Mountain Pass isn’t the first of its kind. The last two decades tell the story of promising opportunity met with unfortunate failure as private companies Molycorp Minerals and Neo Performance Materials attempted to bring revival. But this investment in Mountain Pass is a strategic play: the military thinks it’s important that the U.S. have the ability to process and refine rare earth metals, especially in a time where geopolitical rivalry between China and the United States is heightened. By loosening China’s grip on rare earth metals markets, China’s ability to control battery costs is reduced, which is good news for suppliers, OEMs, and consumers.
Record-high PMI hinting at what’s to come in 2021
As I wrote in last week’s edition of Transmission, elevated automotive production continued through the end of the year. Supply chain disruptions, like production halts and component shortages caused by COVID-19, left suppliers and OEMs with a lot of ground to cover moving into the new year.
IHS Markit Manufacturing PMI shows that the average manufacturing activity rose to 55.2 in December up from 53.8 in November (essentially, any number higher than 50 indicates an increase in activity from the month prior and any number below 50 indicates a decline). While the index covers manufacturing across different sectors, the automotive industry makes up a hefty portion of the output calculated for the U.S., China, Japan, and Germany, all of which were among the worldwide leaders in vehicle manufacturing in 2019.
The IHS Markit PMI also found that, despite recovery efforts, purchasing managers were still continuing to cut payrolls, suggesting that many purchasers are hesitant about the outlook for the first half of 2021.
(Chart: Freightwaves SONAR. Tight capacity leaves outbound tender rejects in Detroit up 800 bps y/y.)
The Gist: Better manufacturing PMI prints are a rising tide that lifts all boats: in theory at least, robust industrial activity and improving employment should help support consumer spending and car sales. Elevated production output is one of the primary reasons the freight market is experiencing tight trucking capacity. Yes, this is widespread across all sectors of industrial production. Yes, it will hit each sector differently. However, since we’re seeing this production increase in the auto sector as well, like expected, tightened capacity is leading to more tender rejects. Starting back in July, outbound tender rejects leaving Detroit have significantly higher than the same time last year.
Industry News:
- Tesla sold 499,550 vehicles in 2020, just 450 vehicles shy of its 500,000 sales target. This past year threw a lot of challenges at the auto industry, making this accomplishment even more impressive.
- GM has issued a recall of over 620,000 pickup trucks. Faulty seat belt brackets, in Chevrolet’s Sierra and Silverado models, were the issue at hand.
- Massachusetts has followed after California’s banning of new ICE sales. The Northeastern state has set a 2035 deadline.
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