Rare Minerals Promise Rare Opportunities and Call for a Refined Understanding of Risk

Rare Minerals Promise Rare Opportunities and Call for a Refined Understanding of Risk

Photograph by Chris Fertnig/Getty Images

The place-name Silicon Valley rightly honors the element used by chip-makers to guide electrons through semiconductors. Silicon—symbol: Si—does humanity a vital favor by being the second-most abundant element in the Earth’s crust. On the other side of the spectrum, among the least plentiful elements, are neodymium, europium and lanthanum. These are rare earth elements, three of the 17 “REEs” that manufacturers increasingly need in order to bring high-tech, high-ticket products to market.

The world’s leading economies and their manufacturing sectors face a product-development landscape that is ever more complex and fast-changing. Factors affecting it are geological, geopolitical and at times gee-whiz, as one invention or another upsets the status quo. Within Zurich’s data-analysis community, implications of the new dependence on scarce minerals are reminiscent of the supply-demand equations around energy production. Exploring and drilling for oil and gas in a new location is always possible, but not always profitable. And few activities bear a greater need for advanced risk management.

That said, fossil fuels are suddenly looking less scarce. As hybrid cars roll off U.S. production lines—fitted with 10-plus pounds of lanthanum in their batteries—the gasoline they will need may enjoy an improved price stability. That is due in good part to hydraulic fracturing (“fracking”) technology, which has resurrected domestic oil and gas production.

For most players in the REE supply chain and in high-tech manufacturing, risk and opportunity toggle back and forth in unnerving fashion. Energy prices, even as they appear somewhat tamed, interconnect with the rare-earth minerals market to add a critical variable. Mike Halvey of Zurich in North America sums it up as “a global competition for resources brought on by technology innovations that will very likely produce even further tech breakthroughs.”

At the level where Halvey’s unit operates, everything involves dominoes and ripple effects. The REE used in LED lighting is europium. China effectively enjoys a monopoly on europium, strictly based on price to market, which is facilitated by China’s extensive iron mining, because the two activities dovetail. Once essential in making color televisions, europium is the key ingredient in low-heat, energy-saving lighting. A manufacturer of LED lighting needs the present supply situation mitigated against disruption. In addition, it needs the scenario of a successor technology to be adequately assessed, foreseen, perhaps even quantified.

“Our success lies in our ability to devise both immediate and long-term solutions for our insureds and customers,” says Halvey. “We understand the crisis, the bump in the night. Supply-chain risk for REEs is increased due to the high material costs—and we have the systems and people to respond at a superior level to those circumstances.”

On almost a separate plain lie the longer-range solutions to which Halvey refers. To deliver them requires a deeper and more varied matrix of data points, plus human expertise and judgment that is itself rarified. “This area of the economy would pose a challenge even if it were static and unchanging,” Halvey muses. “Instead it is subject to dramatic change, because the stakes are high and substantial assets are being deployed against it all the time.”

The challenge he describes tends to come in a one-two sequence. There is a tactical move analysts identify and there is the condition that would trigger it. An example would be the dramatic run-up in the price of rhenium that occurred several years ago. Unique in its value to any jet engine maker, this REE, only discovered in 1925, soared from a normal per-kilogram price range of $3,500–$4,000 up to $12,000. Without delay, the world’s engine makers devised an effective global recycling partnership that helped return rhenium to prior price levels.

“Always in the case of a very scarce and high-value resource,” observes Halvey, “you have the possibility of significant changes in behavior among market participants. Like every other type of change, these behavior shifts can create benefits and new market openings.” The advantage, of course, lies with those who first saw the shift in strategy or behavior on the horizon.