A Partial Equilibrium Model of Metals with an Application for Rare Earth Elements

Compared to oil and gas, metals have been rather a side issue in the economic analysis of natural resources in the last decades. However, in the recent past we saw an increase of interest in the topic, mainly driven by the heated discussion about critical metals. Rare Earth Elements (REE) are their most prominent exponent displaying many of the characteristics of a critical metal. They are important for key technologies such as renewable energy generation, at least some of them are scarce in geological sense, there is a high dependency on imports from one country (e.g. China), and serious environmental problems are associated with their mining and winning. In this paper I aim at identifying the most important parameters influencing prices, consumption and recycling of Rare Earth Elements and at quantifying their impact. Thereby, I want to draw conclusions about plausible future developments of the market and about potential policy intervention. The analysis has to consider the multifarious drivers of metal markets including finiteness of resources, costs of mining and winning, technical progress, evolution of demand, or capacity constraints. I develop a numerical model for the Rare Earths market and use it to simulate the future market given certain assumptions to achieve this.The model is of the partial equilibrium type. It covers the full life cycle of a metal, from the extraction of ores, over winning of the metal itself to the use and its disposal. Since metals can be molten and used again, recycling is a crucial part of the model. Perfect foresight and rational profit maximizing agents are assumed. When determining the supply of Rare Earths, both already active and potential mines are taken into account. The model will simulate a time span of about 10 to 20 years. The demand side is modeled price elastic and based on projections about future needs for Rare Earth Elements. Other important aspects of natural resource markets such as technical change and endogenous capacity constraints are considered. The same holds true for trade restrictions by China, a key feature of today’s Rare Earths markets. Several sources of data have to be employed to calibrate the model on Rare Earth Elements. Data on resources and investment as well as operational costs of mines are available in feasibility studies provided and published by mining companies. Prices for Rare Earth Elements can be extracted form sources such as ThompsonReuters DataStream. To define scenarios for the future demand of REE, projections, mainly from industry experts, can be used. Since no noteworthy recycling in an industrial scale exists for REE today, engineering studies are needed to get quantitative information about the possibilities and the costs of recycling Rare Earths. Generally, it is expected that the more abundant Light Rare Earth Elements, will see moderate prices in the future. The less abundant Heavy Rare Earths will probably see a higher level of prices for a longer time span. The magnitude of the future influence of Chinese policy on the Rare Earths market is not clear. On the one hand, Chinese export restrictions increase the prices of the metals outside China. On the other hand, this implies incentives to open new mines outside China and to recycle. Prices for other metals such as zirconium, uranium or niobium co-determine the supply of REE. They often occur together and can therefore be mined together yielding profits for REE mines. This is to be explored quantitatively. Fostering the recycling of REE is perceived by many as a key to both reduce the dependency on imports and the environmental impacts of mining. It is expected that the potential for recycling varies strongly between different rare earths, depending on their applications. Many recycling technologies are new or currently under development. Therefore, they are expected to be effective only in the medium or long term.