European automakers seek hedge against China's rare earth dominance

European automakers are in discussions with an Australian mining company about sourcing elements the help power electric vehicles from outside China, which dominates the global supply of rare earth metals. 

The mining company, Arafura Resources, is developing the $728 million Nolans project in Australia's Northern Territory that is expected to cover as much as 10 percent of global demand for the type of rare earths used in permanent magnets for electric motors. 

Crucially, Arafura plans to process ores close to its site, ensuring direct oversight of the treatment of toxic waste products at the project it bought in 2001.

"We have engagement with European manufacturers to directly supply them with material," Arafura Chief Financial Officer Peter Sherrington said in an interview, adding that he expects to sign agreements before the end of the year as talks advance to volumes and price.

New rules on sustainability and traceability "have opened carmakers' minds up to the need of this," Sherrington said.

Rare earths are emerging as another source of concern in the transformation to EVs. They will require vast amounts of battery raw materials like lithium, nickel and cobalt, which is leading automakers including BMW, Volkswagen Group and Tesla to go directly to miners. 

China is expected to put much of its production to use domestically in the future. The country controls two-thirds of mining and 85 percent of refining of rare earths, according to BloombergNEF.

Simmering tensions that previously made the elements -- also important for applications in defense -- a political pawn are spurring efforts to procure from outside China.

Last year, the U.S. Department of Defense committed funding for the Australian producer Lynas to set up a processing plant in Texas that will cost an estimated $30 million initially. Other companies advancing projects include Hastings Technology Metals and Peak Resources. 

While carmakers including BMW, GM and Toyota have sought to reduce the amount of rare earths -- a vehicle uses an average of 3 kilograms (6.6 pounds) -- switching to alternatives tends to make motors less efficient. Tesla initially used induction motors that did not need magnets to power its EVs, but switched gears with the Model 3.

Renault's EV motors are unusual in that they do not use rare earth metals.

"To have future safety of supply, you need to create your own," said Joanne Jia, a vice president at China's Hangzhou Permanent Magnet Group, which has developed magnets that can switch between two types of rare earths depending on price. "The material is critical but very small in quantity." 

A new law in Germany on supply chain responsibility has also spurred interest, said Arafura's Sherrington. Starting from 2023, companies will be held accountable on social standards across their entire supplier network and including waste products, or face fines.

Efforts to establish supply are also underway in Europe, which is now the top region for EVs and is on course to become the biggest consumer of the elements. The European Union last year set up the European Raw Materials Alliance to help ensure supply of critical raw materials fueling the world's most ambitious plan to fight climate change. In rare earths, the alliance has identified 14 projects in Europe for investment of 1.7 billion euros ($2 billion).

"There's always been awareness about the dependency, but availability, at a price, was fine," said ERMA Chief Executive Officer Bernd Schaefer. "That's now changing to a mindset of the tremendous cost of not having the material."