Demand for rare earth elements (REEs) is expected to surge over the coming years as their role in the green energy transition becomes increasingly impossible to ignore. Around 20% of REEs account for 80% of their market value, demonstrating the Pareto principle and the 80-20 distribution once again.
According to the latest McKinsey study, "Global demand for magnetic REEs is expected to triple from 59 kilotons (kt) in 2022 to 176 kt in 2035."
The consulting firm attributes the trend to strong growth in electric vehicle (EV) adoption, outpacing the substitution of REEs with copper coil magnets and the high rate of renewable capacity expansions in wind power.
They point to insufficient current production and project pipelines, which may leave a 60 kt supply gap, or around 30% of projected demand, over the same period.
Magnetic REEs--primarily neodymium, praseodymium, dysprosium, and terbium--are essential for high-efficiency electric motors. For this purpose, MP Materials (NYSE:MP) is of critical national security importance, as it operates the Mountain Pass mine--the only active domestic rare-earth mine.
The company is also heavily investing in vertical integration and, in partnership with Apple Inc. (NASDAQ:AAPL), is building the first fully integrated rare earth magnet manufacturing facility in Texas.
McKinsey notes that the market is also vulnerable to concentrated supply risks. China controls more than 60% of global REE mining and 80% of refining, and McKinsey estimates that heavy REEs should remain predominantly sourced and refined in Asia-Pacific through 2035.
Despite China's recent export controls on certain medium and heavy REEs, which have elevated geopolitical concerns, regulatory pushbacks, and persistent structural constraints on permitting and environmental impact remain in the rest of the world.
McKinsey estimates that even if Chinese production scales to fill the shortfall, geopolitical risks could still strain the system.
Although primarily an uranium producer, Energy Fuels (AMEX:UUUU) is worth watching for its efforts to diversify into rare earth processing. Its White Mesa Mill in Utah is capable of processing monazite sand (a source of REEs) and has achieved commercial production of separated Neodymium-Praseodymium.
While recycling could be a partial solution, the study notes its limitations. Pre-consumer scrap from magnet production is mainly located in China and is already close to recovery capacity.
Post-consumer scrap--magnets in electronics, EVs, and appliance offers future potential, but low collection rates and complex disassembly make recovery uneconomical under current systems. Most REE magnets end up in slag during smelting or are shredded alongside other metals.
The challenge of isolating magnets from post-consumer products is leading the market to explore new methods. Options such as robotic disassembly, hydrometallurgical separation, and hydrogen-based processes are promising, but still in the early phases.
Scaling these technologies to meet industrial demands could take another decade.
McKinsey estimates that by 2035, the global recycling system for rare earth elements will produce 40 kt of pre-consumer and 41 kt of post-consumer scrap--sufficient to ease, but not completely eliminate, the looming shortage.
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