Rare Earths from Japan's Junk Pile

It takes two Hitachi (HIT) workers eight minutes to slice open the metal casing of a used air conditioner compressor. The prize inside: four wafer-thin magnets containing about 30 grams of rare earth metals.

Hitachi, which makes everything from nuclear power plants to home appliances and batteries, uses as much as 600 tons of rare earth metals in its products each year. It is one of hundreds of Japanese manufacturers depending on rare earth shipments from China, which produces 97 percent of the world's supply of the lightweight, malleable metals essential to hybrid cars, cell phones, and hard disk drives.

In the second half of last year, China cut its exports of rare earths by as much as 72 percent. Then in late December, the Chinese government said it would restrict shipments again in 2011 to free up supply for local manufacturers and rein in an industry that is damaging the environment with waste gas, heavy metals, and other pollutants.

The export clampdown has driven up prices and sent Japanese companies, the world's biggest users of rare earths, scrambling to find other sources. "Japan imports nearly all its metals, but the difference with rare earths is that they are used for environmental technology and high-efficiency motors, which is where the market is now," says Hikaru Hiranuma, an analyst with Tokyo Foundation, a research center based in Japan's capital.

Hitachi says it expects recycling to meet 10 percent of its rare earth needs by 2013, up from almost zero now. "We need to make sure we have a stable supply, and recycling is part of that," says Kenji Baba, general manager of Hitachi's resource recycling office.

Inside a warehouse in Matsudo City, Hitachi demonstrated the results of its recycling research one day in December. Four refrigerator-size devices used saws to open up compressors without damaging the rare earth magnets inside. A separate conveyor belt fed disk drives into a machine about the size of a ship container. The drives came out the other end in pieces ready for rare earth harvesting. Hitachi says the machines are the first of their kind.

The drop in exports from China, combined with rising demand from Hitachi and other companies, drove the price of neodymium, one of the rare earths, to a recent $88.50 a kilogram from $19.12 in early 2009, according to Lynas, a rare earth miner based in Sydney. Lynas is building a $535 million rare earths mine in Western Australia. Neodymium is used in the batteries that help power the Toyota (TM) Prius.

"China's monopoly isn't going to hold up because prices are high enough now to make it worthwhile for other people to get into the business," says Mitsushige Akino, who oversees about $450 million in assets at Tokyo-based Ichiyoshi Investment Management. Trading company Sojitz, one of Japan's biggest importers of rare earths, has agreed to buy as much as 9,000 tons annually from Lynas' Mount Weld mine over the next 10 years. Sumitomo, Japan's No. 3 trading company, says it's considering an investment in Colorado-based rare earth miner Molycorp (MCP).

Other Japanese companies are following Hitachi's lead and mining discarded products. Tokyo-based chemical maker Showa Denko has opened a plant in Vietnam to begin recycling dysprosium and didymium, rare earth metals used to strengthen magnets. The company, a top producer of components in hard disk drives, plans to recycle 800 tons of rare earth metals at the factory. Copper processor Mitsubishi Materials has recycling joint ventures with Panasonic (PC) and Sharp. It has also started researching the cost of extracting neodymium and dysprosium from washing machines and air conditioners.

The bottom line: China's decision to restrict exports of rare earth metals has prompted Japanese companies to find new sources of supply.

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