It is certain that the prices of the critical technology metals, which are required for the manufacturing of the nickel metal hydride batteries for Toyota’s current Hybrid Synergy Drive, will be going up by 2011, as demand for them is predicted to exceed supply sometime in, or soon after, 2011. Toyota can perhaps reduce its cost of these metals by using less in smaller batteries, but with increasing prices that may not work. Perhaps Toyota is going to use its own version of what I am going to now name “Rare Metals Auditing and Conservation” or RAMAC, which in a way will allow a company to lease its own metals from itself. This can stabilize a supply while allowing it to increase whenever possible.
I think that Toyota is in the process of creating an internal revolution in the way it manages its supply and value chains, with regard to sourcing and valuing critical metals, by which I mean those metals without which a component cannot be built.
I am going to explain what I think is Toyota’s version of the RAMAC system as it pertains to the manufacturing of batteries for the electrification of motor vehicles intended for private use and primarily for the carriage of passengers not freight.
Let me, as a preliminary to that give you some background as to how Toyota manages its sourcing and valuing of the platinum group metals necessary for manufacturing its exhaust emission control catalytic converters and its oxygen sensors.
Unlike the United States, Japan has almost no metallic natural resources; it certainly has no domestic supplies of platinum, palladium, or rhodium, which are today produced almost entirely in Southern Africa (platinum, rhodium, and palladium), Russia (palladium and platinum), Canada (palladium), and the USA (palladium).
Unlike the US government, the Japanese government encourages its domestic industries to source and recycle critical raw materials. The Japanese government has a long range plan, itself, to stockpile critical materials for both civilian and military production, so that the situation of 1939 can never repeat itself. At that time, the Japanese war machine was facing a massive interruption in its supplies of steel, oil, and rubber and it informed the (military dominated) government that if it didn’t “acquire” secure supplies of those materials then its ability to make war would begin to decline sharply by late 1941 or early 1942. We all know what types of decisions were motivated by this simple looming shortage.
Today, Japan is again acutely aware of the fact that it must conserve critical resources and stockpile them to maintain the viability of its industrial base, or it could lose the economic struggle now accelerating between Japan and China, Korea, Malaysia, and, soon, India, because those nations are better supplied with critical raw materials. Japan’s industrial innovation is currently world class and certainly at least equal to that of the US, in technologies such as battery development, and production, for the electrification of private passenger carrying vehicles.
The great Japanese trading houses work in conjunction with Japanese industry and with the diplomatic, and soon, stockpile buying, support of the Japanese government to seek out, buy, and process critical materials for industry and the military.
In the case of the platinum group metals the Japanese trading houses such as Sumitomo, Mitsui, and Mitsubishi officially compete with each other internally for ultimate customers, but would never, for only the sake of competitive advantage with regard to one another, prevent one another from acquiring a raw material critical to Japan’s industrial survival.
In the case of the platinum group metals, as a good example, not only are the Japanese trading houses long term buyers of very large quantities, but they are willing to enter into binding offtake agreements to buy large quantities at prices that can be calculated exactly for the long term. This means that the producers can borrow against such contracts as collateral. In the free market this creates a strong incentive for miners to make deals with Japanese trading houses at good prices for both parties, even if they are below market!
Additionally, Japanese trading houses also hedge platinum and palladium and create virtual hedges for non-exchange traded rhodium, for example, by methods such as the offtake agreements discussed above.
Finally the Japanese trading houses own or contract with Japanese and European mining and refining companies to recycle platinum group metals from automotive scrap. The global Japanese car makers such as Toyota, will marshall selected automotive scrap containing critical metals from their own dealers, and consign it to a Japanese full-service trading company such as Sumitomo, which will have the scrap picked up and shipped to Japan for recovery of the critical metals for reprocessing into the appropriate forms for re-use. Typically, companies like Sumitomo offer to do every step of the process, from picking up the scrap to delivering finished components utilizing the recovered critical metals, back to a customer such as Toyota.
In light of the long term and sophisticated planning by Japanese industry, it should not be surprising that Toyota is aggressively fighting back against Honda’s Insight hybrid, which Honda has identified as a Prius fighter, by offering a smaller hybrid to compete directly with the Insight. This has allowed Toyota to create the impression that the Insight is not competing in the Prius market segment, but rather in a segment that Toyota overlooked, very small hybrids. In the meantime before the new Yaris size hybrid can be brought to market, Toyota will continue to make and sell the current generation of Prius even as it introduces a new larger size next generation Prius, which was intended originally as a replacement for the current generation Prius.
I believe that this means that Toyota will continue, not only to extend, but to expand the Prius brand and volumes, while adding a new entry into the hybrid space, a small, purposely designed, hybrid Yaris-size car.
This means that Toyota would need more of the rare earth metals, lanthanum and neodymium, than even Toyota itself thought it would need as well as additional supplies of cobalt and nickel
Let me tell you briefly what Toyota has done up until now to minimize the risk of interruption of its supply of rare earths, cobalt, and nickel for making its nickel-metal hydride batteries for the Hybrid Synergy drive:
First, as with platinum group metals, it has commissioned some of the Japanese trading houses to seek out additional supplies of the required metals.
Nickel today is, and cobalt later in the year will be traded on the London Metal Exchange, which means that contracts guaranteeing the delivery of both metals can be bought with at least two years’ duration.
Japanese trading companies, acting on behalf of clients such as Toyota, seek out spot buys of nickel and cobalt in markets such as today’s, and negotiate and execute offtake when and where feasible taking advantage of and locking in low prices. Copper for wiring harnesses and motor winding is also sourced aggressively and all three metals, nickel, cobalt, and copper are recycled from auto company generated and owned scrap, for the benefit of the car companies as much as possible.
There is no exchange trading of the rare earth metals and there is little if any publicly acknowledged recycling of them. Additionally there is not yet today any reliable volume production of the rare earth metals outside of the People’s Republic of China (PRC), and the PRC is not a good place to enter into an offtake agreement as any such agreement will always be modifiable by decisions of the PRC government with regard to export allocations and taxes.
It is rumored that both Toyota and Honda had or have offtake agreements with the promising non-Chinese rare earth mining and refining operator Lynas, but Lynas is at the moment in limbo, as it has had to suspend operations due to the withdrawal of funding. This has stopped the construction, not only of Lynas mining operations, but also of the very large rare earth refinery Lynas was about to build in Malaysia, which would have been the first constructed, or operating, outside of China since the late 1990s.
The other Australian rare earth mining opportunity was Arafura, but a Chinese miner has just bought into Arafura with the probable intention of taking any ore concentrates produced there to China for refining, where they will be subject to Chinese export allocations and restrictions.
Toyota has a backup plan, which is very aggressive for a car maker. Toyota’s own in-house trading company has bought a smaller Japanese trading company, which has an interest in a rare earth mine being developed in Viet Nam with the participation of the Viet Namese government.
This could make Toyota the first ever car company to be vertically integrated as a producer of batteries of any type. It would have the mine and the refinery for rare earth metals and its own in-house battery and powertrain manufacturing.
This would allow Toyota to be the first car company to acquire critical metals such as rare earths, cobalt, and nickel for perpetual use. This would mean that since Toyota would produce and refine rare earth metals it would have the facilities also to recycle them. These expensive and technology-intensive operations would not have to be duplicated or built only to be used occasionally, since they would be processing ore to extract, separate, and refine rare earth and associated metals continuously anyway recycling would simply add a feed stock stream to an existing one.
Toyota in this scenario would know exactly how much of the critical rare earths it could obtain at any given moment, and any additional feed of ore or scrap would only serve to increase the total.
The batteries, wiring, and motors of cars on the road could be viewed as critical metals long term inventory , and market data would allow Toyota to calculate how much rare earth, nickel, and cobalt metal it could recover for reuse in any given time period.
In such a system scrap purchased from outside of the company would simply be a permanent addition of metals in or for use in the master inventory.
I believe that Toyota and, most likely, Honda are now watching Australian politics to see if China is allowed in fact to effectively take over Arafura, which will add jobs and create wealth in Australia, but ultimately place Arafura’s output under the control of the Chinese government.
I suspect that Toyota and Honda, having both, probably, made now moribund offtake agreements with Lynas would both like to buy Lynas and go forward with its plan to build a refinery in Malaysia. Perhaps the two of them can strike a bargain or can make a deal through an independent trading house such as Sumitomo.
In any case, if a Japanese car company or a Chinese mining company gets control of one of or both of the Australian deposits, the rare earth metals produced there will either go into a RAMAC type system operated by Toyota or Honda or into China’s domestic supply. In either case those metals will be taken off the world market.
The Japanese car companies are moving towards an end game for acquiring and holding forever as much rare earth metal as they can. Otherwise, they will wind up with a technology, the production of which has been severely limited by the inability of the mining industry to increase production enough to satisfy demand.
I think that Toyota’s announced increases in its production of nickel metal hydride battery, using hybrid power trains, indicates that it has adopted the closed loop use of rare earths.
If I am right, then open market rare earth pricing will go through the roof as the available supply diminishes through Chinese and Japanese sequestration for their own use. However, at the same time, companies like Toyota will have some flexibility in determing their costs, due to the fact that only they will know their true internal cost of critical rare metals in their closed loop value chain.
Perhaps this is one of the reasons that Toyota has been dropping the replacement cost of nickel metal hydride battery packs over the last few years, even as prices in the open market for the key rare earths were going up.