Did A Shortfall In The Supply Of The Rare Earth Metals Lanthanum and Neodymium Force Toyota to Reduce The Production Of Priuses In May?

Implications: Toyota and Honda have both announced in the last month that they will use nickel metal hydride batteries in their hybrid vehicles for the near term, at least for the next five years, and perhaps well beyond that. Toyota has also announced that it will dramatically ramp up nickel metal hydride battery production so that it can ramp up hybrid vehicle production. Toyota will be introducing a new more powerful Prius power train along with several new additions to the Prius 'family' of vehicles in january, 2009. Honda has announced that it will in 2009 be introducing its new nickel metal hydride powered Prius fighter small hybrid car in late 2009. Why then did Toyota say that the drop in Prius sales last month was due to a lack of batteries? Could Toyota purchasing have made such an error , or is something much bigger happening?

Analysis: Toyota's increasing need for nickel metal hydride batteries does not seem to have kept up with the ability of China to supply the necessary 'critical raw materials,' the rare earth metals, lanthanum and neodymium. 

There is no secret that China's heavy industries, the pollution from which are deemed by the Chinese government to be capable of affecting the air quality in Beijing, have been ordered to scale back or even shut down until after the Olympic Games. There is rumored to be chaos among the rare earth metal refiners and end users as the supplies of rare earth concentrates have dwindled due to this edict and due to a shortage of hydroelectric power and logistic support caused by the recent massive earthquake.

Toyota must use Chinese rare earths to make its nickel metal hydride batteries, and since it only makes the batteries in its Japanese plant, it must depend on exported material, but as the supply crisis in China continues it is only Chinese plants that have a good chance to get the scarce raw material.

It is rumored that Honda is working now with some domestic Chinese suppliers to try to ensure that it can have enough nickel metal hydride batteries to launch its Prius fighter on time even though Honda, like Toyota, does not like to work with Chinese quality issues or to allow outsiders to see its proprietary technology and manufacturing processes for nickel metal hydride batteries.

Therefore I believe that Toyota is reducing the production of the current model Prius so that it can have on hand sufficient nickel metal hydride batteries to launch its new family of Prius models next year. This is a difficult decision for Toyota, but it is the only one possible, if the new models are to be launched.

Toyota and Honda are now taking a very hard look at the possibility of either directly or indirectly financing rare earth mines outside of China, but doing so very discretely, because the Chinese rare earth producers are known to be less than friendly or forgiving in their treatment of customers who seek other or alternate sources.

Canadian rare earth mining ventures, Great Western Mineral Group and Avalon Ventures, along with the Australian ventures, Lynas and Arafura, all say that they could be in full production within 3 to 5 years if they were fully funded now. One past producer, Chevron Mining, in California, and one new entrant, Thorium Energy, Inc. in Idaho also claim they could be in full production in five years.

Toyota and Honda must look at all of these sourcing opportunities if they are not to risk not to be able to produce 35 billion dollars a year of profitable product by 2012.

Did I mention that the permanent magnet business is in the same dilemma, a looming supply shortfall of critical neodymium?

Something's got to give, and I think it will be the hesitation that investors have had to fully fund the rare earth mining industry.