China’s “Rare Earths” Exports Collapse, World Prices Soar

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Let’s think back to September 2010. Japan confronted China at sea in a dispute over fishing rights. The Japanese arrested a Chinese fishing boat captain. The Chinese soon imposed an embargo on rare earths exports to Japan.

Suddenly, rare earths – a relatively obscure set of industrial minerals, oxides and metals – became the stuff of high international attention and intrigue. It became common knowledge that China controls about 97% of the world’s rare earths output. Overnight, the dire industrial and political implications of that geological monopoly became apparent.

Investors were – and are – right to be interested in this situation. Just last week, we learned that the value of China’s rare earths exports has soared almost nine-fold, year on year. That is, a tonne (i.e., a metric ton) of Chinese rare earths – a weighted composite of 17 different materials – currently rings the cash register for just over $109,000. This is up dramatically since July 2010, when each tonne averaged buyers a mere $14,405.

In other words, China is raking it in. In fact, the prices of rare earths out of China have averaged about a $10,000 increase per tonne per month over the past year!

It gets worse for non-Chinese users. In February 2011 China reportedly exported a total of 750 tonnes of rare earths to a global array of buyers. This was slightly more than the 647 tonnes China shipped in January. Yet in just this one month, the average price for a tonne of rare earths leapt ahead by $34,000, according to a calculation by Reuters News Service based on data from China’s customs office.

The rapid increase in price is due to the Chinese government’s successful effort to restrict and reduce the volume of rare earths exports. Adding to the confusion, China has also changed the way it reports rare earths exports. This has artificially boosted the volume figures by including products made from rare earth metals in the total.

Could things get worse for Western buyers and users? Well, yes. Also last week, we learned that China might soon start importing some of the rare earths that its economy needs but doesn’t produce in sufficient quantity.

According to Liu Junhua, the deputy secretary for China’s Baotou Rare Earth High-Tech Industrial Development Zone Committee, “China may eventually need to import [heavy rare earths] materials.” According to Mr. Liu, speaking at a recent conference, there’s a “strong possibility of [China] importing heavy rare earths” in the next three-four years.

So here’s the scenario: Chinese export volumes are down. World prices are rising, and fast. And China may soon be importing the heavy rare earths for its own industrial needs.

Let’s review what this all means for investors…

The share prices for rare earths companies began to soar last fall. After the Japan-China dust-up in September, rare earths companies quickly became stock market darlings.

Many of the rare earths stocks I recommended to the subscribers of Energy & Scarcity Investor doubled in fairly short order. I suggested taking profits on two of those stocks, but still advocated long-term investments on selected stocks in this sector.

Looking back toward the end of 2010, pretty much any company with a “rare earths” tag line was a strong performer in the stock market. The investment community threw big money at a large stable of rare earths investment opportunities. But times have changed.

In the past six weeks or so, in the face of tight demand and fast- rising prices, investors have looked at the rare earths sector with even sharper, more discerning eyes. The rationale is twofold.

First, only a few non-Chinese companies will achieve output – and begin to generate cash flow – within the next three years. And second, only a small handful of companies will survive in the long-term race to supply the world with rare earths over the next decade or so.

One company I recommended should have a new mine up and running by the end of this year. Another company, one that I consider an excellent speculation, is modernizing a rare earths facility in Russia.

Meanwhile, there’s Molycorp, a company that is reconstructing its mine, mill and other facilities at Mountain Pass, Calif. It’s a major effort, with a sticker price in the vicinity of $500 million. The announced time scale is in the 24-month range. My concern about Molycorp is that the California project involves building a brand-new plant, with new equipment and bringing in a newly hired work force that’s still in training. Anything could go wrong and cause delays. And considering that it’s happening in mining-unfriendly California? I’m sure you get my point.

The larger point is the rare earths story is not going away. It is getting bigger every day and is sure to provide some outstanding opportunities for vigilant investors.

Regards,

Byron King
For Daily Reckoning Australia

Byron King
Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. Byron is also co-editor of Outstanding Investments.
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6 Comments on "China’s “Rare Earths” Exports Collapse, World Prices Soar"

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Dan
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This article is extremely important because of what rare earth metals are used for:
1. US military
2. Green technology
3. Gadgets including the world’s IT infrastructure

Couple this with peak oil (artificial or not), China’s nearly completed MAD (mutually assured destruction) readiness and Japan’s probable further economic decline. This is going to become big news again very soon. Coincidental is that Iceland’s economy faltered, as it is the other place where rare earth elements could be mined in sufficient quantities to compete against China (http://www.realpolitik.tv/2011/02/greenland-final-frontier-for-rare-earth-elements-uranium-and-much-more/). And not at all coincidental is George Soros’s interest in Iceland – it’s the ultimate power grab.

Pete
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Rare earths aren’t that simple IMO. They aren’t one or two elements. Nor are they are rare as their name suggests.

I think the issue isn’t so much that rare earths are hard to find – they’re not. It is more the fact that most of the worlds production of rare earths comes from China. For the rest of the world to bring new production online will take time. During that time, China can play trade war games, such as selling rare earths below cost to bankrupt new producers.

To me it seems like much more than an issue of scarcity.

Dan
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Yes, Pete, 17 elements in this group of minerals. However demand has been steadily increasing for decades, yet non-Chinese output generally has been declining. Are you saying this is because those mines just couldn’t be bothered competing because of poor return on investment? My understanding was that exploration for new sources has been unrewarding. Given that demand now outstrips supply by a fair margin, I think for the “rest of the world” to “bring new production online” might take a LOT of time since, even in Iceland, which can potentially supply 20% of the world’s demand, mining is only in… Read more »
Pete
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Dan: “Are you saying this is because those mines just couldn’t be bothered competing because of poor return on investment?” – Yes, pretty much. “Given that demand now outstrips supply by a fair margin, I think for the “rest of the world” to “bring new production online” might take a LOT of time since, even in Iceland, which can potentially supply 20% of the world’s demand, mining is only in the “pre-feasibility study” stage!” That was my other point. There are rare earths to be had, but the investment to bring production online is not there. We shouldn’t underestimate the… Read more »
Lachlan
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Apparently the yanks have let all their RE production go and it would take some time to reinstate such. Seems hard to believe for the welfare warfare state of new Rome. As I understand you seriously need these materials for weapons and associated technologies.
Maybe the lefties really do have this peace lovin, dope smokin new world all orgynized? Better get with the program maybe extend my vege garden for some new resinous green currency ;)

Ross
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This is a very poor article unbecoming to DR in the lack of investigatory work. The foremost problem with rare earth mining and processing is environmental. It is filthy and far more work needs to be done on researching the improvement of processes that are today inadequate, especially those on the illegal sites in China. What Byron doesn’t tell you is that the Chinese cracked down on two things; firstly illegal mining ventures, and secondly smuggling of rare earths that accounted for 90% of the trade flows from China to Japan. How can DR’s editor countenance this sort of omission?… Read more »
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