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Rare Earths - Not as Rare as Previously Thought

Rare Earths - Not as Rare as Previously Thought

By Sandrina Riddell 30.07.2011

China rules the rare earth metal market and prices have increased 10-fold since 2009.

China holds a monopoly over rare earth metal supplies, providing 95% of the world’s needs. Last year the Chinese government began to ration its exports by imposing quotas, which reduced exports by 40%; they also started to pick and choose which countries to export to and how much.

The major markets for Chinese exports are Japan, the EU and the USA. A “made in China” label doesn’t mean that all the parts are produced in China; it only means that the product was assembled there. However, with the monopoly over rare earth’s commerce, China is in a privileged position to dictate the terms of the trade and get a bigger share of the pie by having electronic components made at home. Some international companies may not have access to rare earths in any other way.

The other obvious reason for rationing supply is to create scarcity and provoke a price increase. From this perspective, China is in similar privileged situation to that of OPEC, which has been able to manipulate oil prices through quotas and price fixing.


Of course, from their perspective, the Chinese have very solid justifications: export quotas are necessary while they are cleaning up their own backyard, since their industry consists of many and laxly regulated rare earths mining companies which have wreaked havoc on the environment. This is the secret to Chinese success in the rare earths market: even though it has only 30% of worldwide reserves, it drove its competitors out of business through loose regulatory standards and low labour costs. Another reason for Chinese success has been that its deposits are more accessible than those of other countries; however, better technologies are shifting that balance.

The Flip Side of Quotas

Imposing export quotas may backfire on China for various reasons. First of all, China's main trading partners are taking notice - Japan, the European Union and the US. For example, the EU is pouring millions of euros into researching rare earths substitutes.

Some end users have replaced cerium, which is used to produce glass, with selenium because in the last two years cerium has become out of reach for producers - its price increased from $4 to $135 per kilogram!

Another alternative source of rare earths comes from electronics recycling; however, the process has been costly so far due to the widespread use of these metals recently, and the extant technology allows only for partial recovery of those metals.

Furthermore, there are talks of formal complaints to World Trade Organisation (WTO), which China has been a member of since 2001. A WTO member is held to higher standards: export quotas are illegal unless a country has a temporary shortage that it doesn’t allow it to fulfill its own needs first. The other negative development is the grand-scale smuggling of rare earths out of China. The Chinese Society of Rare Earths (CSRE) estimated that the quantities smuggled represent almost 30% of the total output, and went mostly to its neighbor, Japan. On one hand this black market is bad for the Chinese economy. On the other hand, the unofficial and additional supply keeps a lid on rare earths prices.

Recent Developments

As mentioned previously, China is not the only country that has the resources; Australia, the US and India also have them. Mining companies from all over the world are closely watching the developments in this field. Some companies, such as Molycorp Minerals from California has recently re-opened a closed mine. Concerns over national securities are looming in the US, since rare earths are used in the manufacturing of military equipment.

Luckily there are major projects in development such as Australia’s Lynas Corp (LYC) whose Mount Weld mine is the largest rare earths mine outside of China. Lynas came close to Chinese ownership when it was looking for investors in 2009, but the Australian government vetoed the bid and Lynas ended up raising necessary funding from the equity markets. As expected, Lynas’ shares have appreciated by 300% after China announced export quota cuts in July 2010.

Other companies listed on ASX - RAM Resources Ltd  (RMR), MetalBank Limited (MBK) or Orion Metals Ltd (ORM) - are also mining rare earths.

In the long run, China is expected to shift its role from the world’s major exporter of rare earths to a major importer because it has already used a good portion of its resources and the internal demand is not expected to cool any time soon.

Nevertheless, the most recent and important news came out of Japan, which happens to be a major importer of rare earths. Japanese scientists' discovery of massive quantities of those metals in the Pacific seabed may change this industry forever. It is estimated that the deposits could be as much as 1,000 times higher as those on land and can be readily extracted.

The question on everybody’s mind is when the extraction of the minerals is going to start. As you can see, rare earths are not as rare as previously thought and the Chinese dominance in this market is slowly coming to an end.

Trading Rare Earths

As with any other market, I question whether it would be prudent to get involved after spectacular gains have already been made and major reserves have been discovered. I reckon that I am a bit of a contrarian; I always ask myself if the current trend is sustainable. In this case, are the producers of cell phones, low-energy light bulbs, wind-turbines, and hybrid auto batteries still willing to pay top dollars for those metals? Prior to the Pacific seabed discovery analysts from Goldman Sachs believed that the uptrend is likely to continue in 2011 and 2012. Nevertheless, the balance was expected to shift towards a surplus in 2013, and serious price reductions are projected starting with 2015.

Considering the latest developments, all the projections should be fast-forwarded and investors should proceed with extreme caution, as we might just have passed the rare earths price peak.

>>Back to the newsletter to view other articles - July 30th 2011



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