Rare earth metal production reliant on monopoly

November 14, 2010 12:14 pm

These scarce metals are being used in the following sectors:
– Energy (wind power generators, La-Ni-H batteries, magnetic refrigeration).
– Transport (catalytic converter, hybrid cars, electric bicycles),
– High-tech manufacturing (magnets, LCD panel displays, iPods, MP3-players, lasers, mobile phones),
– Agriculture (natural feed additives),
– Defence industry (radars, missiles).

Approximately 97% of these rare earth metals are being produced in China. Nevertheless, China itself only has 35% in reserve of these metals. If China continues to explore and mine at the current pace, its stockpile will be decreased to zero within twenty years, thus making it dependent of imports. The US have an alleged reserve of 13% of global stock. It is no surprise that the world industry recently panicked, after the news that China has blocked exports to Japan, the United States of America and Europe.

China’s authorities hastened to deny that the country had cut off outbound shipments, with China’s customs stated that it has been “reviewing export licenses and other paperwork for rare earth shipments”. Already in July, China said it was planning to cut export quotas for ‘rare earths’ by 72% for the second half of the year. Critics state that China is abusing its position, referring to a dispute with Japan about the Senkaku-islands in the South East China Sea. We also can argue that China needs rare earth metals and why should the country not be allowed to replenish its reserves?

Companies and politicians in the US and Japan are busy finding alternative exporters to diversify the risk and become less dependent on only one or a few suppliers (e.g. China). For instance, some Japanese companies recently stated that they were interested in consulting Vietnam as a possible supplier of rare earth metals. This ‘frontier market’ country is one of the potential producers of ‘rare earths’. Sojitz Corporation, a Japanese trading company, is planning to start importing rare-earth metals from Vietnam in 2012.

With prices of rare earth metals skyrocketing (about sevenfold) in the past half year, combined with a realistic threat of being cut off from crucial resources, it is logical that importing companies and countries are looking to alternatives. In the ’80s and ’90s (Western) countries closed mines due to environmental reasons and because of a lack of return on investments. Nowadays the situation is reversed: The United States and Australia are even planning to (re)open rare earth mines again in the coming years. Before these mines become fully operational, it will take many years and much effort and of course money. In short, for many years China will keep its monopoly, thus being an important country to take into account of.

I’d love to have made you as an investor a suggestion how to profit from the price dynamics in this market, however, rare earth metals are only traded on the spot or OTC markets. So, there is no futures market available for hedgers, speculators or arbitragers. Good luck anyhow!