Skip to comments.The Politics of Rare Earth (For the serious investor thinking of diversifying)
Posted on 10/03/2010 9:36:13 AM PDT by WebFocus
arlier this week, the U.S. Senate held hearings on a bill to jumpstart domestic production of rare earth minerals, in order to break Chinas near-monopoly on these little known but essential raw materials. Yesterday, I was asked to appear on Chinese TV to offer some background and insight on the issue.
Rare earth refers to a collection of 17 elements from the periodic table, with Star Trek-sounding names like holmium, europium, neodymium, and thulium. They tend to be found together, and exhibit similar chemical properties that make them useful and in many cases vital for a whole host of high-tech applications, such as superconductors, magnets, and lasers. Rare earths are essential ingredients in many emerging green technologies, including wind turbines and batteries for electric cars. A lot of advanced U.S. military hardware, including tank navigation and naval radar systems, also depends on rare earth-based components.
Despite their name, rare earth minerals actually arent that rare. Theyre commonly found throughout the earths crust. However, there are only a handful of places in the world where rare earths are found in high enough concentrations to make extracting them commercially feasible. Before the 1960s, the few rare earths that were needed were gathered from sediment deposits along rivers in India and Brazil (like those prospectors washing for gold with pans in Western movies). Then demand took off, especially for europium for use in making color television sets. Over half of this expanded global demand was met by a single mine, Mountain Pass, in the deserts of southeast California.
China began mining rare earth minerals in the 1980s, and by the mid-90s was well surpassing the U.S. in production. China had several competitive advantages over the U.S. First, it has some of the best concentrations of rare earths in the world, including the huge Bayan Obo mine in Inner Mongolia. Second, it had cheaper labor costs. Third, it had laxer environmental rules. Rare earth minerals are often mixed with radioactive elements, and processing creates low-level radioactive waste. The Mountain Pass mine, which had been bought in 1977 by Unocal, the oil company, began running into all kinds of regulatory problems concerning waste disposal, just as it was losing market share to cheaper Chinese competitors. It closed in 2002, leaving the market entirely to the Chinese. Today, China produce most than 96% of the worlds rare earth minerals; Bayan Obo alone accounts for 45%. (The neat graph below is courtesy of Wikipedia).
Given the critical reliance on rare earths for national security needs, not to mention promising new technologies, theres been growing concern over the past few years about this exclusive reliance on China as a sole source of supply. This concern has been heightened by recent Chinese moves to tighten export quotas, as well as talk (so far just talk) about banning the export of certain rare earths entirely, presumably to favor the development of domestic high-tech industries. Such worries were heightened even further this week as a result of the latest diplomatic fracas between China and Japan over some disputed islands in the East China Sea. It has been widely reported that, in retaliation for Japans arrest of a Chinese fishing boat captain in the contested waters, China effectively halted shipments of rare earth supplies critical to Japans electronics industry. China officially denied that any embargo had taken place, and shipments have since resumed. But the episode sent shivers down the spines of leaders around the world, crystallizing unspoken fears that a more powerful China might use its monopoly on rare earths and similar forms of economic leverage as a weapon. The next time they fall into a disagreement with China, they have to wonder, will China play hardball and cut them off from vital resources?
[When I showed up to speak on Chinese TV about this subject, I was told I could mention export controls but not the recent dispute with Japan, since China denied it had ever withheld rare earth minerals. I'm always willing to be diplomatic, but I don't censor myself. I told them that the Japan incident was a critical part of why other countries are concerned -- not recognizing it would be like trying to ignore the 800-lbs. gorilla sitting in the room -- and that if they didn't want me to mention it, they better not put me on. We finally agreed that I would note the accusations/concerns that supplies had been withheld, as long as I also noted China's denials. Fair enough. But I find it interesting that, unlike most of my other interviews, this one has not been posted on their website. This is obviously a very sensitive subject in China. I also find it revealing that, on the same show, I was pointedly not asked to comment on the biggest story they ran that day, on U.S. House passage of a bill labeling China a "currency manipulator." The party line on that topic was set in stone, and clearly voiced in the news story -- alternative perspectives were not welcome.]
Its important to remember, though, that while China may have a competitive advantage in rare earths, it does not have a stranglehold. There are other sources of supply; they may not be as cost-effective, but they are available and customers concerned about Chinas reliability as a supplier might be willing to pay a bit for some alternatives. The Japanese, who buy the majority of unprocessed rare earths from China, are certainly busy: Sumitomo and Toshiba are both setting up projects in Kazakhstan, and other Japanese investors are looking at buying mining rights in Vietnam. Lynas Corporation (LYC.AX) plans to start tapping rare earth reserves in western Australia next year.
In the U.S., this July, Molycorp (NYSE: MCP) raised $394 million in an IPO aimed at reopening the Mountain Pass mine in California. So far, though, its been a rocky start. Prior to the IPO, the companys first request to the Department of Energy (DOE) for a $280 million government-guaranteed loan was rejected. Its initial share offering, pitched at the time as a pure greentech play, met with weak demand and came in priced below expectations, raising $100 million less than hoped. But Chinas latest little power play may have changed the equation, shifting Molycorp overnight from a greentech to a national defense play. One bill introduced in Congress earlier this year proposes establishing a strategic stockpile of key rare earth minerals, as well as supporting U.S. production. Molycorp is hardly the only one standing in line Lynas is pushing for Australia, as a key U.S. ally, to be included in any plan, and a slew of rare earth start-ups have already been launched to capitalize on excitement over greentech, potentially creating a fragmented market. But analysts say that only Molycorp and Lynas have the mining licenses and waste disposal experience to move ahead rapidly, and given the preeminent role the Mountain Pass mine once played in global production, Molycorp will almost surely find itself in pole position if Congress decides to act. [Disclosure: I've recently invested in Molycorp stock for precisely this reason.]
(Its interesting, by the way, that the Chinese nearly ended up owning Mountain Pass a few years ago, when the oil company CNOOC tried to acquire Unocal, which owned the mine at the time. Of course, due to political protests from Congress, mainly unrelated to rare earths, the deal was dropped. Had it succeeded, the options available to Congress today might look very different.]
As for China, in my view it really shot itself in the foot. By flexing its muscles so eagerly, over a relatively minor incident, it alarmed its customers and possibly frightened them off, when a softer approach might have lulled them into continued and deepening dependence. Theres no question that China can extract rare earths at the cheapest price, in purely monetary terms. But now Chinas trading partners must be seriously wondering, what could the real price amount to, when the bill eventually comes due?
Article noted for later perusal.
Another American industry regulated out of existence by the EPA.
It's chilling to think about just how much damage a government full of frothing lunatics can do. Thanks for posting.
Imperative to explore and implement other options.
Since you wrote this article for the serious investor ( or speculator as the case may be ), you might want to add that anyone can invest in RARE EARTH via the exchange traded fund symbol : REE.
See here :
Didn’t Pearl S. Buck write a novel about this a few generations ago?
Good Earth is not necesarily Rare Earth :)
In a discussion about small gas turbines and the high temperature metals they need (i.e. alloy elements) he said their are eco-capitaist ahve already bought up the lands etc where what we need is. I get the impression these were not folks friendly to conservatism or capitalism. If they exist, could they have their hands in the other rare earth elements and how do they benefit?
One of those things that make you go “Hmmmm”. ;o)
Rare Earths are the key to smaller computers, high powered batteries, and alternative energies.
Take for instance lanthanum, ten pounds of which are used in the battery of every Toyota Prius and are also a key component to high powered wind turbines.
Then there is indium which powers the most cutting edge solar panels. The fact is, our economy is likely to be defined by rare earth metals over the long term as miniature computers and alternative energies take center stage. Not to mention, rare earth metals are central in almost every facet of our military technology.
The kicker is that China holds 95% of the world’s rare earth metals supply. Although rare earth metals are in fact quite abundant on this planet, China is the only place that currently has the capabilities to produce them in large quantities.
The United States produces virtually none of these metals currently, partially because of our small supply, but also because of environmental concerns for mining them. Estimates show us being upwards of 10 years away from legitimate rare earth metal production capabilities; that’s if we decide we want to.
Meanwhile, China has already begun to strong arm the world with its hold of rare earth supplies. In July, China reduced its rare earth export quota by 72%, sending prices soaring. Not only that, but it also has export taxes ranging from 15% to 25% on the metals. That’s the kind of regulation that makes it quite difficult for companies in other countries to produce things like solar wafers cheaply.
This calls for ice cream and a vacation to Europe!
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