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For Rare Earths, Not Oil

Written by Nick Hodge
Posted April 18, 2012

A new OPEC has been unveiled.

Only it isn't for Middle East sheiks to jeopardize control of the world's oil.

Instead, it's been put together by the Chinese to further manipulate the supply of critical rare earth metals.

Here's what you need to know...

Rare Earth Monopoly

China already controls about 95% of global rare earth production, which are needed to make your smart phone, TV, and countless other high-tech devices.

The Middle Kingdom's control of the market, coupled with their willingness to manipulate prices, sent the cost of rare earths thousands of percent higher over the past few years.

China has effectively put an export tax of 42% on rare earths.

Many early retirements are being enjoyed by shareholders of rare earth miners outside of China as a result.

In March, the U.S., Europe, and Japan lodged a formal complaint with the World Trade Organization about China's activities in the industry.

This has not only put rare earths back into the spotlight, sending shares higher, it's also led to a quick reaction from China.

One-Country Cartel

Earlier this month, Beijing responded by creating a rare earth industry association to “consolidate the sector, promote international exchanges and help its 155 members deal with trade disputes.”

That's Chinese for “control the supply and run up the prices.”

It's basically going to put all the rare earth mines under control of a few large conglomerates to concentrate its already-strong monopoly. Baotou Steel, Rising Nonferrous, and China Minmetals are likely to be three of the strongest.

I won't get into the trade dispute details.

I'd rather just make money.

But it's not going to be from rare earths.

Check this out...

Not So Rare

To understand why future rare resource profits won't be made from rare earths, you must read this incredibly insightful blurb from Forbes, emphasis mine:

There’s a reason why [China's rare earth cartel] won’t work. It’s that China doesn’t actually have anything like a monopoly on deposits of rare earths. Nor of the technical knowledge to extract them and process them. What they’ve got is a contestable monopoly. And the thing about contestable monopolies is that as soon as someone starts to throw their monopolistic weight around then someone starts to contest it.

The rare earths just aren’t rare you see. Just among the people I know and have talked to there’s a large new mine opening in Australia, two others being reopened, one in the US, another in South Africa. The three of them together, given a couple of years, could be supplying 40% of world demand: that’s a pretty big intrusion into a previous monopoly over 97% of production, isn’t it? And that’s before we start talking about the other four or five similar sized mines that are working through the technical process, or the 200 odd junior mining companies digging holes into likely looking heaps of rock.

If China actually did have a monopoly, or anything like it, on deposits of rare earths then it might be right to be worried about their setting up of what certainly looks like a cartel. Given that the things are actually more common than copper, occur darn near everywhere (another acquaintance claims a mountain of them in Greenland) and really are not as difficult to mine and process as many seem to think, the setting up of that cartel could be said to be too little and too late to protect their position. Or even, given that it has always been a contestable monopoly that cartel is what is driving the people to contest it.

Indeed, Lynas (ASX: LYC) and Molycorp (NYSE: MCP) are well on their way to increased production. And their share prices have been reflecting that of late.

The Forbes article is correct...

Rare earths aren't rare and now many companies outside China will start bring production online.

The time to make your fortune in rare earths was two years ago.

And yet, there's another resource no one's paying attention to that's about to undergo a similar market metamorphosis.

Like rare earths, China controls more than 70% of its production.

Like rare earths, China is starting to manipulate the market — adding export quotas and taxes and driving up the price.

Like rare earths, the need for this mineral is only rising, thanks to high-tech devices and batteries. Demand is up more than 4,000% over the past few years.

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Nick Hodge

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Nick is the founder and president of the Outsider Club, and the investment director of the thousands-strong stock advisories, Early Advantage and Wall Street's Underground Profits. He also heads Nick’s Notebook, a private placement and alert service that has raised tens of millions of dollars of investment capital for resource, energy, cannabis, and medical technology companies. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.

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