Rare Earth Metals and China
You know that feeling you get when you were correct about something but no one listened?
When you go on and on and on about something, only for people to ignore it until it starts causing problems?
This is the situation I've found myself in this week over rare earth elements. And it's frustrating as all hell.
I have been on the soapbox for years warning folks that China has had too much control over the world's rare earth metal supply. But now that the Chinese are threatening tariffs over the products, it's all of a sudden a problem.
What's the big deal about these rare earth elements?
Rare earth elements — sometimes called rare earth metals or rare earth minerals — are a vital component in most of the technology we use every single day.
There are 17 rare earth elements. They are cerium (Ce), dysprosium (Dy), erbium (Er), europium (Eu), gadolinium (Gd), holmium (Ho), lanthanum (La), lutetium (Lu), neodymium (Nd), praseodymium (Pr), promethium (Pm), samarium (Sm), scandium (Sc), terbium (Tb), thulium (Tm), ytterbium (Yb), and yttrium (Y).
They're used in the production of everything from smartphones, laptops, and rechargeable batteries to GPS units, televisions, speakers, magnets, fluorescent lighting, and much more...
The automobile industry alone uses tens of thousands of tons of rare earth elements each year in the manufacturing of catalytic converters.
And as the demand for newer, faster, and better technologies will no doubt continue to rise in the future, so too will demand for the raw rare earth materials needed to create them.
Despite their name, most rare earth elements aren't exactly “rare.” In fact, cerium is as abundant as copper. What is rare, however, are economically feasible rare earth mines. Locations where REEs are in high enough concentrations to mine profitably really are very rare. And they're mostly located in China right now.
Approximately 90% of the global supply of rare earth elements comes from just one country: China. It is a true oligarchy.
But now, with the trade war raging between Washington and Beijing, China is threatening to slap major tariffs on REEs.
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The truth is, China has been drawing down exports of REEs for years. Between 2005 and 2012, China cut rare earth exports by almost 50%.
Not only that, but this isn't a new tactic for China. In 2010, China completely cut off rare earth exports to Japan over a territorial dispute. This caused prices for all rare earths, particularly neodymium, to soar.
The halt in supplies was globally challenged by several nations, resulting in a ruling against China's export quotas by the World Trade Organization.
In response, the U.S. Department of Energy initiated Project REACT, short for "Rare Earth Alternatives in Critical Technologies," to specifically address the growing global shortage of rare earth materials.
Today, the United States is 100% reliant on imports for neodymium and many other rare earth elements.
There's only one rare earth mine in America, which only produces a small amount of rare earth metals — and it's now owned by a Chinese firm.
The Mountain Pass Mine in California was operated by Molycorp, Inc. But the company filed for bankruptcy in 2015, and the mine has since been purchased by the Chinese rare earth consortium Shenghe Resources.
For investors, though, getting exposure to rare earth minerals isn't easy. There are several large mining companies like BHP and Freeport-McMoRan that mine small amounts of rare earth elements. But there is no major miner with pure rare earth exposure.
There are also several junior exploration companies seeking a big find. But no doubt many are simply trying to capitalize on the rare earth hype and have no assets of any real value. Most are scams.
The Market Vectors Rare Earth/Strategic Metals ETF (NYSEArca: REMX) is an option. REMX tracks the performance of a basket of companies involved in producing, refining, and recycling rare earth and strategic metals. That's probably best for short-term trading.
One specific Japanese company with a significant neodymium asset to mention is Hitachi. The company owns over 600 patents associated with neodymium magnets and is recognized as a worldwide leader in this field with innovations in its power tools. This may serve the company well in the future.
We will be on the lookout for breakout investment opportunities in the rare earth market and plan to bring you some new ideas very soon. So stay tuned.
Until next time,
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
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