Categories: Base Metals
Topics: General Base Metals

Rare Earths Poised for a Turnaround

Rare earths are 17 chemically similar metallic elements that have a wide variety of uses in today's high-tech world including in the defense, electronics and renewable energy industries. Many major firms such as Apple and Boeing rely on having access to rare earths. 

That is why the politicians in the U.S. were in such an uproar a couple of years ago when prices for rare earths were skyrocketing due to export restrictions placed on them by China. It has about 30 percent of the world's rare earths deposits but accounts for well over 90 percent of production. Other countries such as the United States quit producing rare earths for a number of years because it is a highly polluting industry. 

The political furor has died down somewhat as prices for rare earths have come back down to earth over the last year or so due to slackening demand brought on by the global economic slowdown. Prices are down more than half from the peak prices set in 2011. But now rare earths are back in the news as China continues to revamp its industry, shutting down about 20 percent of the country's production capacity, combining smaller firms into bigger ones and limiting the number of companies that can export rare earths in an effort to better control the industry. 

But this news pales in comparison to what consumers of rare earths may be facing in a few years..... 

China's consumption of rare earths has already quadrupled over the last decade thanks to its position as a leader in the magnet market which accounts for 30 percent of China's usage. Now it plans to develop their own downstream industries that use rare earths to manufacture value-added products. What does this mean? It means China will likely consume much of their rare earths production domestically. In fact, China may become a net importer of rare earths as soon as 2014. Here we go again...China as the 800 pound gorilla in a commodity market. 

This is great news, however, for North American companies that are beginning to produce rare earths again and are already beginning to benefit from Chinese regulation of overproduction. These include the likes of Molycorp (NYSE: MCP), Rare Element Resources (NYSEMKT: REE) and Avalon Rare Metals (NYSEMKT: AVL). The CEO of another small rare earth firm, Peter Cashin of Quest Rare Minerals,  said “They [the Chinese] are an unanticipated customer for us...The Chinese would be a huge market for us.” The same can probably be said of most North American rare earth producers.

Avalon Rare Metals has properties in the Northwest Territories of Canada, Quest has properties in Quebec and New Brunswick in Canada, Rare Element holds properties in Wyoming while the best-known name Molycorp is re-opening the Mountain Pass facility in California. 

A caution here for investors...some of the companies – Avalon and Quest – are low-priced stocks trading a little above $1 a share and thus are inherently volatile. Also rare earth production at these companies is still in the very early stages. Quest, for example, will not start production until 2017. The Government Accounting Office (GAO) says it may take many years for the North American industry to fully reboot itself and come onstream. 

The Chinese becoming a net importer will exacerbate the supply situation in rare earths. Rarer heavy rare earths, used in mobile phones and magnets, are expected to remain in a supply deficit until 2025. While more common light rare earths are expected to, over the next five years, move from a surplus to supply balance and then to a supply deficit according to Mr. Cashin. 

He may be right. As with other commodities China, for the first time ever, has begun building stockpiles of rare earths (according to China Securities Journal). That means, as with oil and many other commodities, Chinese authorities are anticipating a large increase in demand in future years. 

That should mean good times are ahead for rare earth producers and time for investors to begin slowly accumulating these beaten down stocks like Molycorp. For more conservative investors, a broader-based would involved the use of an exchange traded fund - the Market Vectors RareEarth/Strategic Metals ETF (NYSEMKT:REMX). Its portfolio contains a wide variety (28 different equities) of these type of companies.

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