Minyanville:
Understanding China's Rare Earth Metals Market: What Changing Regulations Could Mean
Rare earth metals (also known as “rare earth elements” or “REEs”) are 17 chemical elements in the periodic table. While many of these elements are actually found abundantly in the earth’s crust, their geochemical properties and dispersion make them difficult to extract in the pure forms necessary for use in many critical industries.
These rare earth metals are used in important global industries, including electronics, aerospace and alternative energies. For instance, Yttrium is commonly used in energy efficient light bulbs and cerium is used in oil refineries as a fluid catalytic cracking catalyst. The growing end-markets for REEs have made their supply a top concern around the world.
China’s Role as an REE Supplier
China has become a leading supplier of rare earth metals since the early 1990s, thanks to its willingness to intensively mine the elements at the expense of the environment. Despite large reserves of their own, at the time many countries opted to forego the environmental impact and simply import rare earth metals from China, as prices were relatively cheap.
The dynamics of this trade began to change in 1999, when China imposed trade limits on rare earth metals since it deemed them strategic resources. Some analysts believed this was to encourage high tech industries to move their manufacturing into China, but the country insisted that the decision was both strategic and part of an effort to curb environmental impacts.
By 2008, China controlled some 97% of the rare earth metal market, making it a de facto worldwide supplier. The dependence became a problem in 2010 when the country cut its export quota to 40%, causing a global supply crunch and prices to skyrocket. Fortunately, these prices have since moderated, thanks to less demand and additional supply coming online.
While China supplies some 90% of the world’s REE demand, the country’s reserves account for just 23% of the world’s total. The country insists that these supplies are declining in major mining areas, while excessive mining has resulted in pollution-related problems and even natural disasters in some places where they are commonly mined.
Environmental Concerns Arise
China’s two-mile wide Baiyun Obo is home to the world’s biggest mine and the single largest source of rare earth metals in the world. While the mine has certainly helped create jobs and build wealth, the operation comes at an enormous environmental cost, with toxic runoff from the refining process and poisoned lakes where rocks are kept before processing.
Daily Mail’s Richard Jones reported in 2010 that workers regularly experienced acid burns, while some “had trouble breathing” after completing a 12-hour shift, due to the sulfur-filled air.
But in the end, it’s the relaxed health and safety laws in China that may be keeping rare earth metal prices low. These low prices discourage other operations from starting up in countries like Australia or the United States, since they would be unable to compete on price. Additionally, even if a new plant was opened, it could take some five to 10 years to come online.
China Tightens Its Grip on the Industry
China has started imposing regulations on its rare earth industry. While these regulations are officially aimed at protecting the environment, many speculate that the true motive may be to move its manufacturing industry higher up the value chain. These regulations have since become a major topic of debate in the World Trade Organization (WTO).
A white paper published by the Information Office of the State Council (China’s cabinet) in June of 2010 suggested that the country would impose stricter environmental standards and protective exploitation policies for the industry, and came just months after the European Union, U.S. and Japan challenged the country’s restrictions on exports through the WTO.
According to Molycorp (NYSE:MCP), a major producer, China’s largest producers have already halted operations, while the government remains very determined to curb illegal mining and enforce stronger environmental standards. These efforts are putting pressure on its internal REE production, but could help stabilize or strengthen prices moving forward.
Global Response to China’s Decisions
Many countries opted to develop their own rare earth metal reserves, following China’s market moving decisions to cut exports. Countries like Australia, Brazil, Canada, Japan, South Africa, Tanzania, Greenland and the United States are all undergoing efforts to restart rare earth metal production after China undercut prices in the 1990s.
Some public companies operating in the space include:
- General Moly Inc. (NYSEAMEX:GMO) – A development stage company focused on molybdenum properties located in Eureka County, Nevada, USA.
- Lynas Corporation Limited (ASX:LYC) – A rare earth metal company focused on developing its properties in Australia and Malaysia.
- Molycorp Inc. (NYSE:MCP) – A rare earth metal and molybdenum development company with a presence in 11 different countries around the world.
The Bottom Line
Rare earth metals are a vital component of many critical technologies, ranging from renewable energy to defense applications. While China has been a quintessential provider since the 1990s, REE reserves are starting to pop up in many other major world markets, after the communist country imposed export restrictions that wreaked havoc on the market in 2010.
Moving forward, China appears ready to continue its crackdown on the rare earth metals industry, putting pressure on global supply and helping boost prices. But, the opposing supply coming online from other markets around the world could help offset these trends and ultimately stabilize the market with a more robust supply to meet growing demand."
Please, do not forget, that we own stocks we are writing about and have position in these companies. We are not providing any investment advice on this blog and there is no solicitation to buy or sell any particular company.
