This is an interesting story on "rare earth" elements; something I've begun digging into of late, as a potential investment theme, since these items will go into many of the current "green technologies". Unlike most "commodities" for which China is the world's largest vacuum (importing like mad), this niche is an area China has an abundance. That said, the irony of this piece in terms of environmental impact - is overwhelming.
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- Some of the greenest technologies of the age, from electric cars to efficient light bulbs to very large wind turbines, are made possible by an unusual group of elements called rare earths. The world’s dependence on these substances is rising fast.
- Just one problem: These elements come almost entirely from China, from some of the most environmentally damaging mines in the country, in an industry dominated by criminal gangs. Western capitals have suddenly grown worried over China’s near monopoly, which gives it a potential stranglehold on technologies of the future. In Washington, Congress is fretting about the United States military’s dependence on Chinese rare earths, and has just ordered a study of potential alternatives.
- Here in Guyun Village, a small community in southeastern China fringed by lush bamboo groves and banana trees, the environmental damage can be seen in the red-brown scars of barren clay that run down narrow valleys and the dead lands below, where emerald rice fields once grew. Miners scrape off the topsoil and shovel golden-flecked clay into dirt pits, using acids to extract the rare earths. The acids ultimately wash into streams and rivers, destroying rice paddies and fish farms and tainting water supplies.
- “In many places, the mining is abused,” said Wang Caifeng, the top rare-earths industry regulator at the Ministry of Industry and Information Technology in China. “This has caused great harm to the ecology and environment.”
- There are 17 rare-earth elements — some of which, despite the name, are not particularly rare — but two heavy rare earths, dysprosium and terbium, are in especially short supply, mainly because they have emerged as the miracle ingredients of green energy products.
- Tiny quantities of dysprosium can make magnets in electric motors lighter by 90 percent, while terbium can help cut the electricity usage of lights by 80 percent.
- Dysprosium prices have climbed nearly sevenfold since 2003, to $53 a pound. Terbium prices quadrupled from 2003 to 2008, peaking at $407 a pound, before slumping in the global economic crisis to $205 a pound. (which is why finding companies that specialize in these type of commodities could be a long term boon - unfortunately, they all appear to be in China)
- China mines more than 99 percent of the world’s dysprosium and terbium. Most of China’s production comes from about 200 mines here in northern Guangdong and in neighboring Jiangxi Province. Half the heavy rare earth mines have licenses and the other half are illegal, industry executives said. But even the legal mines, like the one where Mr. Zeng worked, often pose environmental hazards.
- A close-knit group of mainland Chinese gangs with a capacity for murder dominates much of the mining and has ties to local officials, said Stephen G. Vickers, the former head of criminal intelligence for the Hong Kong police who is now the chief executive of International Risk, a global security company.
- Western users of heavy rare earths say that they have no way of figuring out what proportion of the minerals they buy from China comes from responsibly operated mines. Licensed and illegal mines alike sell to itinerant traders. They buy the valuable material with sacks of cash, then sell it to processing centers in and around Guangzhou that separate the rare earths from each other.
- China is also the world’s dominant producer of lighter rare earth elements, valuable to a wide range of industries. But these are in less short supply, and the mining is more regulated.
As for the global marketplace?
- The Ministry of Industry and Information Technology issued a draft plan last April to halt all exports of heavy rare earths, partly on environmental grounds and partly to force other countries to buy manufactured products from China. When the plan was reported on Sept. 1, Western governments and companies strongly objected and Ms. Wang announced on Sept. 3 that China would not halt exports and would revise its overall plan.
- But the ministry subsequently cut the annual export quota for all rare earths by 12 percent, the fourth steep cut in as many years.
- Congress responded to the Chinese moves by ordering the Defense Department to conduct a comprehensive review, by April 1, of the American military’s dependence on imported rare earths for devices like night-vision gear and rangefinders.
Options outside of China have one minor issue:
- According to the Baotou institute, heavy rare-earth deposits in the hills here will be exhausted in 15 years. Companies want to expand production outside China, but most rare-earth deposits, unlike those in southern China, are accompanied by radioactive uranium and thorium that complicate mining.
So outside of US military, who are the biggest users? "Green" initiatives - especially wind:
- The biggest user of heavy rare earths in the years ahead could be large wind turbines, which need much lighter magnets for the five-ton generators at the top of ever-taller towers. Vestas, a Danish company that has become the world’s biggest wind turbine manufacturer, said that prototypes for its next generation used dysprosium, and that the company was studying the sustainability of the supply. Goldwind, the biggest Chinese turbine maker, has switched from conventional magnets to rare-earth magnets.
- Executives in the $1.3 billion rare-earths mining industry say that less environmentally damaging mining is needed, given the importance of their product for green energy technologies. Developers hope to open mines in Canada, South Africa and Australia, but all are years from large-scale production and will produce sizable quantities of light rare earths. Their output of heavy rare earths will most likely be snapped up to meet rising demand from the wind turbine industry.
From an investment perspective, expect to hear of "rare earth" initiatives by miners in the months & years ahead, and giddy stock market speculators rushing in much like lemmings - notwithstanding the fact that any large scale production will take years to ramp up, much like a new potash mine. Details should never get in the way of a good investment theme.