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By Stuart Burns

Reports on China's rare earth elements (REE) industry are nearly always alarmist in nature, drawing on the squeeze China put on world supplies a few years ago that led to a spike in prices and the fact the country remains the source for some 90% of supply and 50% of global reserves.

In recent years, though, China's behavior regarding the rare earths has been relatively benign. True, Beijing was not above using REE supply to pressure the Japanese a couple years ago when they had a dispute over some small islands, but generally speaking, repeated reference to the fact that China supplies 90% of the world's rare earth metals and oxides and has reduced export quotas presents a misleading picture of the market being squeezed.

In fact, the market is well supplied and as our monthly Rare Earths price index shows, prices have been drifting off since early Q4 last year in spite of recent announcements that China is going to start stockpiling REEs.

Piling that Rare Earths Stock

The Chinese stockpiling, under the direction of the Ministry of Land and Resources, began with a pilot project almost a year ago in China's primary mining region of Baotou in Inner Mongolia. At least 10 storage facilities are being built and managed by the world's largest producer of rare earth metals, government-controlled Baotou Steel Rare-Earth (Group) Hi-Tech Co.

Chinese state media reports say stockpiles may eventually top 100,000 metric tons, while a report from Dow Jones states that over 40,000 tons of storage have been built in just the last few months. A Bloomberg Businessweek report quotes sources that say the State Reserves Bureau (SRB) intends to pay 10% above the market price for its stockpiled REEs as if this increased demand at higher-than-market prices were a threat to current prices.

While it is not impossible prices could rise this year, the reality is China's export quota has not been fully utilized for a couple of years now. Reports that exports fell 9.7% are not a result of restricted supply, but of muted demand. Consumers are getting more savvy about switching to non-REE technologies, alternative supplies from Molycorp (NYSE:MCP) and Lynas (OTCQX:LYSDY) are rising and the speculative interest in REEs has waned after many got their fingers burned in the aftermath of the last spike.

Calls for a U.S. stockpile are not a bad idea in terms of managing supply, but the country is not at strategic risk - it should be remembered only 5% of the U.S. consumption is for military use, 95% is for commercial applications. If it comes to a squeeze, the military will come first and it's the supply of iPods that may be hindered, not cruise missiles.

China's SRB is, in practice, more a savvy manager rather than satanic manipulator of market supply, releasing metals into the market to slow price rises and buying when prices are weakest to support local manufacturers. In so doing, they arguably bring stability rather than present a threat, and almost certainly make a profit by buying low and selling high.

What This Means for Metal Buyers

So consumers should not be hassled into panic-buying by worries of the SRB buying up all the supply. In reality, Chinese REE producers are probably struggling to make money and find a home for all the metal they are producing.

Western rare earths producers like Molycorp, for one, will be hoping prices do not drift any lower and may be quietly cheering from the sidelines if the SRB buying stops prices going any lower.

Disclosure: No positions.

Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: China's State Reserves Bureau Stockpiling Rare Earths; Should Molycorp Worry?