A B12 Shot for the Commodity Boom

Includes: AVL, GMO, REE, REMX
by: David Fessler

Let’s say you own products that satisfy 98% of the world’s demand for them. How would you handle such power?

  • Responsibly, knowing that it’s critical to economies and people everywhere? Or…
  • Irresponsibly, holding the world hostage by raising the price as much as you want and raking in the profits?

China is doing the latter.

The country’s mines currently supply 98% of the global demand for rare earth elements. And with that kind of market share, you might be tempted to become greedy.

Really greedy.

Reuters reported on Tuesday that the Chinese raised the price for rare earth metals past the $100,000 per ton mark – the first time ever that the price per ton has vaulted into the six-figure range.

According to Reuters, that’s an almost nine-fold increase from a year ago, and up an astonishing $34,000 per ton in the last month alone.

This is a growing problem – one that isn’t going away, either…

China’s Triple-Digit Shocker

In itself, China’s announcement on Tuesday is nothing new. The country has raised rare earth prices by $10,000 per month since last July (when a ton of the metal cost a “bargain” price of $14,405).

At the same time, China has also been reducing its exports of rare earth elements since last year. Why? Because its ultimate goal is to keep all the rare earths it produces.

Nevertheless, when I saw the price breach triple-digit territory, I couldn’t help revisit the subject, as it’s obviously shocked China’s rare earth industry customers.

Unfortunately, they have few options available in the short term, other than to pay China’s exorbitant asking price.

In the long term, however…

The Western Challenge to China

As commodity guru Rick Rule likes to say, “The cure for high prices is high prices.”

And over the longer term, it won’t matter what China does. It’s a fairly safe bet that other rare earth producers around the world will be pulling out all the stops to increase production at existing mines, or hasten the development of their mines if they haven’t already.

Not too surprisingly, shares of rare earth companies outside of China’s stranglehold soared on the news.

Last Friday in my article on the rare earth industry, for example, I mentioned development-stage rare earth producers that are based right here in the West (mostly Canada).

Some companies operating in the space include:

  • Rare Element Resources (AMEX: REE): $534 million market cap.
  • General Moly (AMEX: GMO): $476 million market cap.
  • Avalon Rare Metals (AMEX: AVL): $688 million market cap.

As you can tell, these are not huge companies. And it’s no wonder their stocks have been popping in recent months.

However, for a more conservative play on this very real shortage story, you might want to consider going the ETF route.

That’s where Market Vectors Rare Earth Metals ETF (Nasdaq: REMX) comes in. The fund launched in 2010 and enjoyed a nice run-up out of the gate. It has now settled in around the $25 level.

The fund holds a basket of RE companies, including some foreign shares such as Australia’s Lynas.

I would not be surprised to see it head higher from here. With China’s stranglehold on rare earths and a widening supply and demand gap, companies in rare earth elements could be a great investment for the next several years.

Disclosure: None

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