Rare Earths: The Law of Supply and Demand

by: George Maniere

As prices for rare earth metals climb, many junior mining companies are anxiously anticipating the prospect of cashing in on filling the need for these critical materials. Though this could mean big opportunities for those who are able to meet a growing demand, among expert speakers at the Critical Metals Investment Symposium in Vancouver, BC, there was little agreement about how the supply and demand will be sustained.

"These are projections, these are not predictions. These are only based on data from the marketplace," said Jack Lifton, co-founder of Technology Metals Research. "We're assuming that everyone's projections are exactly what will happen, which is not necessarily going to happen."

Rare earth elements do certainly have useful applications in increasingly important technologies including magnets for wind energy turbines, hybrid and electric vehicles and batteries of varying sizes.

Though rare earth metals can be found in many places around the world, because their applications in technologies are only now emerging, few countries have invested in producing these materials. At the moment, China alone produces 94 percent of all rare earth elements mined in the world and it will be years before any major mines are currently online in other countries.

"Unless we decide to go into production of rare earths outside of China in the next couple of years, we're basically ceding to China at least in the automotive rare earth industry," said Lifton.

Meanwhile, the Chinese government is steadily tightening export quotas and raising international (FOB) prices to such an extent that it is causing alarm in governments around the world.

"Making money is not the goal of China," said Lifton. "The goal of China is to raise the standard of living for its people and to clean up the place."

The U.S. Department of Energy is listing many rare earths as critical materials as far as 15 years into the future, which even paying higher metal prices may not resolve the situation as end-users, like car manufacturers, insist on certainty of supply. Both analysts and downstream producers say that if the rare earths aren't available, they will have no choice but to design around these materials.

"The fact of the matter is that two things have to happen for any technology to be used in an industry: the material has to be available and it has to be cheap enough," said Jon Hykawy, the Clean Technologies & Materials Analyst for Byron Capital Markets. "You can't commit a plant to a material you can't get. You're going to end up with an idle plant."

Hykawy says he was recently in China where he spoke with local academics and rare earth producers about how they see national policies for cutting the export quotas of these metals.

"The Chinese say domestic prices are too high to build and sustain the rare earth industry in China. They are also unanimously saying that FOB prices were far too low," said Hykawy. "They are saying 'we don't care about your industry. If you think you're going to build a sustainable rare earth industry off of our material, forget it.'"

Efforts are now being made to bring mines on-stream outside of China by giants such as Molycorp (MCP), Great Western Minerals (OTCPK:GWMGF) and Lynas Corporation (OTCPK:LYSCF). Even this, however, does not guarantee that the value of these metals will continue to climb into the future.

"What I say to all the potential rare earth miners is: stop pretending that the rise in prices for rare earth metals is a good thing because you are forcing your largest end users," said Lifton. "Everyone seems to fantasize that there's infinite demand for rare earths, there's an infinite price for rare earths. This is silly; a $15 billion rare earth industry is not going to happen!"

Lifton also says that the future is far from certain as there are so many stakeholders involved in the process: governments, mining companies, downstream producers and consumers.

"There are too many rare earth ventures out there. We have to go to the low cost people in politically friendly countries and we have to stop thinking that every time someone finds REEs in a place that this is a wonderful, valuable thing," said Lifton.

John Kaiser, founder of Kaiser Bottom Fish, is more optimistic about the prospect of rare earth element producers outside of China being able to profit on future demand and compares it to what he calls the "Field of Dreams" analogy borrowed from the famous quote in the 1989 movie starring Kevin Costner: "If you build it, they will come."

"If we see all these rare earth projects come on-stream there will be a super abundance of the whole range of rare earths available and I do think that the rare earths lend themselves very well to a 'Field of Dreams' kind of concept where if you make the supply available, the commercialization will take place and the demand will materialize to soak up the supply," said Kaiser.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.