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Strategic Commodities: Rare Earths: why China is cutting exports crucial to Western technologies tnr.v, czx.v, lmr.v, abn.v, rm.v, alk.ax, ura.v, cgp.v

Mar. 21, 2011 6:45 PM ETIQ, REE-OLD, FCX, NEM, GOLD, LIT, FMC, SQM
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  Mainstream media is jumping now on the the Rare Earths story. Japan tragedy will bring more attention to the Energy Transition, Peak Oil situation and realisation that Alternative Energy requires state-based initiatives which will create necessary infrastructure - like Internet was developed first as a military application or Chinese 12th 5 year plan, which put now Electric Cars as Strategic Industry.
 Nuclear Power will be under microscope for quite a while now and other forms of renewable energy will receive finally proper attention. At the heart of this transition into New Energy, including Wind and Solar power generation are Strategic Commodities: Lithium and Rare Earths.
"We are monitoring the M&A situation in the Lithium market space here - everybody would like to find the next Orocobre just before Toyota was buying into it."

  Situation is getting even more critical with some reports suggesting that China will start importing Rare Earths as early as 2014. Our main question remains open - maybe it is already too late and U.S. Corp will be never able to catch China in this strategic game. You can make a guess who is leading the way in Wind Power now...

"We have a panic now and it could be pretty much warranted. With Japan tragedy and nuclear fears we have Greed Meltdown in place, which can provide a very good entry point into the markets if it is Not The End of The World. Here is the most important part - you have to decide yourself what is really going on.
  We will run just a few thoughts:...

9. Nuclear Power will come under pressure - it will become more expensive to build and approve the plants - Uranium price will be even less elastic to the Demand. We do not have a call on Uranium now, but juniors with other projects in gold, Silver and Copper were all sold off on Uranium scare - bargains will be found for the value of Non Uranium assets.
10. Alternative Energy will be the future, we all will be ready to pay more for the safe and secure Energy supply.

11. Lithium sell off on Japanese battery makers worries will be the great opportunity to accumulate your favorite plays in this strategic sector. Lithium Brine projects are not about only Lithium production, but mostly about Potash production by the output. Here is not only Investment Play on Electrification of our transportation, but the Food play as well.

12. Rare Earths will experience rotation from the leaders in the sector after last year unbelievable run into the underdogs of the sector with solid projects - the future is here in Lithium and REE - the way to produce, store and use the Power in the most convenient form - Electricity. It is all about Electric Cars, Batteries, Solar and Wind now."

The Telegraph:

Rare earths: why China is cutting exports crucial to Western technologies
By Peter Foster 7:00AM GMT 19 Mar 2011

The key to hundreds of modern technologies, from iPhones to smart-bombs, lies in the little-known rare earth metals, 95 per cent of which are mined by China. Its decision to slash exports has left the West scrabbling for alternative supplies
The Inner Mongolian city of Baotou is like an LS Lowry painting come to life: a faded industrial landscape of chimney-stacks and coal depots, shunting yards and steel plants. But amid the outskirts of this north China steel town there is one clutch of buildings that are noticeably more modern than the rest. They are home to a research institute that has suddenly become the envy of the world.
The showpiece headquarters of the 'Pioneering Rare Earth Hi-Tech Development Zone' is home to 400 research scientists who specialise in a group of 17 metals known as 'rare earths'. Until recently, most people had never even heard of these obscure elements.
However, they are the magic ingredient in almost everything that makes modern life possible. They may have exotic-sounding names such as terbium, europium, dysprosium and lutetium, but they also have decidedly everyday applications; from BlackBerrys and iPhones to catalytic converters and low-energy lightbulbs.
Known in China as 'industrial vitamins', rare earths are an essential component in green technologies such as electric cars, solar panels and wind turbines. Rare earths are not only essential for civilian life; the world's hi-tech armies also need rare earths for a host of applications from toughening tank armour to guiding smart-bombs and powering night-vision goggles.
Given their global application, it may come as a surprise to know that 95 per cent of world rare earths production is controlled by a single country – China. Last year China's ministry of commerce announced drastic cuts in the amount of rare earths it would make available for export. Quotas were cut by more than 70 per cent for the second half of 2010 to only 8,000 tons, compared with 29,000 tons for the same period the previous year, at a time when global demand for rare earth elements (REEs) was picking up fast.
Analysts say quotas are expected to shrink by a further 11 per cent this year. Rare earths demand has tripled in the past decade to an estimated 136,000 tons this year. By 2014 some analysts are now predicting a 20,000-ton shortfall in key metals.
Prices of the most sought-after rare earth metals and oxides have spiked in the international markets, with some dealers reporting that neodymium (used in computers and lasers) is now impossible to obtain outside China. At $72 a kilo, cerium oxide, used in polishing glass and lenses, is now 15 times more expensive than it was a year ago; neodymium has more than tripled in value to $115 over the same period. Analysts do not expect them to cool off for at least two years.
So how did the world come to find itself in a position where it is almost totally reliant on China for its rare earth metals? Part of the answer is to be found in the main entrance at the Baotou complex, where a welcome sign quotes China's former leader Deng Xiaoping on one of his reform-boosting southern tours of 1992: 'There is oil in the Middle East, but there is rare earth in China.' Twenty years on, that has turned out to be a prophetic observation.
China has been focusing on rare earth developments for nearly 50 years, founding the Baotou research institute in 1963 after discovering that they were sitting on the 'mother lode' of rare earth deposits at the Baiyunebo iron-ore mine, about 80 miles north of Baotou.
It is from the iron-ore tailings (the waste-product from the iron extraction process) that China extracts much of its rare earths, and because it uses waste materials, it does so at unbeatably low costs. Baiyunebo remains by far the largest deposit of rare earths in the world, and even today, industry experts say, China is only using about one-fifth of Baiyunebo's potential.
In an exhibition hall – with an apologetic smile we are told that foreign reporters are not allowed to meet the scientists themselves or visit their labs and factories or the Baiyunebo mine – we are invited to learn the history of rare earths, which, it turns out, are not that rare.
Several of these elements are more abundant in the earth's crust than lead and nitrogen. Of the nearly 100 million tons of known global reserves that can be economically extracted, the United States Geological Survey (USGS) says 36 million are in China, 19 million in Russia and the states of the former Soviet Union, 13 million in the US, 5.4 million in Australia and 3.1 million in India. South Africa, Mozambique, Vietnam, Greenland, Indonesia, Nigeria, Canada and North Korea also have resources.
Rare earths were first discovered by a Swedish amateur geologist in a feldspar quarry outside Stockholm in 1787. Then only a chemical curiosity, by the 20th century they had been used in an increasing number of industrial applications.
Until 1949 India and Brazil produced most of the world's rare earths, before the baton was taken up by the monazite mines of South Africa. In the 1980s when the electronics industry took off it was America that led production from a mine at Mountain Pass in California. The Sony Walkman, that icon of electronic sophistication, was made possible by samarium-cobalt magnets that were the only ones light and efficient enough to run a cassette player powered by two AA batteries.
US dominance quickly evaporated in the 1990s when China flooded the market with super-cheap rare earth elements, often mined at huge environmental cost. So cheap were Chinese rare earths that by the early 2000s most of the world's mines were closed (Mountain Pass was mothballed in 2002), unable to compete with Chinese prices and supply.
At the same time, China invested heavily in the complex technologies of rare earths refining and production, discovering far cheaper processes that used hydrochloric instead of nitric acid and refining extraction to 99.999 per cent purity – better by several percentage points than in America.
The result, according to US analysts, is that the rest of the world has sleepwalked into the parlous situation it now finds itself in. 'We all know the ball has been dropped in this [rare earths] space and not only by the US but by a whole swath of Western economies,' wrote Christopher Ecclestone, of the New York-based investment consultancy Hallgarten & Co, in an excoriating report on the issue.
But now the world has, as the US Secretary of State Hillary Clinton observed late last year, had its 'wake-up call'. America's Government Accountability Office (GAO) issued a report entitled Rare Earth Materials in the Defence Supply Chain.
It pointed out that even the US's main battle tank, the M1A2 Abrams, uses samarium-cobalt in its navigation system, as does the state-of-the-art Aegis Spy-1 radar. Rare earths are also used in the motors that power the rudders and tail-fins of the fifth-generation F-22 Raptor, and even the hellfire missiles that target Taliban terrorists from drones above the battlefields of Afghanistan need a chemical produced only in China.
The GAO report estimated it could take 15 years for the West to catch up with China and develop alternative supplies. Karl A Gschneidner Jr, a senior metallurgist at Iowa State University's Ames Laboratory, has been studying rare-earth materials since the 1960s. 'There is nearly zero rare-earths mining, processing and research going on now in the US,' he told Chemical & Engineer News.
Several international mining companies are racing to fill the gap, prospecting for deposits in Canada, Australia, South Africa and Greenland. Some, such as Molycorp, the US company that now owns the Mountain Pass mine, plan to restart production next year.
So is the world right to be scared about rare earths? After years of careless over-exploitation, China argues, it is now simply moving to consolidate production and put supplies of a vital resource on a more sustainable footing. The arguments are partly economic – China's own burgeoning technology industries and its attempts to lead the world in green technologies will require large amounts of rare earths in the future – and partly environmental.
As well as the Baiyunebo resource, China has rare earths deposits in the southern provinces of Jiangxi and Guangdong, where the metals can be found in high concentrations in clays a few feet below the earth's surface. As a result the 1990s saw an explosion in the number of poorly maintained local mines that were both wasteful and polluting.

On a visit to the hills of Longnan County in southern Jiangxi, the mines can be seen dotted throughout the densely wooded hillsides. Signs announce that these sites are not open to visitors and on closer inspection it is not hard to see the reason why. 'Mine' is really too grand a word to describe the homespun tangle of plastic pipes and roughly constructed chemical holding tanks that are buried into the foot of the hillsides.
The tanks, their concrete sides cracked and worn, are set up in trios; one filled with a bright blue liquid, another with a thicker chocolate-brown solution, and a third with a white powder that shimmers under a clear liquid. As we move closer, the smell of ammonia lifts towards us on the breeze.
It seems incredible that these low-tech, mom-and-pop mining operations are the cradle of some the world's most hi-tech gadgets. The brown slurry swirling through a Heath Robinson filtration system represents one of the world's primary resources of the rarer 'heavy' rare earth elements.
The valley floor is dotted with mines as far as the eye can see, the aquamarine pools studding the rich green landscape like a Bel-Air suburb. The system used to obtain the rare earths is extremely basic. At regular intervals miners dig holes about 8ft deep, into which they drip-feed a concentrated solution of sulphuric acid which sinks down through the clay, leaching out the rare earths elements as it passes.
Some of the acid also travels upwards through the roots of the trees, which have curling, sickly-brown leaves. When the rains come the chemicals from poorly managed mines are sometimes swept into the water supply, poisoning drinking water, killing rice crops and, in one case in Guangdong in 2008, wiping out an entire reservoir of fish. Faced with widespread environmental problems, China has already closed hundreds of illegal operations and has promised to tackle the smuggling gangs, often backed by corrupt officials, that still operate.
Once the raw rare earths clay is extracted, it is trucked off to processing plants across China that separate out the 17 individual elements, and then process them into different rare earths oxides and compounds.
The owners of a private rare earths processing factory in southern China granted us access to their facilities to observe the production process, but asked not to be named, citing the growing sensitivity of the rare earths issue with the Chinese government. Inside, the factory is like a giant industrial chemistry set. The rare earths clays are churned in long ranks of rotating drums with solutions of acid and water, through which each individual element is separated out from the other.
As the solvent-extraction process continues, staff buzz about, monitoring the tanks, and checking Ph levels and flow-rates until they end up with the raw elements in solution, such as liquid neodymium chloride (NdCi3). In the final stage of the process, the pure elements, by now evaporated off into a white powder, are shovelled into casserole-sized ceramic dishes and baked for several hours at high temperatures. The dishes emerge the colour of burnt toast, and their contents are unloaded and packed into drums for delivery.
Back at the rare earths institute in Baotou, Zhang Rihui, a senior economist at Baotou Steel's Rare Earth Elements division, says, 'China has no intention of constraining foreign enterprises from using the rare earths resource,' pointing out that companies can come to China and enjoy unlimited and relatively cheap supplies – as many, including world-leading companies such as Rhodia of France and Showa Denko of Japan, already have.
China, he adds, has a legitimate right to protect reserves of some metals, such as neodymium, that are needed for its burgeoning green-tech industry, and according to China's state media, China's government is now creating stockpiles, further unnerving foreign governments. The current steep rises in world prices, Zhang says, without irony, are 'merely an objective consequence of Chinese government policies, not their intention,' repeating the official line that the quotas are necessary to conserve and regulate resources. 'China just wants to run the industry properly, on a sound environmental footing and try to minimise any waste of the resources,' he adds.
'I reiterate, the price of REEs materials is nothing compared to the price of finished products which integrate REEs, so China has made only a tiny proportion of the profits as the REEs provider. This is not sustainable. China welcomes the world to find alternative sources of supply. Western complaints also ignore the fact that while China puts restrictions on the exports of the metals themselves, there are no restrictions on the export of products made in China using REEs.'
Surprisingly, perhaps, foreign industry experts who don't have political axes to grind have sympathy with the Chinese position. They say that a lot of the current fears over rare earths supplies are being overblown, partly by speculative investors hoping to turn a quick buck on the shares of fledgling rare earth exploration companies, and partly by vested interests in Washington who are looking for subsidies and guarantees for their operations.
'There is a huge amount of hype surrounding rare earth metals at the moment and a lot of it is very frustrating,' says Ian Chalmers, the managing director at Alkane Resources, a mining company based in Perth, Australia, that is bringing rare earths deposits on stream in the next 12 to 18 months.
'I've been in this business for 20 years and never seen anything like it. The reality is that China dominates the rare earths industry and it has a very clear policy of seeking to take those rare earth metals into value-added products and that is a concern in many people's minds. But if you look at production coming on-stream in the next 10 years, the situation is not as dire as people make out.'
Nigel Tunna, the managing director of the British-based Metal Pages, a leading industry information provider, is also sceptical of claims of long-term rare earths shortages. China's tight quotas have forced up prices and caused temporary shortages of some metals, he acknowledges, but that in turn will stimulate global production or force manufacturers that don't want to rely on China to look for substitutes.

Analysts already expect that the two biggest miners of rare earths, Molycorp of the US and Australia's Lynas, could deliver an additional 60,000 tons to market by 2015. 'China is doing two things with its policy,' Tunna says. 'It is protecting against foreign ownership of strategic resources and at the same time creating incentives for foreign companies to bring their manufacturing to China. The West has grown used to cheap raw materials, but is going to have to get used to the fact that prices are going up as countries scramble to secure finite resources.'
Ironically, given the fears over a rare earths supply crunch, the concern for many inside the industry is not a shortage of the metals, but a future excess that could drive down prices and once again render non-Chinese mines uneconomic.
The reason, Judith Chegwidden, a leading industry analyst at Britain's Roskill Information Services, explains, is that the rare earths industry, while vital, is tiny by global standards. Even factoring in recent price rises, the entire rare earths business is forecast to be worth only $3 billion a year by 2014, barely one per cent of today's iron ore market. What the world will spend on rare earths this year – $2 billion – is roughly equivalent to what China spends on iron-ore imports in a fortnight. 'There are more than 200 rare earths deposits that are being marketed to the investment community,' Chegwidden adds, 'and most of them will never come to anything.'
In such a small market, where prices can fall as rapidly as they have risen, many of the rare earth mining opportunities being explored begin to look dangerously uneconomic. Rare earths may be abundant, but finding them in sufficiently high concentrations to make their extraction economic is more problematic. One Canadian-listed company, Avalon Rare Metals, which hopes to exploit a large deposit in Canada's Northwest Territories, estimated its start-up costs at $900 million, an astronomical sum, say market analysts, given the value of the entire industry.
The military-strategic fears, while good for headlines, are also somewhat overblown according to industry insiders, a view endorsed in October 2010 by a year-long Pentagon study into how to secure future supplies of rare earths and other critical materials. 'The quantities are extremely small,' Eric Noyrez, the chief operating officer of Lynas, said on the sidelines of the Critical and Rare Metals Summit III in Washington in October, estimating that the US military would need 10 to 20 tons of rare earth metals a year for its weapon systems. 'Fixing that would not take much time,' he said.
Looking to the future, mining groups must also face the risk that as alternative deposits become available, China could flood the market with rare earths such as lanthanum and cerium, which it has in superabundance at Baiyunebo. 'China currently exploits only about 20 per cent of its rare earth capacity in Baiyunebo, so if it decided to extract say, 25 per cent, it could meet all the world's needs for rare earth metals and still throw 75 per cent away,' said one foreign rare earths executive working in China, who asked not to be named.
Officials in the US, Japan and Europe are now debating whether to lodge a complaint with the World Trade Organisation over China's export quotas on rare earths. Their concern is that China will have an unfair price advantage as it builds up a green-tech industry that it wants to export all over the world.
Last year, the Geneva-based WTO secretariat warned in its biennial trade policy review that China's export quotas on rare earths and some other key metals were causing worrying distortions. 'The resulting gap between domestic prices and world prices constitutes implicit assistance to domestic downstream processors of the targeted products and thus provides them a competitive advantage,' it said.
Those who doubt China's motives for its rare earths controls also point to the months-long diplomatic spat between China and Japan last year over the arrest of a Chinese trawler captain in disputed waters in the East China Sea. Reports emerged that China had quietly ordered customs officers not to sign off shipments of rare earths to Japan. Several Japanese traders who had been expecting shipments said they had been stopped without explanation; China denied the allegations.
The world remains to be convinced. Already Japan, which accounts for 65 per cent of China's rare earths exports, has announced an inquiry into China's policies. Toyota, which needs lanthanum, dysprosium and neodymium to make its Prius hybrid cars, has formed a special task force to examine how to secure non-Chinese sources of rare earths, and is seeking supplies from Vietnam. 
Similar inquiries are being launched in the US, where the House of Representatives has passed the Rare Earths and Critical Materials Revitalisation Act of 2010, which would support the development of a non-Chinese source of rare earths for America, partly through loan guarantees for exploration companies. In Europe, discussions are under way about how to counter China's dominance, with the German Chancellor, Angela Merkel, describing it as 'urgently necessary' for Europeans to invest in non-Chinese sources of rare minerals.
In the end, perhaps, the rare earths debate comes down to that most precious of all global commodities – trust – which is in dangerously short supply when it comes to China's trade relations with the US, Europe and Japan. In the eyes of many, the case for not relying on China strengthens by the day. As Congressman Bart Gordon, the chairman of the House Science committee, observed when approving the legislation to support US companies exploring rare earths, 'It would be foolish to stake our national defence and economic security on China's good will, or hope that it will choose to compete in a fair and open global marketplace for rare earths. The stakes are simply too high.'
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