China Maintains It’s Firm Grasp Over Rare Earth Markets

Jun. 02, 2011 5:42 AM ETTASXF, GMO
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Contributor Since 2011

I have been an investor for 30+ years. When I retired in 2004, I took over the control of my investments full time. In March of 2009 I committed a sizable stake to the market and doubled my money. I sold half about a year ago and what I started with is in drips dividend reinvesting. The other half I have been a bit more speculative with, but I recently bought SLV at $26.00 in January and sold it all on April 29th for a 66% realized gain. I spend my time reading every financial classic I can get my hands on and have become a fairly good chartist. I write a blog and I upload videos to Youtube under the "nom de plume" InvestingAdvicebyGeo. Hope you will visit my sites and leave feedback.

While China has been busy stockpiling their rare earths, the rest of the world has been left scrambling to secure the rare earths that they need for their industries and military applications. The U.S. has been making progress moving forward to develop projects that will free them from the yoke of China’s firm grasp over the rare earth market.

In Alaska Governor Sean Parnell, in a letter to Energy Secretary Steven Chu that concluded that The United States cannot sit idly by bas China tightens the noose of dominating the words supply of Rare Earths. He asked Secretary Chu to “move more aggressively to develop new mines.”

While citing that the Bokan Mountain Deposit is the most advanced project in Alaska, he proposed an immediate initiative combining federal and state government in the speedy development of Alaska’s vital rare earth resources. He cited that the Bokan Mountain Project is unusually rich in all of the heavy rare earths so vital to our high tech industries. From the random reports in the Wall Street Journal, Barron’s and the media I can only surmise that Washington is finally beginning to wake up to the fact that we must take an expedited pro active approach to secure our own sources of rare earths.

According to my sources, the President has set aside funds to create a rare earth hub, which is being modeled after the “Manhattan Project” where top scientists will be brought together to develop a rare earth supply chain.

In April,2011, Colorado Congressman Mike Coffman introduced the Rare Earth Supply–Chain Technology and Resource Transformation Act of 2011 (RESTART), which will give loans to the industry and speed up permitting. Fortunately the U.S. is beginning to take action to secure our own vital rare earth resources.

It is no secret that China dominates the production of rare earth elements. Over 97% of world’s production comes from China, but over the last few years the nation has tightened its control over the production and export of the 17 elements to the tune of between 37 and 50%. News of further controls over the industry has come out over the last few weeks, including a major shakeup in the establishment of a rare earth exchange in Baotou, Inner Mongolia.

In April, China did increase this year’s production quota of rare earths by 5 percent over 2010. However, the government took serious steps to clamp down on illegal mining operations that, through the black market, have added a significant amount of supply to a starving market. The crackdowns on illegal mining have only served to aggravate the already constrained supply issues it is estimated that 30-40 thousand tons of rare earths are smuggled out of the country every year. Chinese officials also suspended new mining licenses until June, 2012, which will not help alleviate supply tightness.

Along with the cut back from anywhere between 37 and 50% on exports for 2011, to add insult to injury, a hefty tariff was imposed on rare earth elements. Right now the Chinese are saying the tax will be small, $9.22 per ton of light rare earths. This marks the first time that they have differentiated between light and heavy rare earths. Moreover, there are already whispers by analysts that have noted that this may also change future export quotas to reflect the law of supply and demand for the different elements.

In an attempt to further regulate the market a major new development has been the creation of the Baotou Rare-Earth Products Exchange. The exchange will be the first and only rare earth product exchange in the world. The exchange will not trade futures, but only spot products. The process of establishing the company is nearing completion and is scheduled to be registered on or about August 11th, 2011.

According to the China Daily, Ms. Wang Caifeng, a former official at the Ministry of Industry and Information Technology who is setting up the country’s Rare Earth Association, said “that the exchange will help increase the transparency and regularization of the rare-earth trading market.”

The exchange will act much like the China Iron and Steel Association which will assist companies with exports as well as aiding negotiations with foreign buyers. The exchange will also allow for Chinese producers to have more leverage over the market, and further help them in their efforts to consolidate the rare earth industry.

I have long suspected that the Chinese government has wanted to consolidate the rare earth industry, allowing the largest companies to take over smaller producers. Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co Ltd. (SHA:600111), the largest rare earth producer in the world and the main power behind the new exchange, may benefit dramatically from a consolidated market, and has been charged by the Chinese government to build a strategic reserve of rare earths.

On May 19, the State Council stated publicly for the first time that it plans to consolidate the rare earth industry allowing the biggest players to control the industry in the next two years.  The Chinese government wants to eliminate small scale rare earth producers citing environmental concerns. While it is important to remember that China is not a free market economy, I feel that this is yet another ploy to further constrain the exports of rare earths as China seeks to monopolize the export of rare earths.

As reported the Chinese newspaper, Business China, The State Council said “the country aims to concentrate 80% of southern China’s heavy rare earth mining assets in the hands of the three biggest companies in the next one to two years,” One of the companies that will most likely take over production in the south is China Minmetals Corp.

As reported in Reuters, in April, exports were slashed in half year-over-year, yet the value of the exports raised tenfold averaging $121,933 per ton. The benefits to the producers of rare earth elements are clear. Exploding prices will help grow profit margins on their balance sheet. It is unlikely seeing the consolidation and reduction of exports over the last year that China will relinquish their power over this market in the near term.

I would recommend companies that mine Heavy Rare Earths like Ucore (UURAF), General Moly, (GMO),  Avalon Rare Metals (AVL) and Tasman Metals (OTC:TASXF), which are selling at bargin prices today June 6th.


Disclosure: I am long AVL, OTCQX:UURAF, GMO, OTC:TASXF.

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