Last month, China cut its shipments of rare earth exports to Japan. China and Japan have a maritime spat going on and this ban is probably fallout from that. In any event, the ban alarmed Japanese manufacturers who depend on China for rare earths.

The term “rare earths” refers to a group of obscure minerals, such as cerium, rhodium and neodymium. They are critical to a host of cutting-edge technologies. We use them in everything from hybrid cars to low-energy light bulbs. They are also used in all kinds of electronics, from cell phones to laptops. You’ll also find rare earths in batteries, polished glass, exhaust systems and more.

Japan makes all these things. In fact, it is the world’s largest consumer of rare earths. China is the world’s largest producer of rare earths, with 95% of the market. So you can see this is a match up of heavyweights.

Japan has vowed to find new supplies.

New supplies are out there, but there is not much production coming on line until a couple of years from now, if all goes according to plan. In the meantime, rare earths prices are up as much as fourfold this year.

This has not had as dramatic an impact as, say, a fourfold increase in the price of oil would. That’s because for most applications, rare earths are only a small percentage of the cost of the final product.

Still, prices have gone up enough — and availability is tight enough — to cause some alarm in Japan.

I think the situation is alarming not only for Japan, but for users of rare earths everywhere. This will stimulate the search for alternative suppliers. And China may want it that way anyway. The production of rare earths is tough on the environment. As the FT reports, commenting on China’s approval to develop a new rare earths mine in Jiangxi province:

“For the industry as a whole… there are signs that the Beijing government does not wish it to get too big. The consolidation of China’s rare earths sector is part of a broader national effort to shift away from this type of low value-added, high environmental impact products.”

To that end, China has raised export taxes on rare earths as high as 25%.

Stratfor, too, points to the fact that China’s rare earths industry was often not profitable. Stratfor mentions some the other things China is doing that impact both supply and demand:

“That its prolific, financially profitless and environmentally destructive production of REE [rare earths elements] has largely benefited foreign economies is not lost on China, so it is pushing a number of measures to alter this dynamic. On the supply side, China continues to curb output from small, unregulated mining outfits and to consolidate production into large, state-controlled enterprises, all while ratcheting down export quotas. On the demand side, Chinese industry’s gradual movement up the supply chain toward more value-added goods means more demand will be sequestered in the domestic economy.”

So China’s production of rare earths may fall… and it may consume more of what it produces at home. That means less for the rest of world.

Most of the production went to China in the first place because it was cheaper. And miners didn’t have to worry about the environmental damage they caused.

Both those things are changing.

The Japanese are out looking for rare earths outside of China. The FT reports Japanese firms checking out deposits in Vietnam, India, Canada and Brazil. Most of these projects are still in the early stages. And even the near-term projects need significant funding. But when they come online, they will be significant new sources of supply.

Japanese firms are finding ways to use less rare earths in some cases. For instance, Japanese engineers found a way to use half the rhodium used to make catalytic converters. There are other experimental efforts ongoing that try different materials altogether. As Stratfor notes, the rare earths boom “means many industries are in a race against time to see if alternative REE supplies can be established before too much economic damage occurs.”

So there is a window of opportunity here. I agree with Junji Nomura, who is in charge of research and development at Panasonic. “Rare earths will be a big problem for two-three years, but in four-five years, the problem will be gone.”

That’s a wide enough window to make good money speculating in rare earths. There are a handful of quality deposits out there that will begin production in the next few years.

Keep in mind these are high-risk plays. If the rare earths boom unravels, these stocks will do poorly. But if the rare earths boom can hold together for a just a year or two, these small cap stocks could soar. These stocks are volatile right now, but I will be keeping an eye on rare earths to see how this story will all play out.

Sincerely,
Chris Mayer

Penny Sleuth

November 3, 2010

How to Play the Scramble for Rare Earths was originally featured in the Penny Sleuth.

Since neodymium magnets are so strong, they can be smaller. You wouldn’t have in-ear headphones without neodymium; the magnets would be too big. Hard drives use neodymium magnets to control the actuator arm that moves the read-write head. Most wind turbines incorporate permanent magnets as part of their generator assembly (more on that later). Advanced electric motors use them too. A Toyota Prius needs about 44 pounds of the stuff.

There is one chief source of rare-earth metals, and that is China. This is not because China has the world’s only rare-earth deposits. Despite the name, rare-earths are actually relatively common in the Earth’s crust. The difficult thing about rare-earths isn’t finding it in the ground; it is processing the raw material into a commercially-usable product.  With 95% of the global production, China has a near-monopoly. Unfortunately, China is now embargoing rare-earth exports.

This is all seems to be part of an escalating trade squabble between the U.S. and China.

The U.S. accuses China of currency manipulation and pressures it to revalue. The politicians also complain about China’s subsidies in the green energy sector. Of course, considering that the U.S. engages in massive currency manipulation itself (and also subsidizes green energy projects) this tends to cast a halo of hypocrisy over the whole dispute.

If our enlightened leadership manages to shut down trade with China, it won’t be very helpful, I’m afraid. Despite some claims to the contrary, a 40% revaluation won’t improve our balance of trade with China much. It also won’t do a great deal to reduce the unemployment rate. The difference in wages is just too great. A slew of other countries with similarly low wages would love to step up and take China’s place. Imports will come from somewhere else.

In the midst of this dispute and the embargo, the burning question regarding our portfolio is: how does the China situation affect American tech stocks? Rare-earth shortages have been cited as an Achilles’ heel for growing the wind energy industry, and some have even seen the embargo as a possible reason to sell off companies that require rare earths and buy miners that produce them.

The argument for that may be overblown, however, misinformation can be useful for accumulating shares at cheaper prices. Ignorance and panic driving down valuations in the short term, giving us a tech buying opportunity for the long term.

Lets hope the current friction with China settles down. I suspect an all out trade war would greatly damage the U.S. economy in the middle of a very fragile “recovery.” I doubt it would be very good for China either. The Smoot-Hawley Tariff Act of 1930 is one of the commonly cited causes of the Great Depression. It seems that those who don’t know their history are doomed to repeat it.

There are only three things two nations can do: trade with each other, ignore each other, or fight each other. Only trade creates a net benefit for everyone involved. May cooler heads prevail!

Ad lucrum per scientia (toward wealth through science),
Ray Blanco
Penny Sleuth

October 22, 2010

Profit from Cheap Tech Plays Thanks to the Rare-Earth Element Shortage was originally featured in the Penny Sleuth.

This guy walks into a supply house and goes up to the clerk behind the counter. He says, “Excuse me, but could I buy some lanthanum?”

The clerk is busy smoking a cigarette. He looks the guy up and down and says, “We ain’t got no lanthanum.”

So the guy says, “What? You don’t have any lanthanum? OK, then how about some cerium? Or perhaps you could spare some yttrium? Do you have some cerium or yttrium that I can use?”

The clerk looks at him and shakes his head. “Sorry, pal. Not in stock.”

The guy begins to look a bit desperate. He says, “No? Well then, do you have any europium? Or is there any neodymium? While you are at it, can you please check for praseodymium or samarium? I don’t mean to trouble you, but do you have some gadolinium or dysprosium? And I need some terbium, holmium, erbium, thulium, ytterbium and lutetium.”

The clerk looks at him, shrugs and holds his cigarette out to flick some ash on the floor. “We’re fresh out,” says the clerk.

“Listen,” says the guy. “I hate to be a pest. But I can’t take no for an answer. I have to have these products. Without them, my whole economy shuts down. I’ll be ruined.”

The clerk looks at him and says, “Well, too bad for your economy. I guess you are just plain up the old creek, huh? Better grab a paddle.”

No Funny Punch Line to This Story

Well, dear reader, are you waiting for the funny punch line? Sorry, but there is no funny punch line on this one. This is no joke. I said at the beginning that I would tell you a good old story, not a funny story. And the investment opportunity makes for a good story, or maybe even a great one.

What were those strange-sounding things that the guy was requesting from the clerk? They are called “rare earths,” and for good reason. They are some of the most valuable, critical metals on the face of this planet or any other. Demand is soaring, and supply is…well, supply is not.

Meet the Lanthanides

In this issue of Penny Sleuth, I’m looking at investment opportunities in 15 elements from the periodic table. In formal scientific nomenclature, they are called the lanthanides. More commonly, they are called rare earths.

None of these elements are famous like gold or sliver. None get shipped in giant ore freighters, like iron, aluminum or copper. You sure don’t learn much about these 15 elements in high-school chemistry class, unless maybe it’s the school that feeds lots of kids into MIT or Caltech.

In fact, the only people who really study these elements are master’s- and Ph.D.-level chemists and solid-state physicists. Oh, and national leaders in places like China. But without these elements, much of the modern economy will just plain shut down.

“Just plain shut down? C’mon,” you might say.

But yes, these elements are critical to the modern economy, and that is not hyperbole. We are addicted to rare earths as much as we are addicted to oil, except most people don’t know about the rare earth addiction. But I am going to explain it to.

Say Goodbye to TV Screens, Computer Hard Drives, GPS, and More…

These 15 elements are strategic. These elements play a critical role in petrochemicals, environmental protection, “clean” technology, electronics, automotive applications, optics, telecommunications, computing and defense. They are indispensable to a myriad of intermediate and end uses.

Really, without these 15 elements, you can say goodbye to much of modernity. There will be no more television screens and computer hard drives, fiber-optic cables, digital cameras and most medical imaging devices.

You can say farewell to space launches and the satellites that do everything from show you the weather to offer global positioning down to a few inches. And the world’s system for refining petroleum will break down, too. That’s pretty serious.

What Are These 15 Elements?

These 15 elements are all metals, although usually one sees them in powdered form as oxides. They are called rare earths. But how rare are they? Well, they are scattered here and there in the Earth’s crust. But you won’t exactly trip over them as you stroll along the beach.

It is quite rare to find these elements in deposits that are economic to mine. So that is the investment lure.

Rare earths are usually found in rock bodies called carbonatites — for the most part non-geologists have never heard of them. And for our purposes today all we need to really know is that carbonatites are rare.

Once you find a deposit of rare earth elements in a carbonatite, it is still very difficult to mine and mill the rocks and minerals. The processing chain is long and complex. So we are dealing with rare earths in rare rock bodies that are difficult to mine, mill, and process.

Right now, almost all of the world’s supply of rare earths comes from China, which is why our investment opportunity is so appropriate. Unfortunately, I cannot let you know the specific investment opportunity I’m talking about. That simply wouldn’t be fair to the readers of my Energy and Scarcity newsletter. But now you at least know where to look.

Until we meet again…

Byron W. King
April 8. 2008

The 15 Rare Metals You’ve Never Heard Of was originally featured in the Penny Sleuth.