Rare Earth Metals: Not So Rare After All?

Pick up your iPhone, turn on the television or drive a hybrid car, you will find a common thread among these products: rare earth metals. Suddenly the focus of several converging trends in the global economy, rare earth metals have become as ubiquitos as the very consumer products they are used to create. Don’t let the name fool you. These unpronouncable metals are relatively plentiful in the Earth’s crust, and can be extracted from a diversity of sites around the globe, from southeastern Nebraska, to Western Australia. Yet the demand for these metals may signal a larger shift in the global economy and underscore the race to become a leader in energy technology and solar manufacturing.

Are rare earths a true asset bubble, a la dot-coms or housing, perhaps in the tradition of tulips? Not quite. There is a shortage of rare earths that must be rectified so that all of us can continue to enjoy our ipods and hybrid cars. Indeed, if you combine constraints on supply (China’s export restrictions) and price inelasticity, you do get a picture of a metal with sky-high prices.

Today, China commands the lion’s share of the rare earth mining market. In late 2010, China imposed a quota on rare earth exports, artificially stimualting demand and driving up global prices. REE’s have become critically important inputs to products that have defined the digital age. Prior to 1987, glass, ceramics and oil refining industries were the major uses of REEs, when less than 5% were used in electronics and intense magnets. Yet since 1999, there has been a 50% increase in overall production. In a world marked by an exponentially increasing appetite for consumer electronics, REE’s have become a sina qua non of market parlance and an immensely attractive source of global capital.

China’s dominance in the rare earth market has only emerged in the last decade. Until 1995, Australia was the largest exporter of REEs; environmental concerns in the western world and China’s own willingness to compete with lower pricing in late 90s shifted this competitive advantage. Today, China accounts for some 95% of global rare earth supply, and for certain heavy elements, it is the only producer. when the country decided to tighten supply (in the form of a 72% year-over-year cut in export quotas) last year, the prices of REEs soared. Year-to-date, the prices of La Oxide, Ce Oxide and Nd Oxide, for example, have more than doubled— roughly 100 percent in three months, translating into an annualized growth of 1600 percent!

Beijing’s South Railway Station may serve as a model for the increasing global imbalance in energy technology. The ultramodern station is covered with 3,264 solar panels, manufactured in Chinese factories with REE’s mined in China’s southeast and west. The world is forced to become ‘price takers’ for REE’s at the behest of Chinese producers, who control the market to their advantage. U.S., for instance, has 13 million tons of discovered reserves, whereas the most optimistic global demand forecast comes to around 65,000 tons per year.
So with the spike in prices, businesses around the world are taking actions, trying to realize the juicy profit margins. Big players such as Australia’s Molycorp and Canada’s Avalon Rare Metals own proven reserves, but in order to start production, they need to raise money to build the necessary facilities. Molycorp (current owner of Mountain Pass, an Californian open pit mine for REEs that operated in the 1960s), pushed for an initial public offering of its stock in July 2010, and since then the shares have gone up 500 percent.

Rare earth elements are popular, so are the stocks of their producers. The problem with this popularity however, is that it’s turning into yet another asset bubble. Since the second half of 2010, Wall Street investment banks have become highly promotional of not only REE producers but the rare earth concept itself. Almost all incoming mining companies remotely connected to the story of rare earth are greeted with Overweight ratings (Wall Street’s way of saying: “this time, you will actually make money!”) Molycorp, for instance, is now a $6 billion public company, listed on NYSE, despite the fact that it has never made a profit, and strictly speaking, has no revenue at all. How could a company that has never sold any meaningful products be worth $6 billion in the open market? Nevertheless, the day of reckoning lies ahead. Yet is it apt to characterize the rare earth market in the vein of the Dot-Com boom or housing collapse? For one, the rare earth market is no where near the size and scope of these markets, remaining the purview of large institutional investors and speculative institutional investors. Nevertheless, due to the quota on export, rare earth prices in China remain artificially depressed relative to the world market. For the element La Oxide, there exists a ten-time differential: the cost of La Oxide is $9,000 per ton in China, but if one were to get the same quantity in Australia, one would need $90,000. Simply put, the imbalance between supply and demand is not intrinsic or natural, but due to an external factor of human discretion. As such, prices of REE’s in the global marketplace have become highjaked by political realities in China.
Moreover, rare earths are indeed, not rare at all. Rare refers to early chemists’ unfamiliarity with these elements. In terms of quantity, they are not particularly scarce: the total worldwide reserves (discovered) are about 100 million tons. At current annual consumption rates of 65,000 tons, it takes more than a thousand years for the earth as a whole to run out of REEs, assuming no consumption increase or improvement in efficient processing. In addition, China, aside from controlling a ninety-five percent supply, also accounts for some sixty-five percent of demand. That is, unless China drastically transforms into a net importer of REEs, most buying and selling will happen within the country anyway and have nothing to do with companies like Molycorp and Avalon (they can’t sell profitably to China either, due to the aforementioned price differential).

Sadly, when Molycorp finally starts turning out products in 2013 (the year when the building of its first facility is complete), the increased capacity it brings to the market would help render the whole operation uneconomic. With so many companies raising money to build additional capacity, prices would crash before most of them have a chance to cash in. So when the day comes when anticipated demand is not there, while supply has gone over roof; there remains one way out, and it ain’t pretty.

But ultimately, Molycorp is not the one to take punches, because it is speculating with, not its own, but public investors’ money. Investors in turn are driven by Wall Street research and tips. Wall Street, on the other hand, has an incentive to create frenzy and push share prices ever upward so it could collect fees by advising more companies on their equity sales. If this story sounds so familiar so far, I’m afraid it is not a coincidence.

Yi is a junior at Fordham College studying economics and philosophy. He can be reached at ygao1@fordham.edu

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