China’s Rare Earth Monopoly Presents Unique Investment Opportunities
By Joshua Pidek
Oregon Catalyst’s International Affairs Reporter
China will continue to implement measures restricting exports of rare earths elements. However, the Chinese Ministry of Commerce stated that the 30% figure previously quoted is false, and that China will continue to comply with World Trade Organization (WTO) rules protecting “depletable resources” by outlining the mining, production, and export of rare earth elements. China has continued to deny that it is utilizing its near monopoly on Rare Earth Elements (REEs) as a diplomatic weapon, claiming that the Chinese government did not block REE exports to Japan after a spat over Exclusive Economic Zones (EEZ) in the South China Sea.
As I mentioned in my September article, the most valuable rare earth elements are a group of seventeen oddly named chemical elements at the bottom of the periodic table. While the elements occur relatively frequently, extracting and refining them is expensive, tedious, and environmentally risky. Many of the rare earth deposits throughout North America, for example, are laced with radioactive thorium. However, REEs are essential to producing valuable items like superconductors, nuclear batteries, lasers, radar systems, and powerful magnets used in hard drives, wind turbines, and hybrid cars. Feasible alternatives to REEs are virtually nonexistent at present, so the only option is to find new sources of raw REEs.
Additionally, while the overall value of the rare earth elements market is still small compared to major industries like steel or concrete, the value of mining companies involved in rare earths has exploded over the past month.
There are several reasons why rare earth elements are becoming exponentially more valuable. A major factor is that during the brief confrontation last month between China and Japan over the boundaries of each country’s EEZ in a disputed oil and natural gas field in the South China Sea, China briefly halted all exports of rare earth elements to Japan. While China denies that the restriction was a government plan, the odds of all companies in China simultaneously cutting off exports to Japan seems a bit far-fetched. This willingness to use a near monopoly on a vital commodity to force another country’s hand is unnerving at best.
Another important facet of the jump in REEs’ value is that China is rapidly depleting its deposits. According to STRATFOR, China’s reserves of rare earths have fallen from 33% of world supply in 1996 to 30% in 2010, and at the currently expanding rate of demand, China will exhaust its supply within 15 – 20 years.
In order to safeguard domestic supply and attempt to forestall a shortage of REEs while new mines are brought online, China has begun severely limiting exports to several major importers, including Japan and Germany. Japan has announced that its national stockpile of REEs will be empty by spring 2011 unless China resumes exporting, and Germany has been told by Chinese officials that they must increase their investments in China if they want to continue receiving REEs.
China has stated that while previously announced figures of 30% cuts in REE exports by next year are false, there will certainly be cutbacks. Exports have dropped sharply already this year, and are on track to be reduced again the near future.
Although China, producer of roughly 95% of the world’s REEs, has continued to restrict access to REEs, alternative sources are being explored. Many mines around the world have simply been unable to refine REEs produced as byproducts of their main ore because of the difficulty of competing with China’s low production cost. While the United States must comply with environmental standards that significantly raise the cost of producing REEs, China is able to circumvent these laws and produce at a much lower cost.
However, as the supply drops and demand skyrockets, it is again becoming profitable to produce rare earth elements. Molycorp, an American mining firm, is reopening a mine in Mountain Pass, California. Lynas Mining Group is opening a REE mine in Australia. India signed an agreement on 25 October to provide long-term supplies of REEs to Japan. Germany is in the process of planning “strategic partnerships” with Mongolia, Kazakhstan, and a host of African and South American countries to secure future rare earth element supplies. Despite these promising developments, however, it takes at least ten years to open a new mine, so China will still wield near total control of REE supplies for the immediate future.
The main impacts of all of this will be a massive boom in the value of rare earth elements and the companies that mine them. While REEs are not traded as ETFs at present, their market value has risen sharply over the past months, and REE mining stocks have behaved similarly.
Another interesting development is the potential for a race to control valuable commodities, especially those related to REEs. German commodities agency Volker Steinbach stated on 26 October that China’s decision to curb exports of REEs will likely spark a global race for alternative sources, as it will take nearly a decade to bring new mines online.
In the meantime, the best course of action for the United States is to pressure China to continue exporting REEs, as there is no quick fix to alleviate the squeeze created by Chinese cutbacks on exports. If China does not resume exports at the original levels, construction of many items essential to infrastructure and national security will be practically impossible.
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