The same day that Van Eck launched its Rare Earth/Strategic Metals ETF (NYSE Arca:REMX), as mentioned in “Rare Earth Elements are About to Get a Whole Lot Easier for the General Investor to Buy,” China crashed the party. REMX opened at $20.50 and then fell, then rose almost back to the IPO price, then fell until the close to $19.51. Why? China announced that it was cutting export quotas by 30% on rare earth metals.
China has a corner on this market for a number of reasons:
1) Geologically, China simply has the minerals in areas that are developed for mining. Like how Alaska has oil and Nevada has silver. Until other regions are developed (i.e. Australia, Viet Nam, Russia, California, etc.) this will be a competitive advantage.
2) Currently, China has about 95% of the rare earth production.
3) China has the large processing facilities (and capacity for more processing bandwidth) built to separate the metals from each other.
4) Chinese environmental laws are significantly inferior to more developed nations, thereby allowing mining companies to do as they need, with little regard to the socio-political or physical environmental repercussions. They operate with little (to none) bureaucratic red tape. I can’t tell you how simple – yet ridiculously complicated – it is to get a notary license in New Jersey! So, once it is established as needed and deemed necessary and relevant by the government, it is set into motion and done.
It has been said that China will not use their rare earth metals as a strategic negotiating instrument. To be completely mature in my response, I say “liar, liar pants on fire!” Governments are large corporations. Once they have a competitive advantage they use it. I was not around for the 1973 or 1979 oil crisis, but I think the members of OAPEC/OPEC used their resources as a ‘playing piece.’
As mentioned in “Introduction to Rare Earth Elements,” these metals are found in everything from ovens to cell phones to hybrid cars and solar panels. Again, Japan and South Korea have begun stockpiling them. Lithium, although not technically a REE, but often grouped in, has been declared a strategic metal in Chile. Demand is rising, but China controls the field.
So, looking at four REE equities on October 28, 2010, a few things come to light.
MolyCorp Inc. (NYSE:MCP)
Open: US $39.48
Close: US $33.89
Volume: 15,970,000
Average Volume: 2,290,000
Lynas Corporation Limited (ASX:LYC)
Open: AUS $1.79
Close: AUS $1.49
Volume: 24,100,000
Average Volume: 25,400,000
Market Vectors Rare Earth/Strategic Metals ETF (NYSE Arca:REMX)
Open: US $20.50
Close: US $19.51
Volume: 2,190,000
Average Volume: N/A
Avalon Rare Metals Inc. (TSX:AVL)
Open: CAN $4.78
Close: CAN $4.44
Volume: 2,010,000
Average Volume: 793,475
1) Volume was up significantly with the exception of Lynas because the Chinese news came much later in the Australian trading day.
2) All equities (and ETF) came down significantly.
This further illustrates the Chinese factor.
Moreover to the whole export slashing, what is interesting and seemingly hidden is that China has reduced production levels in 2010. The need for these REEs is greater than ever before and Chinese domestic deposits dropped to 27 million tons by the end of 2009 – 30% percent of the world's total explored reserves. This was 43 million in 1996. China's verified reserves of heavy REEs is about 8 million tons in 2008, while reserves of light rare earth totaled 50 to 60 million.
Demand is there, but China is flexing its muscles, allowing for much more outflow, resulting in a glut later. Why? Because the western world has a tough time rationing. We will consume all we can, than China will still have the most REEs at their disposal…and back to the bargaining tool. The US has lots of these metals, but development was stopped long ago. It was just cheaper if it was made in China.
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