Rare Earth Metals – The Next Gold Rush?

China and Japan are having a small but potentially painful dispute over the ownership of a small chain of islands in the East China Sea.

These islands have very little significance other than the oil deposits that may lie around them. Whoever owns these islands would have claims to the mineral deposits on the ocean floors surrounding the islands.

Tensions heated up when a Japanese coast guard boat collided with a Chinese fishing vessel on September 7. Japanese authorities detained the Chinese captain and tough talk flowed from both sides.

The culmination was the temporary halt of exportation of rare earth metals from China to Japan.

Rare earth? No, I’m not talking about the 1970′s rock group nor am I talking about uranium or plutonium. I’m talking about a group of minerals that contain elements quite rare when discovered in Sweden in 1787.

If you’ve been an Uncommon Wisdom reader, you would have been alerted to this opportunity more than a year ago when my friend, Sean Brodrick, wrote about them here.

Maybe you’ve never heard of rare earth metals, but you use them every day of your life. They’re used in things like cell phones, semiconductors, lasers, fiber-optic cable, plasma TVs, hybrid cars, microwave ovens, and scud missiles.

They — and just about anything electronic — contain some of the most obscure chemical elements on the planet known as rare earth metals.

The United States Geological Survey (USGS) has identified 17 elements that are considered rare earth metals, but nobody paid much attention to them until recent years because of the development of new technologies and electronic devices.

Most of the world’s advanced defense, medical, and high-tech electronics simply won’t work without rare earth metals. These metals have very special physical and chemical attributes, including high degrees of magnetism, luminosity, superconductivity and environmental non-toxicity.

These obscure metals are so critical to our modern world that they are as strategically important as oil, copper, uranium, natural gas, and coal. And I believe that an investment in rare earth metals will be even more lucrative.

And what’s this got to do with Asia? Tons! Keep reading and you’ll understand exactly what I mean and why an investment in rare earth metals could be the best natural resources investment you can make.

Reason #1: Booming Demand. Ten years ago, the world used 40,000 metric tons of rare earth metals a year. Today, the world uses 125,000 tons, but is expected to grow to over 200,000 tons by about 2014.

The reason for the soaring demand is simple: The world is building and consuming more high-tech devices. Plus, new demand from green energy initiatives is gobbling up all the rare earth metals that the world can produce.

The consensus of the forecasts I’ve read predict a 40,000-ton shortage by 2015.

The U.S. Magnetic Materials Association said, “It is estimated that Chinese domestic consumption of rare earth materials will outpace Chinese domestic supply between 2012 to 2015. It is unclear whether rare earth material will be available outside China in the coming years.”

Here is a link to a 2-minute Reuters news video about the demand for rare earth metals that I highly recommend you watch: http://www.youtube.com/watch?v=q2CpFYCqZz8

No question, the world is headed for a supply/demand imbalance and that will push the price of rare earth metals higher. Much, much higher.

Reason #2: Global Supply Controlled by China. Until 1948, most of the world’s rare earth metals were sourced from placer sand deposits in India and Brazil when South Africa became the largest producer. India and South African still produce rare earth metals today, but China has zoomed past everybody since the 1980′s.

This number is almost hard to believe, but it is absolutely true: China produces and controls 95% of the world’s production of rare earth minerals. Yup, 95%!

The problem is that China currently uses about two-thirds of what it produces, but is on a consumption trajectory where it will use everything it produces in a few more years. When that happens, the U.S. and the rest of the world will be S.O.L.!

In September of last year, China announced plans to lower its export quota of rare earth metals to 35,000 tons per year in 2010-2015.

Wait, it gets worse. China’s Ministry of Industry and Information Technology is considering a total ban on exports of terbium, dysprosium, yttrium, thulium, and lutetium.

It’s part of a plan that Deng Xiaoping started almost two decades ago when he said that rare earth metals would “Do for China what oil did for Saudi Arabia.”

Reason #3: A Matter of National Security. Every piece — and I mean EVERY piece — of high-tech military warfare is made with rare earth metals, including precision-guided munitions, night vision goggles, radar, and lasers.

If we lost our supplies of rare earth metals, our country’s ability to produce many of these weapon systems would cease to exist. Since China controls 95% of the world’s supply of rare earth metals, we are extremely vulnerable.

Rare earth metals are vital to the production of most defense, medical and high-tech electronics.

The General Accounting Office said that the U.S. produced zero rare earth elements in 2009 and that it will take up to 15 years to rebuild our own domestic rare earth supply chain.

“The United States has the expertise, but lacks the manufacturing assets and facilities to refine oxides to metals. Refined metal is almost exclusively available from China,” states the GAO.

The U.S. Magnetic Materials Association said that the United States is already in a “silent crisis.” And that “it is unclear whether rare earth material will be available outside China in the coming years.”

In June of 2009, the U.S. House of Representatives passed HR 2647, the National Defense Authorization Act (NDAA). Section 828 of the Act included language concerning “the availability of rare earth materials and components containing rare earth materials in the defense supply chain.”

Section 828 noted that “less common metals” such as the rare earths and thorium were “critical to modern technologies, including numerous defense critical technologies and these technologies cannot be built without the use of these metals and materials produced from them and therefore could qualify as strategic materials, critical to national security.”

Representative Ike Skelton, chairman of the House Armed Services Committee, said “China is a rapidly rising military and economic power and the fact is that they cornered the market on these rare earth metals that are essential for a lot of our advanced weapons systems as well as a lot of manufacturing in the United States.”

Representative Mike Coffman said, “We need to move aggressively on this issue now before it’s too late.”

Between now and the 15 years that it will take to rebuild our own rare earth metal supply chain, you can bet that our Military Industrial Complex is going to be a big buyer and a big stockpile of rare earth metals, the price of which is certain to go much higher.

Reason #4: Green Energy and Rare Earth Metals. Rare earth metals are also a back door way to profit from the “green” revolution. That is because most of the green energy initiatives cannot function with rare earth metals. Three green technologies — hybrid cars, solar panels, and wind turbines — use mountains of rare earth metals.

• Hybrid vehicles, like the Toyota Prius and Honda Insight, are big users of rare earth metals. Each car has about 2 kg of neodymium in it rechargeable nickel hydride battery and another kilogram or so of lanthanum and praseodymium in the drive train.
  
• Solar panel efficiency is measured as a percentage of light energy that is converted to electricity. Silicon solar panels are 25% efficient, but the newest generation of solar panels called multi-junction solar panels have efficiencies greater than 40%. These solar panels use the rare metal indium.
  
• Every wind turbine tower has a massive, highly engineered electromechanical system in it that couldn’t operate without lanthanides.

Here is a link to a very informative video about the role that rare earth elements play in green energy: http://www.youtube.com/watch?v=RxZLKiQd0yk

The Green Energy revolution is still in its infancy and its inevitable growth will place huge demand for rare earth metals and send the prices through the roof!

Reason #5: Brain Drain to China. Getting the raw materials out of the ground is just the first step. The next and equally important step is to refine that dirt into ready-to-use form. Not only does China have the raw resources, they also have most of the production capacity: Metal production, alloying, strip casting, magnetic powder production and, ultimately, magnet production.

The rest of the world is scrambling to open up new rare earth mines, but it will take decades to build the refining capacity. The biggest obstacle, however, is that most of the experience and knowledge is in China and can’t be easily duplicated.

For example, the division of General Motors which deals with miniaturized magnet research shut down its U.S. office and moved its entire staff to China in 2006.

Reason #6: Not in My Backyard. The U.S. may talk about building its own rare earth supply chain, the reality is that mining and processing the finished materials is a dirty, polluting process and the environmental crowd in the U.S. will fight any efforts to build on American soil.

Here is a link to a CNN report on the environmental costs of rare earth metals mining. http://www.youtube.com/watch?v=yO94WHkqHg4

Look at the obstacles oil companies have had to get permission to opening new drilling fields or refineries. Nobody wants them in their backyard and rare earth metal refining is even worse. I can’t see any meaningful production capacity opened anywhere but third world countries that are willing to accept the pollution cost.

How can you invest in rare earth metals?

China Rare Earth Holdings produces about 20% of the world’s supply of rare earth metals which makes it the Saudi Arabia of rare earth metals. China Rare Earth Holdings trades both on the Hong Kong Stock Exchange (0769.HK) and the U.S. over-the-counter market (CREQF.PK).

Avalon Rare Metals owns a large but untapped mine in Canada. It trades on the Toronto Stock Exchange (AVL) and the U.S. over-the-counter market (AVARF.PK).

Lynas Corporation has one of the richest deposits of rare earth metals in the world. It trades on the Australian stock exchange (LYC.AX) as well as the U.S. over-the-counter market (LYSCF.PK).

Molycorp (MCP) went public earlier this year on the NYSE. It owns the Mountain Pass mine in Southern California, the largest rare earth metals deposit outside of China.

I should to disclose that my Asia Stock Alert subscribers already own China Rare Earth Holdings and we are sitting on a huge open gain. Even though we have a big gain, I am holding on for even more profits.

You need to do your own homework and decide if any of these rare earth stocks are appropriate for your situation. These are very volatile stocks, so stay away if you don’t have a high tolerance for risk. The reward, however, should be big, big, big.

Best wishes,

Tony