“There is Oil in the Middle East,
…There are Rare Earths in China.” Deng Xiaoping
There is a big upset in the Rare Earths market right now, and with good reason.
China has steadily positioned itself as the world’s biggest producer of rare earths in recent years. Even though it is sitting roughly a third of the world’s deposits, it is now controlling 95% of global supply. It has squeezed other producers out of the market by undercutting their prices, and now has a monopoly on the market.
Last week China cut exports quotas by 72%. This brings down shipments from roughly 28,000 tonnes to a measly 8,000 tonnes. The Chinese Society for Rare Earths said that its producers weren’t making enough profit. Well, this move should drive rare earth prices through the roof, and give the producers all the profits they could imagine.
So, what are rare earths, and why should you care as an investor?
Well rare earths are as the name suggests, relatively rare. Only 75,000 tonnes are produced each year worldwide. Industries use their unique properties for technological applications like computer hard drives, cell phones, as well as green uses such as wind turbines and hybrid vehicle technology. The rare earths are needed badly for green technology in a modernising economy. Demand is rising and Chinese supply (effectively most of global supply) has just been deliberately bottle-necked.
The names of rare earth elements are not easily dropped into conversation, and are even harder to spell. Let’s just say there are 17 of them and they have names like ytterbium, erbium, and praseodymium. I’m not sure the chemists that discovered and then named the elements back in the day were thinking long-term!
So where do you find this stuff?
The chart below shows how the known resources are distributed globally. It is predominantly found in just five countries: China, where most of it is produced, and Australia, Malawi, USA and Greenland.
The first thing to notice is that Greenland is sitting on 36% of known deposits. This is not often talked about but could be a very important part of the story in the future.
Greenland is home to a population of just 50,000 people. This is about the same number of people as there are in that Country Music capital of Australia, Tamworth. Yet this Scandinavian country is about the same size as Western Australia. Aussie listed Greenland Minerals (ASX:GGG) is sitting on an enormous JORC resource of over 4.5 million tonnes, but the government is currently opposed to developing it as it contains uranium as well.
The mind boggles when you consider the wealth that the Greenland government could generate from its deposit, and then consider how far this could go across the tiny population. You wonder how long the government can sit on their hands for as the non-China world starts screaming out for their minerals.
The Australian rare earths industry is sitting on 18% of global deposits and is far more advanced. Companies with deposits includes Alkane Resources (ASX:ALK), Navigator Resources (ASX:NAV), Lynas Corporation (ASX:LYC) and Arafura Resources (ASX:ARU). These companies are up by an average of 11% in the few days since the announcement of China’s export cut.
Kris Sayce is in the UK this week in the middle of a ‘heatwave’. This quote from UK paper confirms that: ‘Temperatures soared to 31.7C (89.1F) in Gravesend, Kent, yesterday – the highest in the UK this year.’
But before he went over to the sweat it out in the UK, he saw the potential for the Rare earths market to be pressured by the Chinese and made a recommendation for a Rare Earths company in Australian Small Cap Investigator. It is already sitting on 28% gain.
It is certainly a story to follow. Even if China relaxes its export restrictions in the future as some analysts expect, the country has confirmed that stable supply from China can’t be assumed in the future.
This is going to give other more reliable producers as great opportunity to supply the market, giving investors opportunities for gains.
Watch this space.
Dr Alex Cowie
For Money Morning Australia
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CB @ 3:
South Africa’s property market experienced strong growth since after 2000. The fastest growth rate was probably between 2003 and 2006.
The price rises were very much the same as has occured here in Australia in the 2000′s.
Then – quite suddenly – the bubble popped! somewhere during 2007, it popped…
This was caused by a severe tightening of lending standards.
Many who needed to sell their properties had to take losses of between 30 and 50% in order to get a sale. Sales literally all but dried up.
The market has been a dead horse pretty much from 2007 until now.
It has remained a buyers market.
So to say that prices rose ‘so high’ without collapsing is not really true.
Sure, for those people who have not sold their properties during the last 3 to 4 years one could say that. but for most of those who have had to sell, I dont believe they’d agree with you.
Thank you Sandra. That is very interesting, indeed.
My comments were made purely on the basis of the graph referred to by GB, above, @ 1. Follow that link and click on South Africa to bring up the line. Are you saying that it is not showing the crash you are talking about?
CB @ 12:
I’ve had a closer look at this graph and played around a bit with it.
If one looks at SA between 2007 Q2 and 2009 Q2 – it shows a mere 15% drop in prices.
That certainly is not the case from my experience. I believe it’s a case of selective statistics at play here and am suspicious of the source supplier of the base data. I would not be surprised if it’s the real estate industry of one with vested interests.
It just does not gel with what i know about the SA market over the last couple of years. Many people have been very badly burned.
Thanks, Sandra. I believe you. Obviously, the statisticians have been at it again.
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