“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
{ 14 comments… read them below or add one }
cb, if the US was in a bubble then Australia is now, take the time frame back to 87
http://www.economist.com/node/14438245?story_id=14438245
http://www.theage.com.au/business/oecd-raises-doubts-on-job-market-health-20100712-107vw.html
Looks like our headline unemployment rate might be all smoke and mirrors.
GB – I know this to be true through bitter experience: Looking at charts is as interesting as it is meaningless for predicting future price movements. If you think that those trendlines look ominous for Austrlia, compare that to South Aftrica’s. If SA prices could climb so high without collapsing, why would we suppose that ours won’t? Again, I am not saying that a bearish bet against Australian property cannot pay off, or even that it will not pay off. I am only saying that the outcome at this point is by no means certain, and that prices could be as likely to remain stable as they are likely to collapse.
I would agree, however, that this is not the time for wild speculation by taking on insane levels of debt. But then again, is there ever such a time?
MF – Of course it is. And reading through the system’s problems a perverse solution occured to me: Instead of clawing back benefits from people who move into employment, we could perhaps match their earnings with more generous benefits. That would incentivise them to go out and find productive employment … perhaps a perverse system needs to work with perverse solutions?… hmmmm
This one is interesting:
Fear Index rises to 16-year high
http://www.fgmr.com/fear-index-rises-to-sixteen-year-high.html
But this one is monumentally significant. I have not read the article yet, only a summary of it, which I am going to paste in below. The summary is from James Turk’s Bullion Buzz Newsletter, but since we can only paste one link in a message, I will give the link to the full article. Simply on the basis of the summary,what I see here is a most powerful confirmation that when the chips are down, fiat money is no good as a means of payment, since it represents nothing more than a promise of payment. Gold, on the other hand, represents payment in full, and therefore represents the ultimate and safest form of money one can hold.
That is a comment on fiat money versus commodity money at a general level, but the more immediate and particular implication of this new development is that trust in fiat money has now eroded to a critical point where it is starting to be rejected as a form of payment, unless that is, it is backd by gold which must be put up as collateral. Incredible stuff.
“Gold is Back as Money
Julian Phillips
(Abstract by James Turk)
In its 2010 annual report, the Bank for International Settlements (BIS) said that “gold, which the bank held in connection with gold swap operations, under which the bank exchanges currencies for physical gold, stands at 8,160.1 million in special drawing rights, equivalent to 346 tonnes this year, up from nil in 2009.” Apparently the amount has climbed to 382 tonnes since the report was issued. This is the best news gold has had in 30 years, writes Phillips. He discusses what swaps are and who does them; the significance of the transactions; and why this means that gold is back and alive in the monetary system. In short, it seems that a country (or countries) needed foreign exchange to counter some shortfall in its accounts and raised these funds as a short-term liquidity measure, believing it would be able to return the currency and receive its gold back. The gold would then be returned at the conclusion of the swap period in return for the currencies swapped. If it failed to return these funds to the BIS, then the BIS could discreetly place the gold with another central bank, should it not want to keep the gold. If it did so, the BIS would simply report its disposal of the gold, the originating central bank would report the drop in its gold reserves and the gold buying bank would report its increase in the reserves. This puts the transaction into an entirely different category. It seems that the credit of one or more of the world’s central banks is not good enough for other governmental institutions. If word got out as to which this country is, then the financial markets would go into a tailspin, shaking the global financial system to its core. No wonder the BIS is keeping a low profile.”
http://financialsense.com/contributors/julian-phillips/gold-is-back-as-money
cb,
Just a note about South Africa,
The rise there was huge in percentage terms, but it came from a very low base. The average price in South Africa now is just $120,000 in Aussie dollars.
cb…got the email on the Fear Index update Monday… always a good read…
Drew – Yeah, sure. I suspect, though, that large numbers are as easy to come by as low ones. In a fiat monetary system that is backed by nothing and where “money,” the principal means of payment and exchange is conjured into existence at virtually no cost, the starting base is of little consequence. As a general rule, people tend to form their expectations that a dollar today is the same as the dollar yesterday, or the dollar of tomorrow.
This is not the case, and it is not the case by design, and it is the main reason why there can be so much disagreement about certain asset prices. Having fundamentally different assumptions in the back of their minds, and quite often unawares, people are simply talking past each other.
For example, when the bears say that prices surely cannot rise any higher, they are probably right in terms of today’s dollars, in which they think as a means of payment and measurement. But if we think in terms of tomorrow’s dollar,say 5 or 10 years down the track, there is simply no way to know, because there is simply no telling or guessing how much excess dollars the powers that be are going to conjure into existence.
It is like estimating the time of your arrival to the North Pole, pulling a sled, simply on the basis that you are walking so many miles per day in a true northerly direction. Can you count on eventually arriving? Counterintuitive as that may be, the correct answer is that you cannot. Why? Because even as you walk, the very ice against which you measure your progress, could be shifting and floating with you in virtually any direction.
It is essentially the same with valuing things in fiat money. Unless we find an external reference point in terms of which we can define value, there is simply no way of telling how much this or that is going to cost in dollar terms, because the insiders and the cartel in charge of it mess around with its purchasing power as, and when, it suits their plans and interests. So, in dollar terms, prices could be anywhere, up or down, or both and the same.
And of course, the impressive rise in house prices would be far less impressive if we kept in mind that the dollars of 30, 20 and 10 years ago were not the same as the dollars of today. And even when you adjust a graph for inflation, you still not get the full picture because the official inflation figures have been tempered with, and they have been tempered with precisely so as to short change you at every turn, and keep you ignorant of the same, while giving you the illusion of prosperity and financial progress.
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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