China’s reduction of its rare earth metals’ exports by up to 35 per cent in the first half of 2011, may have rattled countries that import these types of materials.
This is so because the Asian country has played a significant role in raising the awareness of the minerals, which are vital components especially in the manufacturing sector.
The family of 17 minerals, known as rare earth elements (REE) or rare earth oxides (REO), is commonly used in the production of world’s state-of-the-art indispensable technologies, ranging from mobile phones, LCDs, light bulbs, to laser beams, superconductors, radars and even smart bombs.
As China dominates 96 per cent of the world’s total production of REE, which according to “Technology Metals Research” and “ROTH Capital Partners” is estimated at 123,000 tonnes in 2010, the market’s performance is often influenced by news coming from the main supplier.
According to a recent market study issued by Philip Shen of ROTH Capital Partners, a California-based investment banking firm, pricing of REE often moves on news about Chinese supply. Many individual oxides spiked more than 5,000 per cent above their ten year averages after recent export quota cuts and Chinese official’s efforts to clamp down on illegal producers of rare earths. The more recent price decreases have been driven by an uncertain macro environment.
“We believe the limitations of supply from China, coupled with an unchecked increase in demand, has caused an imbalance that will continue during the next several years,” Shen writes.
The US Geological Survey (USGS) estimates that the world’s total REE reserves stands at 114 million tonnes, 48.3 per cent of which is located in China.
“In fact, certain industry sources already believe the world is facing an REO shortage. According to Lynas Corp, 2010 estimated global demand for REOs exceeded supply by more than 10,000 tonnes. Our projections indicate an overall supply-demand imbalance from FY’11 through FY’16. Regardless of uncertainties in the medium term, a shortfall of supply is likely to occur in the near term as the world waits for new sources of REOs to come online,” the study states.
Metals experience cycles of price volatility
With all this in mind, are rare earth metals a safe investment choice, especially in the light of world economic transformation and the possible emergence of a new recession?
“I would not characterise rare earths as a “safe” investment choice,” responds Don Bubar, President and CEO, Avalon Rare Metals (AVL), a Canadian mineral development company with a primary focus on the rare metals and minerals.
“Rare earths, like most commodities, experience cycles in supply and demand creating volatility in prices,” he firmly adds.
Taking into consideration investors’ growing interest into REE, accompanied by the great deal of media coverage, thanks to China’s reduction of its exports in a move considered by some as an endeavour to force foreign IT companies to open up factories in China, Bubar believes that most rare earth stocks are development stage companies with the risk of never achieving commercial production and cash flow. However, “demand for rare earths remains very strong sustaining relatively high prices and high investor interest,” he said.
But Andrew Mackillop, former director of information, Arab Engineering Company (AREC), Abu Dhabi, and former expert-policy & programming, DG XVII Energy, European Commission, Brussels, believes that REE investing faces two main risks: declining global economic growth; and increased supply of REE.
“In the short-term, however, REE investing can produce huge returns on investment, but at high risk,” he said.
Other analysts see that despite the sharp decline in the share price of many REE companies listed in the stock markets, the reduction in supply and increasing demand will ultimately achieve significant gains for a few companies that have huge deposits.
According to
moneymorning.com, a free of charge global-investing news service, prices for rare earths skyrocketed over the summer, but have since fallen - though nowhere close to where they were in 2010. That volatility was reflected in the prices of many mining stocks.
For example, one of the most heavily produced of the 17 rare earth metals, lanthanum oxide, was $5 a kilogramme in early 2010. Lanthanum hit $140 a kilogramme in July, then dropped 56 per cent to $62 a kilogramme in November.
The stock of companies like Molycorp Inc (MCP), the second-largest producer of rare earth metals outside of China, went from about $13 in mid-2010 to a peak of $79.16 in May, but has since fallen 58 per cent to about $33.
Despite his optimistic view of the REE companies’ gains in the long term, Jason Hamlin, President of
goldstockbull.com, a gold stocks newsletter, thinks that rare earth metals, compared to monetary metals, such as gold and silver, are known to be less resilient during any deflationary period.
“I am bullish on rare earth miners in the long term, but do not view them as a pure safe haven to the degree of precious metals,” Hamlin said, in an exclusive interview with Alrroya Aleqtissadiya.
“There is quite a bit of industrial demand built into their price and any deflationary collapse will result in lower rare earth metal prices. Monetary metals, such as gold and silver, will likely prove more resilient during any deflationary period,” he added.
Demand exceeds supply
Some sources attribute China’s restrictions of its REE exports to the country’s endeavour to crack down on illegal producers of these materials on one hand, and keep abundant reserves for itself so as to meet the needs of local industry over the period of the next three years, on the other hand. In spite of these conflicting views on the real aim behind China's decision, most industry experts believe that the world is already facing a shortage of REE supplies.
Analysts expect that demand for rare earth metals will exceed supply by up to 50 per cent on an annual basis by the year 2015, that is, more than 200,000 tonnes of rare metals per year. According to "Linus Corp" (LYC), an Australian REE mining company, global demand for rare metals has already exceeded supply by more than 10,000 tonnes.
“The opportunity is huge because more than being “rare” earth metals they are “strategic” or “critical” earth metals,” comments Jason Hamlin, President of
goldstockbull.com.
“They are absolutely necessary in critical applications for energy, national defense and high-tech innovations. However, investors created a mania and inflated the prices to unsustainable levels in early 2011. This was driven by fears of China limiting exports. The prices have since dropped to more reasonable levels and so long as the world economy does not fall apart, I look for higher prices in the near future. But if Greece fails, the EU breaks apart and additional bank failures throw the world economy into a deflationary debt spiral, rare earths will likely suffer, although not to the degree of other less strategic sectors,” he added.
IMCOA estimates that the volume of the REE market is estimated between $5 to 10 billion on an annual basis, while the total market value of products in which rare metals were used is estimated around $4 to 5 trillion.
Huge potential seen in mining sector
With growing fears that the IT market might plunge into a “silent mode”, countries such as the US, Australia, Canada, South Africa and Brazil, especially those that have REE reserves, are betting on the development of its REE mining projects, which is expected to reduce their dependence on China. Some people say Western countries will likely inject large amount of money in this small industry.
According to Bloomberg, mining companies including Molycorp and Lynas Corp are spending at least $6 billion developing mines to meet demand. While Arafura Resources Ltd, which is developing the Nolans Bore mine in Australia’s Northern Territory, plans to raise A$1 billion ($1 billion) by the end of 2012 through supply agreements, strategic alliances, debt and equity. It plans to produce 20,000 tonnes of rare-earth oxide annually by 2014. And the list of projects goes on.
Until those projects come online, David Vinokurov Manager of Investor Relations at Canada’s Stans Energy, believes that the closed contenders to China, would be the former Soviet Union, Canada, and Australia. But the challenge for each country “would be to crack the mineralogical code required to separate each element into oxide form so that these elements can be incorporated into supply chains globally,” he added.
Jason Hamlin, on the other hand, thinks that China will have some competition from Molycorp in California, Lynas in Australia and Great Western Minerals in South Africa.
“But China will remain a critical supplier of these metals, even as others come online,” he said.
Lack of investment funds
Despite its popularity, many analysts believe that the REE market lacks proper investment funds.
“The serious technical problem for investing in REE is that there are almost no specific REE investment vehicles available,” the France-based analyst Andrew Mackillop said in his email to Alrroya Aleqtissadiya.
In order to do so, Mackillop believes that it is necessary to look at each stock separately, one by one, choose the best stocks, and manage them, and that the portfolio created must be managed on a daily or weekly basis, “otherwise the risk of loss will be high,” he warned.
David Vinokurov of Stans Energy says that there is no open market for Rare Metals, such as the LME.
“Rare Earth Metals and Oxides are traded on the spot market, usually in brokered transactions. The best sources for Rare Earth Pricing are Metal Pages, and Asian Metals. These online subscription services post latest transaction pricing. As such no publicly tradable stockpiles exist. There is one firm on the TSX Venture Exchange: Dacha Strategic Metals that holds an inventory of rare metals,” he said.
Don Bubar of Avalon Rare Metals says that despite the availability of several investment funds which focuses specifically on the rare metals, there is room for many more of them.
“There is only a small number of rare earth companies in which the funds could invest; as such the funds may have difficulty in acquiring shares in those companies, without having a significant impact on share price (depending on the size of the position they would like to take). The other side to investment funds holding large positions in shares in a small sector is that if they decide to liquidate their positions, there may be increased volatility, and downside movement in some or all of the shares,” he concluded.
Your comments