They are used in all kinds of products, from wind turbines to Apple's (AAPL) iPhones to disk drives, though many consumers and investors are unaware of them or their importance. They are the rare earth metals, 17 rare earth elements which are actually not rare, but because of their geochemical properties, they are dispersed throughout the earth. This means that the concentrated deposits that can be accessed for mining are few.
The rare earth minerals feature such obscure elements as Scandium, which is used in an aluminum alloy for aerospace products, Lanthanum, which is used in battery electrodes, and Lutetium, which is used in high refractive index glass. The uses for the rare earth minerals are often for lasers, computer memories, rare earth magnets, and other diverse uses as important components in many products. China produces roughly 97 percent of the world’s supply of rare earth minerals.
Rare Earth Elements Periodic Chart Source: The Journal of Energy Security
Although the tensions over rare earth mineral production have been around for years, it has escalated in recent years. Recently the US, Japan and the European Union filed a complaint with the World Trade Organization (WTO) which accuses China of exercising overly-tight restrictions on exports of these vital raw materials. Such practices hold down the prices for China’s domestic manufacturers. A year earlier, the WTO had already ruled that China had broken trade rules by restricting exports on the metals, a ruling which China challenged.
China sets the export quota for these rare earth minerals, which was 33, 353.7 tons in 2011, though it shipped barely more than half of that quota, its records show. Last year saw China export 18,586 tons, with the ongoing supply pressures causing prices to rise to four times the cost over the last two years.
China, as expected, has vigorously defended itself in the matter with a response to the latest accusations. Xinhua, the state news agency, said that exploitation of the elements has led to an undervaluation of their prices. Also, China has pointed out that mining the rare earth elements causes pollution and the production of some radioactive waste, so that must be controlled.
Advanced And Green Technologies
One tack the complainants are taking is to emphasize the necessity of the rare earth minerals in the production of both advanced and green technologies. Not only are high-tech products, but environmentally sound ones are cited as being hurt by China’s export controls. For the US’ part, this complaint can also be seen in light of the political atmosphere which has pushed President Obama to challenge China on everything from trade practices to the valuation of the Chinese currency, the yuan. Whether this is just election year rhetoric or a more lasting US position will be clearer as we go through this very political year.
Market Vectors Rare Earth ETF 1 Year Chart Source: Yahoo! Finance
Investing In Rare Earth
Regardless of how investors view the dispute, China’s position in the rare earth market is a strong one. Automakers such as Toyota Motors (TM) are trying to find alternative components for its electric motors for its hybrid cars, and other industries are trying to find alternative to the rare earth minerals as raw materials as well. Others are looking to Russia, which has a large supply which potentially can be mined for commercial use. Still, China is currently positioned to remain the rare earth mineral supplier to the world barring dramatic change. One recent development, whether in response pressures from overseas, is that the Chinese government is now encouraging rare earth miners to step up production to meet growing demand.
There are a number of stocks for investors who want to play the rare earth theme. China Rare Earth Metals (0769.HK), with a $4.2 billion market cap is one. Molycorp (MCP) is one of the best known, and is ironically a US-based company. Rare Element Resources (REE) and Avalon Rare Metals (AVL) are some other names. For ETF exposure, Market Vectors Rare Earth/Strategic Metals (REMX) is a common play. Investors should note that the rare earth sector often experiences volatility, as REMX demonstrated last year. The stocks have the possibility of rising should the demand outweigh the export restrictions and the miners follow through with greater production. Investors should monitor this sector closely before committing to it.
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