China’s recent decision to limit exports of rare earths considered essential for U.S. defense systems has caused a global government backlash and is a driving force behind higher prices for these elements and for the stocks of companies engaged in their exploration.
Industry analysts say the cause for this multi-national anxiety is simple. China already controls more than 95 percent of the market for the 17 elements that comprise rare earths.
Any move that restricts supply will, by definition, have an impact on global prices for these elements used in guidance systems, chemical detectors and precision guided munitions, among many other defense applications.
Concern about China’s restrictions recently reached a fever pitch. The World Trade Organization went so far as to condemn China, saying the world’s most populous nation has no legal right to impose export restrictions on natural resources.
That report did not specifically mention the rare earths situation, but the two fields are closely related, analysts say, adding they expect the United States to file a separate complaint regarding rare earths.
Officially, China says it will maintain its rare-earth export restrictions, but pledged to “cooperate” more with key trading partners. How that would translate into sales for Japan and the United States remains unclear.
This much is known, however. Saying it needs rare earths to meet its own industrial growth, China slashed export quotas by nearly 70 percent to about 8,000 tons for the second half of 2010.
Combined with surging demand for electronics, the move caused rare earth prices to skyrocket. For instance, Reuters reports the value of rare earths for the first 11 months of 2010, the last period for which statistics are available, rose more than 171 percent to $630.5 million.
And Bloomberg has reported the price of neodymium used in the Predator Unmanned Aerial Vehicle has increased more than four-fold to $88.5 a kilogram. China also imposed a 25 percent tariff on neodymium, a two-thirds increase from the previous tariff.
Meanwhile, the Pentagon no longer has a domestic rare earth supply. That is a dramatic reversal from the late 1990s, when the U.S. ranked as a global leader in the field.
All that changed dramatically with the closing of the sole U.S. mine at Mountain Pass in southern California. It closed in 2002, largely based on environmental concerns.
Now, however, the company that owns the mine, Molycorp Inc., says it could begin production again by the end of this year, though many observers don’t expect that to occur until 2012.
Nevertheless, Molycorp’s progress amid China’s cutbacks has served as a major catalyst affecting publicly traded rare earth firms. In fact, since issuing stock to the public last July, the value of Molycorp’s shares has risen by more than 340 percent to roughly $44.50.
Several other rare earths companies, particularly those based in mining-friendly Canada, also have seen dramatic increases in the prices of their shares, observers note.
Consider Quest Rare Minerals. Traded on the Venture section of the Toronto Stock Exchange, Quest shares command roughly $6, a 150 percent increase since May 2010. An exploration firm with no production, Quest has a huge rare-earth tract at Strange Lake on the Quebec/Labrador border.
Rare Element Resources also has seen the value of its stock skyrocket since last summer, when earlier Chinese restrictions received media attention. Traded on the American Stock Exchange, Rare Element’s stock is up more than 350 percent in the period.
Analysts say this company’s exploration success would add another key domestic rare-earth supply. That’s because the company was created specifically to tap into huge deposits at Bear Lodge in Wyoming, one of the nation’s friendlier mining states.
In part because it is traded on a U.S. exchange, the stock of Avalon Rare Metals Inc. jumped more than 275 percent since last May. Avalon is exploring rare-earth properties at Thor Lake in Canada’s Northwest Territories.
Finally, Neo Material Technologies Inc., a producer, processor and developer of rare-earth powders and engineered materials, also has enjoyed enormous shareholder interest. That also reflects Neo Material’s rare-earth legacy.
The company traces its roots to 1982, when General Motors established a joint venture with Sumitomo Special Metals and China’s Academy of Sciences to produce powders used in rare-earth magnets.
The company has reported six consecutive quarters of revenue increases. Since last summer, its stock has soared 140 percent, and the shares have been added to an index that tracks the stocks of leading companies listed on the Toronto Stock Exchange.