China’s Plan to Dominate Rare Earth Metals

You know all those electric cars and “clean energy” sources we’ll be riding in and using to wean ourselves off fossil fuels? They won’t be worth bupkis without rare earth metals — neodymium, dysprosium, terbium and other elements essential to green energy technologies like wind turbines and the power system of the Toyota Prius.

Now for the bad news: Worldwide demand for rare earths — 15 different elements — is expected to exceed supply by some 40,000 tonnes per year in about three to five years.

China Is the OPEC of Rare Earth Metals

And here’s the really bad news — China accounts for 97 percent of global production (139,000 metric tonnes of material in 2008) and about 60 percent of consumption of rare earths.

But despite rising production, China is consuming more of its own rare earths all the time, so it’s exporting less.

Now, China plans to curb its exports of the metals. China has announced that export quotas for the first half of 2009 are being reduced by approximately 34 percent over the same period last year.

China accounts for 97 percent of global rare earth metals production.
China accounts for 97 percent of global rare earth metals production.

And down the road, China is studying a proposal to ban exports of one of the most critical of the rare earths, dysprosium, by 2015.

I believe this is part of a 1-2-3 plan China has to dominate the world’s rare-earths market for decades to come, and with it, the energy technology for the 21st century.

The plan goes like this …

#1) Slash exports. In each of the last three years, China has reduced the amount of rare earths that can be exported. This year’s quota should be the smallest yet, and plans for further restrictions are in the works.

#2) Force manufacturers that use rare earths to move to China.  Oh, sure, companies that want rare earths from China can get them. They just have to move their production facilities to China! Beijing officials are forcing global manufacturers to move factories to China by limiting the availability of rare earths for export, according to a report in the New York Times.

#3) Buy up other rare earth resources around the world. Two Australian companies, Lynas Corp. and Arafura Resources, are planning to open mines in the next couple years that have combined production equal to a quarter of annual global production of rare earth metals.

But then the global financial markets collapsed last year. Both companies lost their financing. Guess who stepped in with new financing? The Chinese, that’s who!

Mining companies wholly owned by the Chinese government showed up with cash needed to finish the construction of both companies’ mines and ore processing factories. In exchange, the Chinese companies received 51.7 percent of Lynas and 25 percent of Arafura.

That’s not all. Remember when Chinese oil company CNOOC tried to buy U.S.-based Unocal a few years ago? One thing Unocal owns is the Mountain Pass mine, a potentially rich rare earth mine in California.

China’s Unocal bid fell through, and Chevron bought the company instead. Who shows up at Chevron’s doorstep but the Chinese, cash in hand, asking Chevron to sell them the Mountain Pass mine separately from Unocal.

Instead, Chevron sold the mine to Molycorp Minerals, a private American group, which plans to reopen the mine by 2012.

The Problem with Prius

But China has other options. It is going to enforce a new rare earths environmental policy that will involve shutting down 80 rare earths facilities to improve efficiencies. Naturally, this will cut supply … and likely raise prices.

Why is China going through all this trouble? You CAN’T make a Prius without the rare earths neodymium and lanthanum. Each electric Prius motor requires 2.2 pounds of neodymium, and each battery uses 22 to 33 pounds of lanthanum.

Terbium and dysprosium are also used in small amounts. Since Toyota plans to double the Prius’ fuel economy, each car will require MORE rare earths. And Toyota plans on selling 1 million Priuses a year by 2012 and 2 million to 3 million by 2014.

Without the rare earth metals lanthanum and neodymium, there would be no Toyota Prius battery.
Without the rare earth metals lanthanum and neodymium, there would be no Toyota Prius battery.

Other hybrid/electric cars made by other manufacturers use rare earths in differing amounts — vehicles including the popular Ford Escape Hybrid and Honda Insight. It all adds up to tremendous demand. No wonder the Chinese are trying to corner the market!

The real threat is to Japan, which uses rare earths in the manufacturing of high tech electronics, flat screen televisions, mobile phones, hybrid cars and more. Japan may take its case to the World Trade Organization — a fat load of good that will do them.

How China’s Plans Could Go Wrong

I remember when every liar standing on top of a uranium mine told me why uranium was going to the moon. Like a fool, I believed them. So I’m not going to go yipping after rare earths just yet. After all, they’re rare, but that doesn’t mean more can’t be found. Not only in Australia, but also in Canada, the United States and Latin America.

On the other hand, supply should be tight for years to come, for the simple fact that it takes years to bring a mine online.

Can You Chase the Rare Earths Rush? Should You?

One of the rare-earth properties that should become a mine sooner rather than later is Thor Lake in Canada’s Northwest Territories. It is owned by Avalon Rare Metals (AVL on the TSX in Canada; AVARF on the OTC or pink sheets in the U.S.). Thor Lake is making progress on its pre-feasibility study.

However, before you buy it, take a look at the chart …

Avalon Rare Metals is already blasting off on a rocket ride
Source: eSignal

This one has already left the launch pad. However, there will be pullbacks, and they may be buying opportunities. I’ll be watching Avalon — and other potential rare earth plays — for my Red-Hot Global Small Caps service.

What Is China Going to Buy Next?

Alternately, if rare earths miners are too expensive, you could go after some of the other companies that China is buying. For example, the Chinese are very interested in Canada’s oil sands. It’s probably because they see the oil sands as another energy source for the 21st century.

On Monday, Athabasca Oil Sands Corp. announced that it was selling a 60 percent working interest in its MacKay River and Dover oil sands projects for C$1.9 billion to PetroChina International, a wholly-owned subsidiary of PetroChina. In other words, the Chinese government.

Will China pursue oil sands the way it has pursued rare earths? Maybe. And if it does, it’s likely that the next company it buys will be one of the holdings of the Claymore/SWM Canadian Energy Income Fund (ENY). That’s a fund I’d buy on a pullback.

Whatever you do, do your own due diligence and make sure what you buy is right for you.

Yours for trading profits,

Sean



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