Interest in rare earths is starting to heat up once again, and it is something you should keep on your radar. China's Baotou Steel has announced its intention to start up the world's first rare earths exchange. The move is expected to increase the liquidity and visibility of these valuable elements while reducing their trading costs.
So named because they were hard to get in the 18th and 19th century, these once obscure elements have suddenly become the focus of several converging trends in the global economy, as they are the key ingredient of magnets. There are 17 in all, divided into light (cerium, Ce, lanthanum, La, and neodymium, Nd) and heavy (dysprosium, Dy, terbium, Tb, and europium, Eu). Since the beginning of the year, the price of 99% pure cerium oxide has rocketed by 650% to $11.50 a pound.
It turns out that you can't build a hybrid or electric car, a wind turbine, thin film solar, LED's, high performance batteries, or a cell phone without these elements. One Prius uses 25 kilograms of the stuff. You also can't fight a modern war without rare earths, being essential for radar, missile guidance systems, navigation, and night vision goggles.
That's where things get interesting. China now produces 97% of the world's rare earth supplies, much of it coming from small mines operating by criminal gangs where it is safe to say, concerns about environmental damage are nil. In 2009, China announced that would start restricting rare earth exports, possibly banning several, it is thought, in order to force foreigners to buy more of their downstream electronic products.
Such a ban was temporarily enforced against Japan last fall, when they arrested a hapless Chinese fisherman (spy) who drifted into disputed territorial waters. The ban was lifted when the man was released. Thus, rare earths made their debut at a Chinese political weapon. Similar restrictions could be enforced against the rest of us as early as 2012.
The world market for rare earths is tiny now, amounting to only $4 billion a year. But Toyota intends on doubling its production of Priuses from 1 million to 2 million units in the near future, while China and South Korea want to boost their combined electric and hybrid production by 1 million units by the end of next year. Nissan is ramping up global manufacturing of its all electric Leaf to 500,000 by next year.
America was once the world's largest producer of these elements, until it was undercut on prices by China (see chart below), and all US production ceased. The threatened Chinese supply squeeze has prompted a group of investors to reopen Molycorp's (MCP) Mountain Pass California mine, a jackrabbit ridden, rattlesnake infested pit an hour southwest of Las Vegas. The mine was the world's largest producer of cerium and neodymium, and provided the europium that was used to produce the first color televisions.
Last August, Molycorp raised $500 million through an IPO to reopen the mine and a nearby refinery at $15 a share. It briefly dipped to $12.50 where I got everybody in, and then soared to $79, making it the top performing IPO for 2010. Further fuel was added to the fire with the launch of the first rare earth ETF, Market Vectors Rare Earths/Strategic Metals (REMX) in November.
Now congress wants to get involved, proposing a rare earths strategic stockpile for the military, and offering subsidized loans to fund it. Remember what that did for oil? The price has already started with cerium doubling to $4/pound since 2007, and neodymium up 500% to $23/pound during the same period.
So it might be wise to use the next generalized equity sell off to dip your toe back into the rare earths pool. The best way to get involved is through the miners themselves, which involves an added element of risk. Take a look at the established players, which include Molycorp (MCP), Avalon Rare Metals (AVL), Rare Element Resources (REE), and Lynas Corp (LYSCF).
From the Diary of a Mad Hedge Fund Trader.