China USWill 2014 be the year that the Chinese monopoly on rare earths production is broken? As 2013 comes to a close, there are indications that this will indeed be the case. 

Followers of the rare earths market likely came across an article in mid-December quoting the Pentagon saying that it is becoming less dependent on rare earth materials used in certain defense applications such as missile guidance systems.

The Bloomberg story notes that China’s monopoly on REEs — the country produces around 95 percent of the materials used in high-tech applications such as green technologies and smart phones — has been loosened, thus decreasing the risk that supplies to U.S. defense contractors could be disrupted.

“Global market forces are leading to positive changes in rare earth supply chains, and a sufficient supply of most of these materials likely will be available to the defense industrial base,” said the Pentagon report quoted by Bloomberg, noting that the prices of most rare earth oxides and metals have declined roughly 60 percent from highs reached in the summer of 2011.

Factors in the breaking of China’s monopoly include increased supplies of rare earths outside of China, most notably production from Molycorp’s (NYSE:MCP) Mountain Pass Mine in California and Lynas’ (ASX:LYC) production facility in Malaysia, along with materials substituted for rare earths.

Indeed as Stuart Burns, writing in Metal-Miner, argued earlier this year, China’s control over the supply chain of rare earths is now threatened by non-Chinese supply:

“New suppliers like Molycorp and Lynas are already significant-enough producers to influence the price (Molycorp is running at about 7,000 tons per year, compared to China’s current run rate of some 20,000+ tons per year), and with ongoing investment likely to raise this figure, China’s days of having a stranglehold on the market are, if not over, then at least severely limited.”

Of course, this is all dependent on Molycorp and Lynas reaching stated production goals. Both companies have faced roadblocks in this respect, with Molycorp falling behind its stated 15,000 tonnes per year target, and Lynas also admitting output trouble.

Referring specifically to magnets, a large market for rare earth metals, Molycorp spokesman Jim Sims told Bloomberg that Molycorp and Lynas “are increasing their production so there’s a growing diversity of supply for those rare-earth materials that eventually go into the magnets.”

The article also said that while China is the primary source of REEs for the production of magnets, a U.S.-Japanese joint venture “has developed the technology for producing these magnets and is building a facility in Japan,” referring to a JV signed in 2010 between Molycorp and Hitachi (TYO:6501) to produce neodymium-iron-boron (NdFeB) alloys and magnets.

The news from the Pentagon came a few months after Russia announced that it would spend $1 billion to produce rare earths in a bid to reduce its dependence on China. The funds would come from Rostec and and investment company IST Group, which agreed to plow a billion dollars into Russian rare earths production by 2018.

Then there’s the step that Greenland took in October of lifting its moratorium on rare earth and uranium mining. The ban’s removal is likely to attract foreign investors to the Arctic landmass in search of its prized rare earth deposits.

While that could still be a ways off, there is already a sign that Chinese rare earths dominance is under threat. An article last Friday in Xinhua, the Chinese state-owned news agency, said that Chinese rare rare earth miners are being forced to phase out excessive production capacity as overseas suppliers chip away at their dominance in the global market.

Supply of critical metals still a concern

The need for the United States in particular to develop its own rare earths industry has not been lost on lawmakers. Earlier this year the U.S. House of Representatives passed a bill that would speed up mining approvals to ensure that the U.S. has adequate sources of strategic minerals such as rare earths. Locally sourced strategic minerals would break U.S. dependence on other countries, such as China, on importing the materials, used for defense and other applications.

Rare Earth Investing News also reported that the U.S. Department of Defense in its biannual Strategic and Critical Materials 2013 Report on Stockpile Requirements, recommended stockpiling $120.43 million worth of heavy rare earth elements (HREEs).

Indeed, while the Pentagon’s assessment that the risk of supply disruptions for defense contractors needing rare earths is diminishing, due to more non-Chinese production, some observers aren’t ready to relax just yet. Bloomberg quoted a spokesman for a group that represents miners and users of REEs, as saying that the Pentagon’s conclusions are “wishful thinking”.

“We still have no producers of the more defense-critical heavy rare earths, and significant gaps remain in the domestic production of metal, alloy and magnets, all found in our most critical weapons, with no appreciable investment planned to solve the production problem,” said Jeff Green, president of J.A. Green Co. based in Washington.

That would appear to bode well for non-Chinese producers and especially explorers of rare earths, who are hoping to bring more supply of the metals, particularly the more lucrative heavy rare earth elements, to market in competition with the Chinese.

Prices predicted to rise in 2014

Looking at events happening in the Chinese rare earths market, it seems that the stage is being set for a rise in rare earth prices across the board next year, according to the experts.

In an outlook piece, Metal-Pages reported that U.S. rare earth prices are expected to rise in 2014 as demand picks up from a two-year downturn and supplies continue to tighten.

Noting that rare earths prices this year have declined “as consumers live off existing stocks and are reluctant to build forward positions as prices continue to show downside potential,” Metal-Pages quotes trade sources as saying that “ the market is poised to recover going into 2014 as consumer inventories dwindle, excess stocks are sold off and volumes show signs of growth.”

Factoring heavily into the supply side of the equation is the Chinese government’s ongoing policy of cracking down on illegal rare earth mines and smuggling.

“My view is that as Chinese actions to reduce illegal mining, processing and smuggling bears fruit and that consumers exhaust their stockpiles built during uncertain times in last two years, you will see market tighten up and prices rise,” Metal-Pages quoted an executive at one emerging North American producer.

The bottom line for investors?

As the Chinese monopoly on rare earths is reduced through increased production from the only two non-Chinese sources currently, Molycorp and Lynas, and Chinese rare earth prices rise due to continued efforts by the Chinese government to stop illegal rare earth mining, rare earth investors could see higher prices, which in turn would translate into higher stock prices for rare earth companies exploring for the metals. 

That’s exactly what happened in July of this year, when a fresh crackdown involving closures of mines in the Chinese province of Ganzau caused rare earth share prices to rise across the board — with the Market Vectors Rare Earth Strat Met ETF ((NYSE:REMX), a collection of domestic U.S. and foreign rare earth companies, gaining nearly 5 percent in five days against a (then) year-to-date loss of 24.8 percent. Savvy rare earth investors will monitor events in China closely to either time the market for a short-term gain, or buy companies on dips that show promise of becoming a near-term rare earth producer.

Continue to check Rare Earth Investing News in 2014 for news of companies that fit this criteria and publication of catalysts that could move their share prices.

 

Securities Disclosure: I, Andrew Topf, hold no direct investment interest in any company mentioned in this article. 

Related reading:

Rare Earth Stocks Gain on Chinese Mine Closures

House Passes Critical Minerals Act

Greenland Opens Up Rare Earth Mining Opportunities