The dramatic rise in prices for rare earths is a tale of supply and demand. China, which formerly supplied as much as 95 percent of the world’s rare earth supply, has been tightening it’s grip on the export of the metals for the past year and a half. That’s led to incredible surges in demand for rare earths, which are increasingly used in high-tech products from electric cars to iPads and wind turbines.
Lathanium oxide is up 769 percent over the past seven months, and Cerium oxide is up 990 percent, according to Fool.com. Stocks in formerly obscure rare earth mining companies have rocketed up, too, with Molycorp, Inc. (NYSE:MCP) serving as the poster child for the frenzied run-up. Shares in the Colorado-based company have risen more than 200 percent over the past six months.
How long can the party last? That’s the million dollar question. China’s crack-down on rare earth exports could soon come under fire. A cluster of countries including the U.S. filed a raw-materials case with the WTO against China. The case alleges that China’s export quotas are illegal. China argues it’s limiting exports to protect its environment, but the WTO appears to disagree. Although the case applies strictly to raw materials including zinc and coke, if successful, it could open the door to future cases that specifically address China’s rare earth policies.
We’re not there yet, though. China could appeal the WTO’s decision and further draw out the process. If the appeal fails, China could shrug its shoulders and ignore the ruling altogether, coping instead with WTO sanctions. If China complies with the ruling, though, the U.S. and other countries will likely try a similar tact in getting China to open up its rare earth exports. The whole process would start over afresh; new case, new WTO ruling, new appeal, threat of sanctions, etc.
We’re not talking about a process that happens overnight, but if China does decide to open back up rare earth exports of its own volition during Q3 2011, we’ll likely see a dramatic plunge in prices for the metals. I, for one, think this is unlikely. Especially since news broke recently that China’s building a handful of enormous storage facilities to house rare earth strategic reserves. Actions speak louder than words, and China looks determined to build up a stockpile of the precious goods no matter what the cost.
Analysts at Morgan Stanley and JPMorgan agree. Both companies upgraded shares in Molycorp this week on China’s rare earth export quotes stating that the disruption “could cause supply outside of China to fall by as much as 40 percent.” “It all adds up, in Morgan Stanley’s thinking, to a stock worth $63 a share minimum – and perhaps as much as $140 a share,” writes Rich Smith at Fool.com.
China’s Great Dam on rare earths may not hold forever. Cracks are showing on the surface, but I don’t think we’ve seen the end to the run-up in prices yet. So long as rare earth mines outside of China struggle to move into production, growing demand for the metals is going to keep pushing up prices. Once the dam breaks, though, you’re going to want to make sure you’re on high ground.
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Tags: MCP, rare earths
