Let’s say you own products that satisfy 98% of the world’s demand for them. How would you handle such power?
- Responsibly, knowing that it’s critical to economies and people everywhere? Or…
- Irresponsibly, holding the world hostage by raising the price as much as you want and raking in the profits?
China is doing the latter.
The country’s mines currently supply 98% of the global demand for rare earth elements. And with that kind of market share, you might be tempted to become greedy.
Really greedy.[ad#Google Adsense]Reuters reported on Tuesday that the Chinese raised the price for rare earth metals past the $100,000 per ton mark – the first time ever that the price per ton has vaulted into the six-figure range.
According to Reuters, that’s an almost nine-fold increase from a year ago, and up an astonishing $34,000 per ton in the last month alone.
This is a growing problem – one that isn’t going away, either…
China’s Triple-Digit Shocker
In itself, China’s announcement on Tuesday is nothing new. The country has raised rare earth prices by $10,000 per month since last July (when a ton of the metal cost a “bargain” price of $14,405).
At the same time, China has also been reducing its exports of rare earth elements since last year. Why? Because its ultimate goal is to keep all the rare earths it produces.
Nevertheless, when I saw the price breach triple-digit territory, I couldn’t help revisit the subject, as it’s obviously shocked China’s rare earth industry customers.
Unfortunately, they have few options available in the short term, other than to pay China’s exorbitant asking price.
In the long term, however…
The Colorado Challenge to China
As commodity guru Rick Rule likes to say, “The cure for high prices is high prices.”
And over the longer term, it won’t matter what China does. It’s a fairly safe bet that other rare earth producers around the world will be pulling out all the stops to increase production at existing mines, or hasten the development of their mines if they haven’t already.
Not too surprisingly, shares of rare earth companies outside of China’s stranglehold soared on the news.
In the article I just published on the rare earth industry, for example, I mentioned development-stage rare earth producer Molycorp, Inc. (NYSE: MCP). Shares of the Colorado-based company shot up by $7.89 (17.6%) on Tuesday.
Right now, Molycorp is processing stockpiled ore from a previous mining operation on site at an annual 3,000-ton rate. And Mark Smith, Molycorp’s President and CEO, is probably laughing all the way to the bank over China’s announcement. He had this to say in a recent news release:
“Our ability to produce 3,000 tons per year from our current facility is allowing us to benefit from today’s dramatically higher rare earth prices. We’re in a great position to capture this increased revenue now, even as we construct our new, state-of-the-art processing facility and develop our integrated mine-to-magnets manufacturing supply chain.
“In 2010, China exported approximately 30,258 metric tons, compared to demand outside of China in 2010 of about 55,000 tons.
“This gap in supply and demand is expected to worsen in 2011, as independent forecasts predict that full-year 2011 export quotas will total less than 30,000 metric tons, compared to total demand outside of China of about 60,000 metric tons. That points to a high likelihood of shortages of many rare earth products.”
Later this year, Molycorp plans to start a new wave of rare earth ore mining. The company expects to hike production to 19,050 metric tons in 2012 and 40,000 metric tons in 2013.
Investors with a long-term outlook (we’re talking two years here) would do well to consider Molycorp shares, especially on big market pullbacks.
With China’s stranglehold on rare earths and a widening supply and demand gap, companies in rare earth elements could be a great investment for the next several years as Molycorp and others try to fill it.
— David Fessler[ad#jack p.s.]
Source: Investment U