Investors Should Take a Long View on Rare Earth Metals

Since China announced a cut in its export quota for Rare Earth Metals in 2012, there has been considerable activity across the world in finding alternative supplies.

Rare Earth Metals are important in the manufacture of many consumer electronics, such as mobile phones and PCs, and in green technology items, such as solar panels, wind turbines and electric or hybrid vehicles as well as for the defence and aircraft industries.

China’s action as the world’s main supplier prompted concern about security of supplies and about protecting industries in many developed economies already struggling with the consequences of the global financial crisis that began in 2008.

There have been three main points of focus in the search for alternative sources. These have been exploration, R & D to find alternative methods that do not depend on the use of Rare Earth Metals and Recycling from existing products when they have reached the end of their lives.

There has been progress on all three fronts with potentially substantial Rare Earth deposits identified in Greenland, Alaska and Canada, on the sea bed off Japan and in Russia in addition to already known sources in Africa, Australia and the USA.

In the US plans are developing for re-opening processing of Rare Earths at mines that were deemed uneconomic when compared to the cheaper sources from China. This has been because Rare Earth Metals have to be extracted from other metal ores and are generally found in small quantities, a complex and messy process that has also raised concerns about the environment around the mines. However, one Australian mining company, Lynas, has already invested heavily in building and starting up a new processing plant in Malaysia which is predicted to become the world’s largest supplier outside China by mid 2013.

Innovations that perhaps would have not emerged without the Chinese action have also included a partnership between a Japanese company and the Jamaican government to extract Rare Earths from the tailings (sludge) left from the Jamaican bauxite mines.

Japan, which had been buying 50% of its supplies from China, has been at the forefront of initiatives to find alternative supplies. This has been exacerbated by a long running dispute between the two countries over the ownership of a number of small islands that flared up again in the last couple of years.

Japan has reached agreements with mining companies in India and Eastern Europe on joint projects for processing supplies but its car companies have also been pioneers of the recycling effort because of the importance of its manufacture of hybrid and electric vehicles.

The country has recently announced that Rare Earth Metal recycling from the batteries of these vehicles has been achieved, a year after the project was first announced by Honda. The process was able to extract more than 80% of the metals from the batteries with a purity of 99%.

The question many analysts are asking is what all this will do to the prices of these metals as an attractive investment.

These prices have been very volatile over the last couple of years and the fear is that the prices will drop with all these new sources being identified.

However, there are a number of considerations that investors should bear in mind. They include the changing nature of geopolitics, such as the Chinese-Japanese island dispute and the desire by countries in the current economic climate to ensure stability of supply for their own home industries. The current global shift to multiple centres of economic gravity will also play its part.

Another important consideration is that China is widely believed to be wishing to develop its economy from mine through to finished product and at the same time to close down illegal mining and clean up its environment, eventually leading to fewer Rare Earth Metals being available to export.

However, it will take a considerable time before the mines and processing operations are set up that can take advantage of the new deposits that have been identified. Similarly recycling is still in its infancy, in both Japan and in Europe.

Investors are advised to stay aware of the geopolitics and development progress of both new processing and recycling initiatives and to do what investors are generally advised to do – which is not to think in terms of short term gains but of the longer term while prices continue to be volatile.

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