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China Halts Rare Earth...

Only a Fool would Sell Here

Written by Brian Hicks
Posted September 6, 2011

China is halting production of rare earths at three major mines in a move that will tighten supply even more...  And it's unknown when production will resume.

According to Reuters:

China, which produces about 97 percent of the world's supplies of the 17 minerals, has cited resource depletion and environmental degradation concerns as reasons for a nationwide crackdown on its rare earths sector.

 It has capped production at 93,800 tonnes and exports at 30,184 tonnes, saying it cannot sustain the sort of output levels demanded by foreign customers.

 Demand for rare earths is expected to double in the next five years, but Chinese output growth is likely to be much slower, and major importing countries have toyed with the idea of taking legal action.

China's dominant role in global production has created incentives for miners to flout rules, especially as global demand surges, with illegal production and smuggling still rampant.

 

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“Rare earth stocks should be sold here.  They’re terrible investments here,” was the word in the grapevine in recent days.

But only a fool would sell here…

As long as demand outweighs supply, prices will continue to rise.  It’s simple economics.

Yes, rare earth stocks have taken a beating recently.  But what hasn’t taken a beating?

It’s not like there’s a huge new rare earth find.  And it’s not as if rare earth prices have come down.  The only reason investors have left the sector is the same reason they’ve left other sectors.  The market came down, scared all the weak hands… and here we are.

Supply is still tight because supply outside China is tight. Demand is exploding.  And rare earth prices are expected to rise even more over the next two years until new supply comes online.

“We simply cannot produce enough for our customers,” said Molycorp’s CEO. 

General Electric is being pressured with higher rare earth prices.  Even Philips Lighting CEO Ed Crawford sees issues over “unprecedented” shortages in global supply of phosphors (depend on rare earths) that has lead to 300% price increases. 

Prices are going up on just about everything… even hard disk drives.  And they’ll continue to go up.  Look, even under the best-case scenarios, China will have a stronghold on the rare earth market for the next few years.  Investors that buy now are likely to see big profits down the road, especially if China chokes off more supply.

Eventually, when more rare earth supply comes online, rare earths may be a short.  But not now...  Sell nothing.  Hold everything.  We didn’t put together two 40-for-40 stock runs following the advice of other people.  We put it together with the patience and investing know-how of investors that know what they’re doing.

You’d be a fool to sell rare earths any time soon.

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