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The Truth About Rare Earth Supply and Demand

Written By Brian Hicks

Posted November 5, 2010

Mention rare earths these days, and you might be met with a confused expression by those frothing over how “the bubble” popped on short-lived Chinese quotas, and the bearish headline assaults that are more fiction than fact…

The idea that supply outstrips demand is ridiculous, at best.

China wants to build 330GW worth of wind generators. They’d need 59,000 tons of neodymium for a project of that scale. That’s more than the country’s entire annual output.

Essentially, they’d be cleaning out supply, leaving nothing for the rest of the world.

Without neodymium, the production of a whole host of technology including medical devices like magnetic resonance imaging (MRI) machines would be kaput for everybody else.

How can a fake bubble pop?

How are we to believe a rare earth bubble exists?

Wake up. What we have here is not a rare earth bubble. What we have here is a rare earth supply problem.

One that cannot satisfy the demand of China, let alone the rest of the world…

There are reports of China’s plans to set up a strategic reserve of 10 rare metals to stabilize supply and keep prices afloat, alluding to the Middle Kingdom’s growing supply concern.

And they’re looking to eventually outlaw all rare earth exports in the next 10 years, according to the Ministry of Commerce.

Plus, Chinese demand is on pace to consume some 60% of the world’s total rare earth supply, leaving 40% of the world’s rare earths to be shared by everyone else.

Truth is, China is still showing a reluctance to export even a fraction of what the world really needs. So while they will still export the materials, industries will be faced with a bottleneck in supply.

China has already shown her hand. And the rest of the world needs to divest itself of Chinese supply dependence — not because China is running out; but because the Chinese have a monopoly and have demonstrated they’ll use that monopoly as a weapon in foreign relations.

The Pentagon turns a blind eye

According to Bloomberg, the U.S. Department of Defense believes that China’s “dominance in the world’s market of rare-earth minerals does not pose a threat to US national security. The report, conducted by the Pentagon’s Office of Industrial Policy, noted that rising prices and supply uncertainties are spurring private investment in new mining operations outside of China that will help meet the US military’s needs, which require less than 5 percent of its rare-earth consumption.”

That’s interesting…

The problem with the report is that it doesn’t examine the supply issue thoroughly enough.

Military hardware problems are just the tip of the iceberg here. The report fails to understand that battery and magnet makers, for example, will be left with a shortfall. The Pentagon is being naïve. (As if we should be surprised…)

Earlier this year, China said it wanted to produce a million electric cars every year.

The supply needed for that lofty goal is enormous. It’d require some 10 tons of terbium, 50 tons of dysprosium, and a thousand metric tons of lanthanum every year. And that’s on top of the rare earth demand for 330 GW of wind turbine manufacture I mentioned earlier…

That means, in a 10 year period, China would use 59,000 metric tons of neodymium, 1,000 tons of terbium, and 3,000 tons of dysprosium.

That order alone means foreign exports will be reduced further.

As the bears will tell you, though, there’s no rare earth problem… But that couldn’t be further from the truth.

The truth about rare earth

Right now, the rare earth market is valued around $1.5 billion.

That could easily triple, if not quadruple, on China’s demand and its reversion to higher pricing.

We have no choice but to play by China’s rules until we reestablish working mines. The bad news is that new production outside of China is at least five to seven years away…

Because while earth elements are not exactly “rare,” what is rare is the number of mines that can produce them and turn a profit.

China’s behavior has forced us to look for alternative sources with mines planned for California, Australia, Canada, and a very promising region in Greenland.

“The Chinese are only exporting 30,000 tons of material to the rest of the world right now and the rest of the world needs 50,000 tons of this material a year… We don’t see the fundamentals of this changing anytime in the near future. The demand is like I’ve never seen it in 25 years in this business,” a Molycorp exec said recently.

There is no bubble. The rare earth bull market is alive and well. 

Check out this video to find out how you can profit from it.

Stay Ahead of the Curve,

Ian L. Cooper
Wealth Daily