Sell Gold--Buy Samarium! Chinese exports limits drive rare earth metals prices sky high!

Yttrium, europium, and neodymium: do they sound familiar? It's not likely you'll remember them any more clearly by their other names, but just in case, they are Y, Eu, and Nd. I'll give you a hint: think chemistry class. Well?

Okay, so that's not helping: you can admit it--you flunked chemistry, and actually thought that yttrium, europium, and neodymium were three of the 58 moons of Jupiter, which means you flunked astronomy, too. No sweat, because unless your bathroom is wall-papered with the Periodic Table of the Elements, you can be forgiven.

Yttrium, europium, and neodymium are three of the 17 so-called "rare earth elements." We have all been exposed to them through those periodic tables securely tacked to the wall of our high school science classrooms, but the relevance of these elements is actually much more significant than we might realize, and even more significant than it was when we were in high school. If you have ever seen the F-22, if used an iPhone, Blackberry, or any number of other "smart" devices, or if you receive electricity from a wind generator, you are actually exposed to these elements more commonly than you think, and benefiting from their unique properties. Rare earth elements (or "metals") are vital to today's new "smart" and "green" industries because of their role in enabling miniaturization and increasing the efficiency of electromagnetic generators and motors.

Of course, while these minerals allow for all kinds of so-called "green" devices, nothing in life is free, and so, not surprisingly, mining for these rare earth metals happens to be rather deleterious to, you guessed it, the environment. Therefore, also not surprisingly, countries with little or no environmental regulations have a huge advantage over those like the United States which do have such restrictions. So, not surprisingly, China is the world's leading producer of theses 17 rare earth elements.

Rare earth metals are not really that rare (its a chemistry name, not an economics name), but they are hard to extract from the earth because they do not appear as stand-alone metals. This Reuters article summarizes the importance of rare earth metals, particularly in the above-mentioned "clean" technologies. From the article:

"What are the rare earths used in? Rechargeable batteries for electric and hybrid cars, advanced ceramics, magnets for electric car motors, computers, DVD players, wind turbines, catalysts in cars and oil refineries, computer monitors, televisions, lighting, lasers, fiber optics, glass polishing, superconductors, and weapons."

And those last two, superconductors and weapons, have the focused attention of the Pentagon, to put it mildly. Superconductors are a category of special materials capable of allowing electrical flow with zero resistance when the materials are cooled to extremely low temperatures. And I mean extremely low temperatures; a "high temperature" superconductor functions at the temperature of liquid nitrogen, which boils at -321 degrees Fahrenheit. Superconductors occupy an ever increasing field in engineering, particularly for the purposes of defense (and offense), as well as power distribution, and anything having to do with supermagnets (ie, high speed trains). Weapons are, of course, one of the United States' biggest export classes and an obsession of the American military-industrial complex. Various weapons from the Pentagon's "smart bombs" to modern fighter planes cannot happen without certain rare earth metals. From this WSJ article, "China Hold on Metals Worries Washington:"

"The fins that steer precision bombs, for instance, have samarium-cobalt permanent magnet motors. The motors that run the rudder and tail fins on a high-performance fighter aircraft like the Air Force F-22 Raptor are built with lightweight, rare-earth magnets. Neodymium is found in the solid-state lasers used to designate targets."

And that is just to name a few applications. You can bet that there are dozens of classified applications about which we have no knowledge. This is exactly why the Pentagon is quite "worried" about China's dominance of the rare earth market. Advanced technology can't do a nation much good if it can't actually be produced, and the Pentagon's advanced applications can't be produced if the major material supplier refuses to supply the materials.

"Major materials supplier" is truly the only title appropriate for China when it comes to rare earth metals. Monopolistic supplier is nearly accurate, but off by a mere 3%. According to the Wall Street Journal, China supplies 97% of the world's supply of rare earth elements. Beijing has a near monopoly on the very materials the Pentagon needs. However, this is by no means invincible monopoly, of course, because the US and other large nations (particularly, Russia) could have themselves been the world's leading suppliers if they would have bothered to mine for the materials domestically. For a long list of reasons, the top ones of which are environmental, the US instead depends on buying rare earth metals from China. This plan works as long as China goes along.

But guess what?

China's not going along anymore.

Demand for rare metal metals increases everyday as new applications are discovered and "clean" technology becomes more important (and governmentally subsidized), and demand is up nearly 20% per year for the last several years. For price stability, increased demand must be met with increased supply, but China is in control of the supply, and China is not stupid. Remember, China calls the shots on 97% of the world's supply of an increasingly sought-after commodity class. Everyone wants it, and only China has it: you don't need an economist to figure this one out.

Indeed, you don't have to be an economist, but apparently, the defense center of the world's most advanced nation and largest economy, the US Pentagon, could not foresee this obvious result. They just couldn't see it coming! In mid-June, the Chinese government announced that exports for the latter half of this year would not be increasing. Notice, that is exports, not production, which means that China is either stockpiling or utilizing the supply. Furthermore, China will not increasing exports of rare earth elements in 2011, either. With announcements like this from the world's near-monopolistic supplier of a commodity class, you don't have to wait long to see an impact in the market. Within the same day, in fact, that China confirmed rumors of the supply squeeze, the rare earth market reacted. We are truly seeing the impact of this announcement on availability reflected in price, right now. Check out what has happened to rare earth metal prices since July:

Europium oxide: up 14% ($540/kg to $615/kg)

Neodymium: up 80% (from $50/kg to $90/kg)

Yttrium: up 84% ($45/kg to $83/kg)

Samarium: up 152% ($21/kg to $53/kg)

WOW! And we thought gold and silver were doing well!

Check these moves out graphically, in order left to right as listed above:


Now we can see why users and consumers, particularly the Pentagon, are "concerned." And so, of course, now Congress has to get involved: besides the House sociopathically declaring China "currency devaluator", some potentially abnormally non-short-sighted legislation passed the House last week. The Rare Earths and Critical Materials Revitalization Act of 2010 aims to jumpstart the domestic rare earth metals by (of course!) subsidizing banks through loan-backing of domestic exploration and mining ventures, among other incentives. I'll withhold further commentary on the bill until I have a chance to review it. For some reason, I just think I'm going to find some machinations in it, but maybe "this time its different," and Congressional intervention will actually help.

Why am I so skeptical? Watch this video from Bloomberg. It was Congress, itself under the "Free-Trade-will-save-us-all" mantra of the (post-likewise globalist Bush 41) Clinton Administration, that allowed China to enter the rare earth metals market in such a massive way. Despite the objections of many, in 1995, Congress approved the purchase of Indiana-based Magnaquench, the company that was at that time responsible for meeting 80% of the military's rare earth needs for laser-guided weapons. Congress "imposed" the condition that the Chinese company maintain the Magnaquench Indiana facilities, but by 1993, they were shuttered. One former Magnaquench employee recounts the now-Chinese Magnaquench as telling employees that "you guys can work for nothing, we're still going to move it."

Furthermore, with a few years of the Chinese entrance to the market, US-based Molycorp, owner of the largest non-Chinese rare earth metals mine in the world, was forced to close its massive Mountain Pass mine in the Mojave of California due to the company's inability to compete with Chinese prices. Now, after 15 years and several folds in price, Congress is getting involved again. I can see Congress passing this latest act, only to then authorize the sale of more US mines to Chinese companies five years from now: we pay for the development, the banks get the interest, and then Congress authorizes the purchase by China. (After all, China is going to start demanding some kind of collateral against this massive amount of US debt they hold, but I digress. That's so cynical, I know, isn't this what "free trade" is all about?)

So, at least until the Senate passes the Rare Metals Act of 2010, the top performer in metals this year won't be silver or gold---it will be samarium! Rare earths will likely continue to outperform even after, as China has already declined to increase exports for 2011, and mining and exploration operations take years to get off the ground. Act fast, and you too might have a chance to make millions with the rare earth bubble!

{Investment alert: I'm being sarcastic! Someone's gonna make millions, but not me! Commodities trading is for the hardcore pro's, and the pro's alone. I'll stick to gold, silver and copper pennies, and maybe a little Swissy. :) }