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Rare Earth Mania And China/US Trade Spat 2.0?

We doubt that many have heard of it, or know what it’s used for, but the price of Praseodymium-Neodymium (sold in oxide form) has been on a tear, up 43% ytd.


Neodymium and Praseodymium, collectively known as NdPr, are two of the family of seventeen rare earth elements (REEs). The price of several other REEs, like Terbium – Ticker SHRATBOX (really) and also used in very powerful permanent magnets - have been rising too (up 36% ytd). 

Unfortunately for the rest of the world, especially the US, China has a monopoly on the rare earths market with 85-90% of global production.

REEs are strategically important due to their (small but critical) applications in products used for the defense and technology sectors - including today’s mainstay of human existence, the mobile phone. China’s dominance arose from undercutting almost every other mining and processing player in the decades prior to its WTO entry.

The current story behind the higher prices is that China is getting serious (again) about the environmental impact of REE mining, and is making renewed efforts to curb significant levels of illegal production. On Monday, managing director of Australian-based rare earth producer, Lynas Corp (who just happened to note how her company is “highly leveraged to any increase in price for NdPr”) commented.

“Demand has always been strong, growth for the magnetic materials will increase as there is greater adoption, particularly for electric vehicles…(and) wind turbines. The second thing, however is that the Chinese central government has been very active over the last six months in ensuring that a lot of what had been announced recently, has actually been enforced on the ground…they have inspected a lot of plants to ensure that they have proper documentation for their raw materials and that has helped to eliminate illegal supply.”

(4Q17 conference call here)

The environmental impact in China is certainly horrendous (see BBC report, “The dystopian lake filled by the world’s tech lust” here).  Sometimes described as “hell on earth” or “the worst place on earth”, this is one view of the Baotou toxic lake, 20 minutes from Inner Mongolia’s largest city with 2.5 million inhabitants.

Okay but…

Obviously, the most important issue these days is what does it all mean for equity prices? Higher rare earth prices are beginning to have an impact. This is the chart for the industry behemoth, China Northern Rare Earth Group.

Closer to home, the price of the VanEck Rare Earth/Strategic Metals ETF has also been moving higher, even though some of holdings are plays on non-REE strategic metals, like moly and titanium.

With a market cap of $62m and small/mid cap constituents, things could get interesting if REE prices enter a sustained bull phase.

Adding insult to injury for its strategic interests, the last remaining rare earth mine in the United States, Mountain Pass in California, has recently been sold to a consortium including Shenghe Resources Holding, which has alleged ties to the Chinese Government. 

Two days ago, Michael Silver, CEO of advanced materials manufacturer, American Elements Corp., met with Trump’s chief strategist, Steve Bannon, and Chief of Staff, Reince Priebus, at the White House.  In “This CEO Wants Trump to Nationalize the Only Rare-Earth Mine in America”, Bloomberg reported.

“The mine should be converted to a national laboratory ‘dedicated to rebuilding America’s rare-earth mining industry so the world knows it is safe to build high-tech manufacturing plants in the U.S.,’ Silver said…he’s proposing the U.S. government apply the Takings Clause of the 5th Amendment and acquire Mountain Pass by eminent domain.”

If anybody’s thinking that surging rare earth prices, China/US tensions and soul-searching about how the US could have let China dominate the global supply of such critical materials, sounds familiar… they’d be correct. It feels a bit like 2010 when there was a sudden mania followed by a  collapse in rare earth stock prices. Below is the Lynas Corp chart during 2010-12.

In the end, China backed down on substantial cuts to export quotas, which it had justified on environmental grounds. In part, this was due to WTO intervention at the behest of western countries led by the US.

The NdPr price peaked in Summer 2011 and never really recovered (chart below). Some analysts speculated whether the resolution of the rare earths dispute, peak in the gold price and the beginning of the ramp in Chinese gold imports through Hong Kong were linked. There was no evidence to support the assertion.

This time around, we have no idea whether the situation in rare earths will come close to the fun that was had in 2011, however, we remain mindful of the quote attributed to Deng Xiaoping that: “There is oil in the Middle East, but there is rare earth in China.”