As China Market Corrects...

Rare earth crisis takes center stage

Mon, Jan 10, 2011 - 11:41am

History is replete with seemingly unexpected and catastrophic appearance of events that nobody saw coming. In the old days, we have Biblical prophets who sounded clarion alarms. Now we are past the age of prophecy. As in historical watersheds, we suddenly find ourselves congealed in the volcanic ash of a modern Vesuvius eruption, which leads us to scratch our heads of how in the world did we come to this point with rare earth supply fears? Where were all the environmentalists who are aware of how rare earths are used in clean energy? Where were the technology companies whose profitable patents are dependent upon? Did not the most scholarly minds at our most eminent universities hear the honking of the black swans floating for all to see? I guess not. Our academicians, business leaders and legislators were enjoying their own Rip Van Winkle reveries, while The Chinese were wide awake co-opting the rare earth arena taking control of over 97% of the world’s supply.

It is easy to accuse The Chinese of using rare earth quotas as a form of tactical diplomacy. However, the fault lies not in the stars but in ourselves. We closed our rare earth production facilities years ago-in effect forfeiting the very means of manufacture to a competitor giant who no longer is sleeping. Now they can claim that they are setting up quotas so they could prioritize their own domestic needs. In reality highly profitable technologies are dependent upon the use of the 17 unique elements and China is trying to get a larger share of the mobile, computer and green technologies, especially now as China begins preparing for an economic slowdown from hawkish monetary policies.Since November, China has shown an inverted v top and is now failing at the 50 day moving average for the second time in danger of crashing through the 200 day moving average. Wars are no longer fought on battlefields, they are fought in boardrooms. Now China wants to take advantage of its 20 plus years of being the sole provider of heavy rare earths and monopolize a commodity whose demand is growing rapidly.

China at one point has looked abroad for rare earth projects and may start doing so again. Recent legislation in the U.S. may bring more of a domestic awareness, but it is very late. Many of these mines outside China are years away from development, especially the critical heavy rare earths in which there is no separation facility outside of China.

The United Stated for all its vaunted scientific know-how, with all its battalions of university savants, long ago left the heavy lifting to China. It reminds me of Rome who invited the Visigoths to enter the gates.

We are akin to a nation of Sonny Liston’s who never saw Ali’s knockout punch coming. It may be hindsight to accuse our politicians and our leaders of malfeasance, not understanding the vital need of these elements by our industrial giants in the latest cutting edge technologies such as Apple for their Iphones and I-pads, GE for their wind turbines and GM for their hybrid cars and numerous applications in the US defense industry such as night-vision. Meanwhile, our nation careens blindly seeking the way out of this morass. The age of prophecy is no longer with us where Elijah can guide us out. Sadly, we reenter a race which once was ours to win as the major developers of rare earth technology decades ago and now we find ourselves four to five years behind.

Out of a field of many contestants in the rare earth sector, there are perhaps one or two who are close to the finish line of producing outside China. Investing in rare earth mining is completely different than gold or silver. Rare earths become quite costly during the separation process and very few projects may be economically viable. Although the mania phase is upon us and investors get caught up with all the speculative rare earths promising a dream. I would stick only to the ones who are advanced and have at least a 43-101 compliant feasibility study.In late December, I came out with a report on rare earths as I saw signs of an immediate cut in quotas. Notice the huge volume coming in to rare earths stocks immediately after the export quota reduction. I would wait for a secondary buypoint for long term investors.

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