We have written in prior posts how rare earths are essential to our new way of life since they are used to manufacture essential electronic components that are in high demand. We also shared how in 2011, China was putting some export restriction on these materials since they currently produce most of them. They also set the expectation of requiring companies that use these materials to set up manufacturing facilities there. But I just recently stumbled upon a Wall Street Journal article, China’s Rare Earths Are Not So Rare. It explains how this strategy may backfire and cause the opposite effect.
The article highlights the fact that China has not been able to consolidate rare-earth producers, filling this strategic industry with wildcat miners that are operating below the central government’s radar. The price differentials promote a black market and the smuggling of these rare earth materials to other countries. It is also too risky for big companies that require a steady supply of these materials. The high prices on rare earths due to export restrictions have also triggered new billion dollar investments outside of China, such as Lynas Corp in Australia and Molycorp in the US. This supply uncertainty has also pushed companies to look for alternatives to these materials, and governments are offering subsidies to develop non-rare-earth-dependent substitute technologies.
But this approach has its risks since a possibility exists that the market will become flooded with excess global supply coupled with decreasing demand for rare earth materials (due the low demand of alternative energies such as solar and wind power). This strategy might create an environment of low prices causing a reduction in new supply-side investments.
This article helps to underscore the dynamics and the forces playing in the rare-earths markets. I think producers have to carefully measure the demand of these materials as well as global supply expectations in order to avoid any excessive price swings in the market. Strictly from a mining perspective, it corroborates the likelihood that we will continue seeing big investments in rare-earth mining and the continued exploration of new substitute materials.
The prediction that rare earths might no longer be rare may one day come to pass.
Limiting Rare Earths Promote Substitution and Alternative Supplies
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