China's stranglehold on rare metals

China's proposals for a new world currency to replace the dollar have drawn a lot of attention in recent weeks. But the Americans should be more concerned about another development that's largely been ignored. It seems that after 15 years of fighting tooth and claw, China is now the world's dominant supplier of an obscure group of minerals called rare earth metals.

Why should that worry America? Because these metals are vital to US industry. You'll find them in almost every consumer technology staple from iPods to BlackBerrys and flat-screen televisions. You'll also find them in wind turbines, solar panels and the super-magnets that kickstart car engines. With 90% of the world's rare earth metals now under China's control, it could soon be impossible to produce a wind turbine or electric vehicle without Beijing's blessing. "The world has to wake up and start thinking of this group of elements as the 'technology metals', without which there will be no technology," says metals analyst Jack Lifton.

The Americans will be kicking themselves for letting this happen. Until the mid- 1980s, the US was a major producer of rare earth metals, mining a huge deposit in the Mojave Desert. In fact, about 42% of worldwide reserves of rare earth ores still lie outside China. But with cheap labour and huge funding from Beijing, the Chinese were able to invest heavily in new mines and processing plants during the 1980s, building a formidable network of rare earth metals research and development laboratories that worked to undercut China's rivals.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

A devastating price war followed. Soon, producers from America to South Africa found it was no longer economic to keep mining. By the early 2000s, most rare earth producers outside China had gone out of business. Yet China continues to cut off exports, leading to a dramatic shift in the last three years from oversupply to demand shortages. With no significant mining capacity left outside China, some experts fear the country will engineer a supply crunch to suit its own industries. That's sending a wave of panic through industries that rely on these metals. With global demand for rare earths growing at 10% a year, there is an urgent need to find deposits outside China, says Hard Asset Investors' Tom Vulcan. Toyota, which needs lanthanum to produce metal hydride batteries for its hybrid cars, has rushed to secure supplies in Vietnam and Malaysia. Car makers are scouring Europe for scrap. A number of mines in Canada and Australia that were forced out of business during the price wars have reopened (see below).

Few in the industry expect a significant new supply to make it to market. There's hope the Hoidas Lake project in north Canada can supply about 10% of the $1bn in rare earths consumed by the US each year. But any serious threat and China will slash prices and put everyone out of business again, says Leo Lewis in The Times. As China cuts its exports to divert reserves to build domestic solar panels and modernise its army, the price of these non-exchange-traded metals will escalate. China has only allocated 38,000 tons of rare earths for export this year, yet demand from Japan alone is expected to be 40,000 tons this year. It looks as though rare earth metals could join oil as an emerging-market economic weapon.

Rare earth metals:a risky play on the trend

Of all the rare earth metals miners operating outside China, Lynas Corp (ASX:LYC) is closest to production. Mining the Mount Weld project inWestern Australia, the group plans to double production as it moves into the second phase of mining. Lynas is also constructing a plant to process the ore in Malaysia. MountWeld has the world's richest rare earth deposit, with substantial deposits of lanthanum, cerium and neodymium (all crucial to the electronics, green energy and auto industries), which will produce some 1.1 million tonnes of rare earth oxides. That's enough to supply up to 20% of the global market for 30 years, reckons Lynas.The rare earths basket price slid from US$14.12 a kilogram in September to about $10.25 in February. But with Lynas's operating costs at around $5.75 a kilogram, the mine "remains a robust proposition," says the Sydney Morning Herald.

You should be clear that this is a small, risky mining play, so don't invest your pension fund in it.The path to digging up these rare metals has not been smooth after a disagreement involving a $95m issue of convertible bonds, the group had to stall its $214m mining project in MountWeld.The shares fell from $1.40 to $0.10. But having agreed terms with bondholders this week, they have soared and Lynas is now free to complete its project. As John Kingsdale of Energy Investment Strategies noted before the impasse: "If the situation works out, Lynas shares could be worth many multiples of the current price by year end."