This Could Send Rare Earth Metal Prices Soaring in 2016

Rare Earth MetalsChinese Pollution Bullish for Rare Earth Metals

China’s pollution is becoming a political liability and rare earth metals are both one of its causes and its solution.

China has long outgrown its “emerging market” designation. By all respects, it’s now a world power, challenging the supremacy of the West on every level, thanks to the remarkable development of its manufacturing sector, which is now spawning a more “value-added” creative capability. Slower growth projections and the record levels of pollution, meanwhile, are proving the old Chinese adage that a crisis is an opportunity. Indeed, both phenomena are stimulating hi-tech development, which will generate new economic opportunities, thanks to China’s dominance in the rare earths sector.

Rare earth metals constitute a special niche in the commodities market, which, after attracting some attention a few years ago, have faded into the background. However, rare earths offer investors something to ponder, even if they choose not to risk part of their savings on these. While the commodities market remains a bit of a disaster, rare earths are a sub-species. While they don’t deviate much from the performance of other raw materials, they do respond to different market and geopolitical conditions.

Rare earths include 17 chemical elements in the periodic table that are essential to the development and production of electronic equipment, special alloys, batteries, magnets, and special glass (the kind used in modern TV screens and smartphones).

The term “rare” doesn’t refer to their availability; indeed, they are abundant. However, in nature, they are highly dispersed and intermingled with other metals in minerals often containing radioactive elements, such as thorium and uranium. For these reasons, they’re difficult to extract or separate both in technical and in sociopolitical terms.

Here’s the Situation

China is the largest producer of rare earths in the world. Altogether, the country produces more than 95,000 tons a year of rare earths, accounting for 95% of world production and 60% of world reserves. This reality has helped China establish a virtual monopoly over the materials. This concerns Western countries due to the ever-growing demand for rare earths from manufacturers of hi-tech products; consequently, the West is dependent on Beijing. (Source: “Why rare-earth mining in the West is a bust,High Country News, June 16, 2015.)

An onslaught of rare earth mining discoveries, especially in Canada, Australia, and the United States, appear to have calmed the market, but in reality, none of these projects is even close to production and few will ever make it to that stage. Eventually, rare earth values will rise and the surviving companies will thrive.

The rare earths that count most, based on the fact that their prices have been the only ones to increase lately, are dysprosium and terbium, incidentally needed in everything from smartphones to missile guidance systems, wind turbine generators, and solar panels. Indeed, so-called “green” technology has generated a strong demand for rare earths, whose extraction and processing, ironically, have far less-than-green consequences.

In fact, in Inner Mongolia, the region of China most associated with rare earth production and mining, there is an artificial lake full of toxic sludge (radioactive waste) resulting from rare earth use. Baotou, the largest industrial city of the region, hosts one of the main rare earth facilities, important for the production of neodymium, used for making lasers and the production of lightweight, but strong magnets applied to consumer electronics, such as in-ear headphones, microphones, and hard drives. (Source: “The dystopian lake filled by the world’s tech lust,” BBC, April 2, 2015.)

China Dominating Rare Earth Metals

Interestingly, China’s domination in the market for rare earths is due less to geology than it is to its willingness to absorb the social and environmental risks that other nations avoid. Baotou’s toxic waste represents the visual evidence of that “sacrifice.”

Technology companies urge us to continuously update our smartphone or tablet, generating demand. Until now, the demand has had seemingly infinite capacity, but environmental constraints, should China ever decide to adopt these, would limit the availability of rare earths, tightening supply and lifting prices, while making the search for deposits elsewhere more important.

Being the world’s largest producer, China has tried to impose increasingly stringent limits on exports, blocking the market and favoring domestic companies that have to pay between five percent and 10% of profits to the Inland Revenue of China. The ever more frequent high pollution days in Beijing and many other parts of China have raised the importance of tackling pollution to the point the government is increasingly considering it a political risk.

Indeed, pollution and the environment has become a leading political issue. In China, the environment is not simply a “global warming” or CO2 issue (CO2 hardly being a toxic gas). China has real pollutants to tackle, from smog to soot.

The Air Quality Index (AQI), which is based on pollutants in the air with negative effects to our health, including nitrogen oxide, carbon monoxide, sulfur compounds, and any number of particulates, can easily reach 200 in Beijing, with average levels in the mid 100s. (Source: “Beijing red alert for smog has a silver lining,” CBC, December 10, 2015.) Consider that major North American cities like New York City or Toronto typically range in the low twenties or lesser.

China’s government has often promised to confront the “Airpocalypse,” as it is being dubbed. Chinese citizens are adamant about Beijing taking action, such that the issue can no longer be buried under the carpet—or behind the smog. The problem could even spill over into violent protest. The Academy of Social Sciences published a report declaring Beijing to be “barely livable” for humans.

Pollution Big Problem for Chinese Government

Beijing has even resorted to media censorship to contain the problem. Indeed, pollution is directly related to the Chinese economy, the weight of investment in heavy industry, and the lack of a proper opposition to challenge the various levels of government. The issue of pollution, therefore, extends beyond the environment and raises questions about the Chinese system’s long-term survival and its ability to reform or adapt.

China’s pollution is caused by coal, as it uses some 50% of the world’s total production. More than 70% of China’s energy derives from coal-generated power. Coal has fueled China’s tremendous economic growth, but if such growth levels are to be sustained, energy production must change. The Chinese government has already started to increase its nuclear energy generation capacity, expected to quadruple by 2030.

Clean air efforts based on greater use of electric vehicles and alternative energy sources should, paradoxically, increase demand for rare earths because all such technologies depend on these metals, affecting their production and distribution. China may have to import rare earths to meet demand and devote more resources to innovation, because Chinese citizens want cleaner air to match their higher standards of living.

China has cracked down on illegal rare earth mining, signaling that it is starting to evaluate the risk of lax regulation, as environmental and socioeconomic risks could translate to social unrest, fueling a “Chinese spring.” China will certainly experience increased internal demand for green technology solutions, even if its rare earth supply will be lower, driven by the very same environmental concerns.

China has priced almost all competitors out of the rare earths market, but internal and external demand will increase as supplies become scarcer. As backwards as it may seem, China’s pollution is, therefore, good for rare earth values.

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