What To Make Of The Rare Earths Bubble


The computer screen your eyes lock onto to read this article relies on a spate of rare earth metals in order to power each pixel.  Turn on your cell phone to make a call and the battery relies on rare earths in order to connect one conductor to another.  The lights flickering overhead may depend on rare earths to power the fluorescent diodes that create light from darkness.  With all the various uses for rare earths, ranging from airplane parts to solar grids, it's hard to imagine that this commodity may be on the downward slide of a bubble and unable to offer investors any value within the immediate future.  The bankruptcy of the US' largest rare-earths producer, Molycorp, seems to suggest rare earths' time in the sun has passed.  What should investors know about putting their money into rare earths at a time of such a steep decline and fall?

End of An Era

Four years ago, investors could purchase Molycorp stock for just under eighty dollars at the height of the rare-earths boom.  Today, that same stock sells for a mere nine cents.  The invocation of Chapter 11 has left Molycorp in the dust in yet another story of meteoric rise paired with meteoric collapse.  Five years ago, investors surged to put their money into rare earths as the commodity offered the hopes of upward gain without a peak in sight.  The vast majority of supply came out of China, who aggressively choked off available quantities in order to keep prices sky-high and the industry awash in profits.  Just as fast as the good times came, however, the Chinese bowed to international pressure and opened up their markets to release a deluge of new rare earths that caused prices to take a swan dive.  Aggressive industrial recycling programs returned a large quantity of rare earths back into the supply chain, making it possible for businesses to deal with middlemen instead of buying wholesale.  Molycorp took the brunt of the damage in the United States, with the Australian sister company Lynas appears like a good partner in bankruptcy.  Yet despite the shortcomings of the industry, demand for these earths stays steady.  Indeed, it's less a problem with the commodity than a problem with profiting from moving earths from supplier to producer.

What's In A Name

You'd likely not recognize any of the seventeen types of rare earths unless you work as an electrical engineer, as they aren't in the conversation for economics quite like gold or silver or iron.  Terbium, for instance, has little use except in the cathode tubes of liquid-crystal televisions.  By contrast, neodymium earths have such broad applications thanks to their magnetic properties and capability to withstand heat that they enjoyed an astronomic rise in value: in 2009, this metal cost just $9 per pound, while it retails today for over $100.  Such rapid growth represented cat nip for investors across the world: neodymium, like almost all other rare earths, climbed to peak value by 2011 before falling back down.  Each one of the seventeen metals responded to the same market shift when the Chinese exporters opened up their stockpiles after a World Trade Organization agreement put enough pressure on the Chinese to ease up their tightfisted ways.  When China lost both the WTO case and the appeal, it spelled the end of the good times, as well as the end of Molycorp.  Yet the bankruptcy of Molycorp, and the potential bankruptcy of Lynas, puts the power back in China's hands.

Back To A Bubble

Deng Xiaoping, the premiere of China between 1978 and 1992 famously stated that China would control rare earths just like the Middle East controlled oil.  Despite the WTO decision, the Chinese Ministry of Commerce has isolated the mining and distribution of rare earths to just six separate state-owned companies, effectively reducing the availability of these earths despite export numbers continuing to rise.  While the WTO decision imposes mandates on export volume, it doesn't specify to whom China must export.  That makes them capable of mimicking the infamous economic sanctions levied against Japan in 2010 after disputes over the Sengoku Islands pushed both nations nearly to the brink of armed conflict.  Japan has since stated that they will increase their rare earths imports by over 50% from other nations; Germany's Angela Merkel echoed the sentiment on a business trip to Mongolia in search of new rare earths to tap.  Such emerging market are, however, years away at best.  If China can get black-market rare earth smuggling under control, furthermore, it can eliminate the undercutting practice that minimizes the profits from legitimate businesses such as Molycorp.  China and corruption go hand in hand, however, making it unlikely that smuggling will dip in the near future.  Even so, the factors that created the original rare earths bubble appear to be cycling back, unintentionally building new criteria for diminished supply. 

Who's In The Driver's Seat?

The collapse of the rare earths market appears to be nothing but bad news on the surface -- especially for Molycorp.  With the collapse of the bubble, however, comes a restriction of available supply without any diminishment of demand, similar to the process by which 2014's decreasing oil prices forced a number of drillers out of business and subsequently caused oil to rebound.  It's difficult to know when rare earths hit exact rock bottom, making this investment a thorny proposition for investors who prefer less risk in their portfolio.  With the declining prices, however, the temptation to buy low should bring in a number of investors at the same time that the limitations of distribution create higher value.  Whether you prefer to wait for an uptick or buy in today, rare earths represent solid growth potential on the commodities market at a time when many other metals have much less of a bright future.

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