Are Rare Earth Price Increases Inevitable?

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It would seem everyone is taking an interest in rare earth metals these days. Not so long ago a casual observer could have been forgiven for thinking they were called rare earths because it was rare for anyone to take the slightest interest in them. Now there are conferences and blog sites and lobby groups all either warning of imminent shortages or crying foul at Chinese trade practices limiting supplies. It is true to say demand has risen dramatically over the last decade as new rare earth dependent technologies have become commonplace. At the same time, supplies have been limited by the Chinese authorities worried as reserves have become gradually depleted and anxious that rare earth metals produced in China should go to develop high technology industries within China rather than overseas.

Now banks and investors outside of the industries immediately involved are becoming interested in the sector as a recent Reuters article reports. Rob Edwards, managing director responsible for steel, metals and mining research at the Russian Renaissance Capital bank, told Reuters in an interview. “It reminds me of a small version of the platinum group metals (PGMs) industry, where PGMs were a pretty mundane metal … but then the world pushed very heavily for widespread use of catalytic converters.” The bank’s interest is plain to see therefore, they are seeing price rises on the way.

The reason western world production of rare earth metals dwindled and the Chinese came to dominate the market was because western producers could not compete with the low prices widespread availability of Chinese material created. The Chinese cost of production was way below western mines and their plentiful supply left no place for western mines. Investors’ interest today is therefore a realization that if demand is increasing by 15-20% per year as Reuters suggests and supply is constrained by the Chinese desire to husband their limited resources, western suppliers will only become viable with higher prices. Projects that look marginal today therefore hold the potential to be very profitable a few years down the line, as prices have to increase. Strangely consumers are not voicing widespread concern about this; their principal issue has been one of security of supply rather than price. Maybe because for most applications the rare earth metal represents a small (although admittedly irreplaceable) portion of the overall cost. But surely if supply is being constrained and demand is continuing to rise there is only one direction prices will go, indeed has to go if funding is going to be raised to bring these projects on stream. Unfortunately this combination of constrained supply, rising demand and relative indifference to price rises will inevitably result in price rises as consumers out bid each other for supplies.  A Rare Earth’s ETF anyone?

–Stuart Burns

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