Finally Finding a Groove
The news of China’s increased export allowances immediately hit names like Molycorp, Rare Element Resources and Lynas. Makes sense. If there’s more of it on the market, the greater supply on persistent demand means the price of rare-earth oxides sinks, and margins for the miners shrink.
This is a case where investors might want to take a step back and look at the even-bigger picture, however.
In a “normal” environment, more supply would indeed mean lower rare-earth prices. We’ve never really seen a normal rare-earth element market, though. We’ve basically seen one state-controlled supplier, and we’ve witnessed that supplier swing from flooding the market with too much of the stuff in the early 2000s (which is why Molycorp’s Mountain Pass mine closed in the first place) to unfairly limiting supply in 2010 (and pushing prices through the roof) to not putting anywhere near enough of it on the market last year, and once again destroying prices … albeit for different reasons.
Surely by now China has figured out it’s better off going with the flow instead of going against the grain.
Though the knee-jerk reaction implies otherwise, it’s not likely that China’s new ramped-up rare-earth quotas are going to undermine the market to the point of killing non-Chinese producers. Indeed, we still need non-Chinese producers to become fully operational, if only to provide some price stability. Mostly, though, we need these miners to become fully operational because there’s a market waiting to buy their goods. And the market’s willing to pay a nice price for them.
Translation: While everyone else is selling these rare-earth mining stocks, now might be the time to do a very Buffett-like thing and take a contrarian stance — buy ’em when nobody else wants ’em.
China’s not looking to trip itself up again. In fact, it wants the same thing Molycorp and Canada’s Rare Element Resources Ltd. want: just enough supply to keep prices high, yet still affordable. In that light, non-Chinese miners actually win from China’s slightly higher quotas, too.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.