Widespread appeals to the World Trade Organization have failed to get China to open up what amounts to a monopoly on rare earth exports, leaving Beijing in control of an increasingly strategic class of industrial commodities.
Many high-tech products use rare earth elements as a crucial ingredient, and China’s stranglehold on its supply has led to protest from a number of U.S. lawmakers hoping to support domestic technology-manufacturing initiatives.
They argue that China’s export restrictions on raw materials discriminate against foreign manufacturers, providing an unfair advantage to Chinese rivals that can effectively source as much rare earth materials as they need.
Rare earths are a group of 17 elements used in industries such as hybrid cars. Although rare earth deposits are actually fairly widespread, China is the largest producer and controls 95% of current global supplies.
Beijing began to control output in recent years, citing resource depletion and environmental degradation but ultimately reserving most supply for internal use.
Officials cite ecological reasons for its reluctance to expand its export quotas to give foreign manufacturers more rare earths. The more rare earths that are mined and processed, Beijing says, the more the landscape is contaminated with exotic pollutants.
While environmental impact should always be a factor to consider for everyone, more cynical analysts point to behind-the-scenes comments from Beijing about using export restrictions to keep prices high and trading partners in line.
No matter what the WTO decides, the world’s appetite for rare earth material will continue to grow. Whether or not the restrictions are eased, rare earth consumers around the world will be affected by the oldest business rule around: supply and demand.
If supply opens up even a little, look to see the first impact on Aluminum Corporation of China (NYSE:ACH), which is subtly working behind the scenes to consolidate the Chinese rare earth industry.
Pulled low by its core aluminum business, ACH has suffered in the last few years and is down 50% from its 52-week high. The stock is still extremely richly valued, at a P/E well above 31, but as far as rare earths go, this is more of a long-term growth prospect than a value play.
As the Chinese side of the rare earth story develops, ACH will become a leading player — not just domestically but all over the world.
Meanwhile, if Beijing keeps balking at international pleas to open up, global miners such as Vale (NYSE:VALE) and BHP Billiton (NYSE:BHP) will have increased incentive to kick their massive dormant rare earth deposits into production.
BHP’s Olympic Dam site alone is big enough to supply the world’s rare earth needs for the next two centuries without sourcing a single ounce from China. The problem is that while these commodities can get pricey, they’re just not as profitable to exploit as traditional copper, silver and gold.
Naturally, this is an opportunity for specialized start-up miners and exploration companies, all of which are eagerly ramping up their smaller assets for production as alternatives to Chinese mines.
Traders can gain exposure either through companies traded on U.S exchanges, such as Molycorp Inc. (NYSE:MCP) and Rare Element Resources (NYSE:REE), or through an ETF, such as Market Vectors’ Rare Earth Strategic Metals (AMEX:REMX).
Companies that depend on rare earth minerals are already on the hunt for alternatives — either new sources of supply or new technologies that reduce or eliminate these materials entirely from their supply-chain needs.
Global manufacturers such as Toyota Motors (NYSE:TM) are not taking China’s domination of this market lying down. They are partnering with upstart producers and researching ways to replace rare earths altogether.