Bull Alert: The 2020 Rare Earths déjà vu all over again.
Call it “The China Syndrome” as many recall how the country sent shockwaves through the rare earths world in 2010 when it (then as a producer of ~97% of the world’s rare earths) slashed global exports, causing prices to jump almost 10 times for certain rare earths. This price bubble collapsed in 2014 after a ruling by the World Trade Organization against China, but by that time the damage had been done. A global industry had all but collapsed and lowest cost production and industry dominance was now Chinese.
Is 2020 déjà vu all over again? On December 1, 2020, China implemented its Export Control Law, which is going to have impact on the export of rare earths from China, Inc. China arguably has the world’s most complete rare earth industry chain, which means in order to make full use of the rare earths mined in various countries, they must come to China for processing. China produces approximately 80% of the world’s rare earths but can only supply about 30% of the input.
China is not the enemy in a global rare earths trade “war”, but at the very least now, the global supplier is not a “friendly”. As we know, rare earths are crucial in military technology, from the manufacture of F-35 fighter jets, nuclear submarines, armoured vehicles and night vision goggles to name a few.
And however you are reading this column on your electronic device of choice, you are relying on one or more rare earths. Our electrical devices use some of the 17 rare earths, but the increased demand for electric vehicles and permanent magnet motors means outside of the military demand for heavy rare earths, that ever present demand for rare earths is only going up.
We have known about this for some time, but only recently has the world started to move on the supply side issue. In 2017, the Mountain Pass mine in the US resumed production and is now undergoing an optimization plan for the production of rare earth oxides. In May 2019, US senators introduced legislation aimed at encouraging the development of domestic rare earth supplies, while the U.S. Department of Defense asked for additional federal funds to bolster domestic production of rare earths. In April 2020, the Pentagon awarded funding to Australian miner Lynas Corp. (ASX: LYC) and MP Materials (NYSE: MP) for rare earth separation facilities in Texas and California, respectively.
Also, in part due to ongoing trade frictions between the US and China, on September 30, 2020, U.S. President Donald Trump signed an executive order declaring a national emergency in the mining industry which was also followed up with funding to MP Materials for US Defense Department funding towards domestic processing for light rare earths.
Unfortunately, to change China’s overwhelming global dominance of rare earths supply, it is going to take many years. There is no shortcut, as investment decisions must be made, facilities designed and built and economically minable rare earths must be sourced. The Saskatchewan Research Council announced in late August the development of Canada’s first rare earths processing facility, expected to be operational in late 2022, but this is just a proverbial “drop in the bucket” in a new global supply.
This does however potentially point to one way that the initial economic problem of timely development may be solved. The US government has already made their intentions clear with industry support. The government of Russia, where substantial rare earths reserves are located, also announced their plan in August 2020 to invest up to $1.5 billion to become self-sufficient in rare earths by 2025 and become a net exporter after 2026. Other countries around the world are also getting into the mix – better late than never.
What does this mean for investors? Check out the InvestorChannel rare earths watchlist for the 20 top rare earths companies in the public market being followed by the partners from the Technology Metals Show. But know this – similar to the past oil boom(s) when independent companies (and countries) challenged the dominance of OPEC, the rare earths sector is a place where investor profits are going to be made.
Frederick Kozak is a Professional Engineer with extensive oil and gas, and international business experience and has more than 25 years involved in capital markets ... <Read more about Frederick Kozak>