Are Global Metal Wars Looming, rare Earths are About to Be a Lot More Rare?

Are Global Metal Wars Looming, rare Earths are About to Be a Lot More Rare?

By Daniel McGroarty

Terbium, Erbium, Lanthanum, Lithium, Cobalt, Cerium: This partial list is a high-tech hodge-podge of Rare Earths and Rare Metals increasingly making their way into headlines and legislative hearings. The challenge now, for policy-makers and the interested public, is to know which Rare Metals loom largest in our ongoing economic development, and whether we can ensure access to a steady supply.

Given the stakes, there's no better time to learn the new language of resource scarcity. Strictly speaking, the Rare Earths - subject of concern due to China's current near-monopoly - include Scandium, Yttrium and the 15 so-called Lanthanides, Elements 59 through 71 on the Periodic Table. Rare Metals is the broader category, including Rare Earths but ranging well beyond.

Many of the Rare Metals are by-products or co-products of base metals: Rhenium - used in jet-fighter engines, stealth aircraft and geo-synch satellites - comes from copper and molybdenum; Indium, from zinc; Tellurium, from copper again - these latter two essential to flat panel displays and photovoltaic solar cells. All told, the Rare Metals include more than 30 materials that - added together - account for a miniscule 0.005 percent of all metals presently mined.

As a result, the Rare Metals are also often called "Minor Metals," a designation that is increasingly misleading as a catch-all category today. To borrow from human physiology, zinc is a "minor metal" in the human body, averaging two grams in the average male, or about 3/1000ths of total body weight. But a zinc deficiency contributes to dwarfism, and can short-circuit genetic transfer and normal cell activity. Imagine your iPod minus a few flecks of Rare Metals. In our modern economy, as in the human body, shortage of a "minor metal" can produce major consequences.

And because so many Rare Metals derive from more heavily-mined metals, access to base metals will be re-valued as well.

Take copper, for instance: The base metal from which we derive Rare Metals like Rhenium and Tellurium. Today, 30 percent of copper consumed in the U.S. annually is produced by American mines. To be sure, we live in a globalized economy; if the U.S. were to simply stop mining copper today, there are known copper prospects in a number of countries. We might turn to Chile, Peru and the Philippines for increased copper supply.

Then again, world demand might be met via development of known copper reserves in Russia, Angola, Afghanistan, DRC Congo or China - including decisions taken in Beijing to exploit copper reserves in the Tibet Autonomous Region. And there is copper in Pakistan and Iran. With the exception of Pakistan - rated "Partly Free" - all of the latter group are rated "Not Free" by the current Freedom House index. So while the world copper market does offer choices, we may well find many of those choices unpalatable from a policy perspective.

The same is true for other Rare Metals. Cobalt is concentrated in the Democratic Republic of Congo, subject to conflict metals prohibitions under U.S. law, and in Zambia, where President Rupiah Banda just attended the opening of a new copper-cobalt mine owned by a Chinese consortium. Or take Lithium - specifically, Lithium Ion batteries, touted as an electric-car alternative to Rare Earths-rich NiMH batteries: Bolivia, which commands vast Lithium reserves, is now partnering with Iran to develop Lithium mines. Whether Iran has decided to enter the supply-chain for hybrid vehicles, or is interested in Tritium - an isotope synthesized from Lithium and used to detonate nuclear weapons - is anyone's guess.

We're used to a world where the geological roulette wheel has conferred fortunes - and political power - on nations that sit atop vast deposits of decayed vegetation and animal matter. We need to extrapolate from oil to the next-generation materials that will drive our evolving economy. The 21st Century will see a new crop of Resource Superpowers: With metal and mineral abundance will come economic wealth - and geo-political power. Access to these metals and minerals will re-order our politics and define future conflicts.

How is the U.S. preparing for this new world of resource competition? In many instances, the U.S. is home to known reserves of Rare Metals or the base metals from which they are derived, but bringing new mines through permitting and into production continues to take seven to ten years - ranking the U.S. dead last among 25 mining nations. Micro-markets in the Rare Metals may never send strong enough signals to incentivize large, long-term investments in mining infrastructure.

We'll either face shortages and periodic high-tech bottlenecks, or we'll be dependent on high-risk or hostile nations for our sources of supply. Neither option is attractive. Can Washington policy-makers find time to address this crisis before it comes to a boil? And assuming they do, can they find a way to encourage metals production with the least disruption to market forces that drive innovation, or will the policy cure prove worse than the disease?

This much we know: We cannot maintain our modern economy without a steady supply of metals and minerals. Those we do not possess here at home, we must source from other countries. But those we possess but choose not to produce perpetuate a needless foreign dependence - leverage other nations may use to America's disadvantage. It's time we recognized that resource security is not simply an economic necessity, but a critical American strategic objective.

Daniel McGroarty, principal of Carmot Strategic Group, an issues management firm in Washington, D.C., served in senior positions in the White House and at the Department of Defense.

Interest in rare earths is starting to heat up once again, and it is something you should keep on your radar. China’s Baotou Steel has announced its intention to start up the world’s first rare earths exchange. The move is expected to increase the liquidity and visibility of these valuable elements while reducing their trading costs.

So named because they were hard to get in the 18th and 19th century, these once obscure elements have suddenly become the focus of several converging trends in the global economy, as they are the key ingredient of magnets. There are 17 in all, divided into light (cerium, Ce, lanthanum, La, and neodymium, Nd) and heavy (dysprosium, Dy, terbium, Tb, and europium, Eu). Since the beginning of the year, the price of 99% pure cerium oxide has rocketed by 650% to $11.50 a pound.

It turns out that you can’t build a hybrid or electric car, a wind turbine, thin film solar, LED’s, high performance batteries, or a cell phone without these elements. One Prius uses 25 kilograms of the stuff. You also can’t fight a modern war without rare earths, being essential for radar, missile guidance systems, navigation, and night vision goggles.

That’s where things get interesting. China now produces 97% of the world’s rare earth supplies, much of it coming from small mines operating by criminal gangs where it is safe to say, concerns about environmental damage are nil. In 2009, China announced that would start restricting rare earth exports, possibly banning several, it is thought, in order to force foreigners to buy more of their downstream electronic products.

Such a ban was temporarily enforced against Japan last fall, when they arrested a hapless Chinese fisherman (spy) who drifted into disputed territorial waters. The ban was lifted when the man was released. Thus, rare earths made their debut at a Chinese political weapon. Similar restrictions could be enforced against the rest of us as early as 2012.

The world market for rare earths is tiny now, amounting to only $4 billion a year. But Toyota intends on doubling its production of Priuses from 1 million to 2 million units in the near future, while China and South Korea want to boost their combined electric and hybrid production by 1 million units by the end of next year. Nissan is ramping up global manufacturing of its all electric Leaf to 500,000 by next year.

America was once the world’s largest producer of these elements, until it was undercut on prices by China (see chart below), and all US production ceased. The threatened Chinese supply squeeze has prompted a group of investors to reopen Molycorp’s (MCP) Mountain Pass California mine, a jackrabbit ridden, rattlesnake infested pit an hour southwest of Las Vegas. The mine was the world’s largest producer of cerium and neodymium, and provided the europium that was used to produce the first color televisions.

Last August, Molycorp raised $500 million through an IPO to reopen the mine and a nearby refinery at $15 a share. It briefly dipped to $12.50 where I got everybody in, and then soared to $79, making it the top performing IPO for 2010. Further fuel was added to the fire with the launch of the first rare earth ETF, Market Vectors Rare Earths/Strategic Metals (REMX) in November.

Now congress wants to get involved, proposing a rare earths strategic stockpile for the military, and offering subsidized loans to fund it. Remember what that did for oil? The price has already started with cerium doubling to $4/pound since 2007, and neodymium up 500% to $23/pound during the same period.

So it might be wise to use the next generalized equity sell off to dip your toe back into the rare earths pool. The best way to get involved is through the miners themselves, which involves an added element of risk. Take a look at the established players, which include Molycorp (MCP), Avalon Rare Metals (AVL), Rare Element Resources (REE), and Lynas Corp (LYSCF).

With advancements and developments in technology becoming more and more dependent on a steady supply of these metals ... any disruptions will have a large impact. Not surprising .... investors, suppliers, and governments are taking notice.