Could Investigation into Rare Earth Quotas be Just What the Market Needed?

An already tense US-China relationship took a new turn last week, as the US, EU, and Japan moved in on the World Trade Organization (WTO) to challenge China’s restrictive export policies for REEs.

With some referring to the move as arguably the most notable form of market legislation conflict in a generation, the potential opportunities that many arise must also be considered.

Investigation not a foregone conclusion

According to Daniel McGroarty, principal of the American Resources Policy Network, China could very well win the case in that it has supposedly been “couching its export policies in language consistent with recognized WTO environmental exceptions.”

McGroarty, who has alsoserved in senior positions in the White House and Department of Defense, added that China could potentially ignore theWTO’s ruling.If this scenario were to play out, the market would almost certainly be looking to source supply from elsewhere, opening up an exciting realm of opportunity for junior REE producers and explorers.

This scenario seems more realistic when the financials of some of China’s main REE mining entities are taken into account. The country’s largest producer of rare earth, Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co. (SHA:600111), announced last week that its net profit last year quadrupled from that of 2010 to $552 million. The main reason given for the rise was the surge in rare earth prices.

In 2011, in the midst of China’s crackdown on illegal REE mines, prices for the commodity skyrocketed by as much as ten times before experiencing a modest correction towards the end of the year.

Opportunities exist

Out of adversity comes opportunity, and with China currently producing 95 percent of REEs globally and controlling about half of all global reserves, some analysts are suggesting that there is a wealth of opportunity for companies willing to put in the hard yards to bring a mine to production level.

From a reserves aspect, countries such as the US and Australia hold notable deposits, yet are often held back on progressing mines to production by legislative red tape. It presently takes an average of up to ten years to obtain all the necessary permits to develop a mine in the US, while in Australia the process is swifter at two years.

Some have also argued that there is an ironic catch-22 scenario in that while populations in areas such as the US are demanding affordable services – including renewable energy, which is highly dependent on REEs – these same populations are continuing to lobby against the fast-tracking of mining permits and the legislative changes needed to make these a reality.

A change in mindset

Without some form of structural change, or at the very least a moderate ramp up in production from countries other than China, the Asian giant will continue to exert its dominance in REE exports. It is this dominance that is allowing China to maintain such high levels of trading leverage, and prompting many to ask: is an incident such as the WTO investigation exactly the prompt to rethink its industrial strategies that the market needs?

Soaring rare earth prices based on one country’s export abilities are forcing companies around the world to look into diversifying supply sources, while international efforts to find new supplies also seem to be gathering momentum.

According to recent reports, an increased wariness about China’s monopoly on rare earth has reinvigorated financial support for new rare earth mines, including efforts by US entrepreneurs seeking to obtain financing to reopen Molycorp’s (NYSE:MCP) Mountain Pass mine, and attempts in Japan to fund new mining ventures in Australia, Kazakhstan, Mongolia, and Vietnam.

The first signs of legislative debate were seen recently when Lisa Murkowski, the Senator of Alaska, announced that the answer to once again creating an independent market is to increase US development of rare earth mines and refineries. She has introduced legislation that she claims allows the designation of rare earth sites as “critical to US strategic interest.”

Murkowski commented,“[t]he president wants to sue the Chinese for something that we could – and should – be producing for ourselves,” before adding, “[a]ll he has to do is look north to Alaska, which has already identified roughly 70 rare earth elements sites.”

She has also, with the support of many within the REE sector, criticized the current government for not paying enough attention to her Critical Minerals Policy Act of 2011, which has been languishing with the senate Energy and Natural Resources committee since last year.

The move to look beyond China as a means of supply has not been limited to the US. Other countries are also beginning to step up policies in retaliation of what they consider to be a monopolized market.

Japan, the world’s largest importer of rare earth, announced last month that it will provide five billion yen ($65 million) in subsidies for projects that reduce the need for REEs as it attempts to cut its reliance on imports.

According to a statement from the Ministry of Economy, Trade and Industry, funds will be made available to support projects that reduce the consumption of magnetic products that use dysprosium and neodymium, improve recycling, and develop new technologies.

Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.