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Japan makes all these things. In fact, it is the world's largest consumer of rare earths. China is the world's largest producer of rare earths, with 97% of the market. So you can see this is a matchup of heavyweights.
Japan has vowed to find new supplies.
New supplies are out there, but there is not much production coming on line until a couple of years from now, if all goes according to plan. In the meantime, rare earths prices are up as much as fourfold this year.
This has not had as dramatic an impact as, say, a fourfold increase in the price of oil would. That's because for most applications, rare earths are only a small percentage of the cost of the final product. The following is from Stratfor, an intelligence firm, which shows you that even now, rare earths often make up 1-2% of the total costs of a product.
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For the industry as a whole...there are signs that the Beijing government does not wish it to get too big. The consolidation of China's rare earths sector is part of a broader national effort to shift away from this type of low value-added, high environmental impact products.
To that end, China has raised export taxes on rare earths as high as 25%.
Stratfor, too, points to the fact that China's rare earths industry was often not profitable. Stratfor mentions some the other things China is doing that impact both supply and demand:
That its prolific, financially profitless and environmentally destructive production of REE [rare earths elements] has largely benefited foreign economies is not lost on China, so it is pushing a number of measures to alter this dynamic. On the supply side, China continues to curb output from small, unregulated mining outfits and to consolidate production into large, state-controlled enterprises, all while ratcheting down export quotas. On the demand side, Chinese industry's gradual movement up the supply chain toward more value-added goods means more demand will be sequestered in the domestic economy.
So China's production of rare earths may fall...and it may consume more of what it produces at home. That means less for the rest of world.
Most of the production went to China in the first place because it was cheaper. And miners didn't have to worry about the environmental damage they caused.
Both those things are changing.
The Japanese are out looking for rare earths outside of China. The FT reports Japanese firms checking out deposits in Vietnam, India, Canada and Brazil. Most of these projects are still in the early stages. And even the near-term projects need significant funding. But when they come online, they will be significant new sources of supply.
Japanese firms are finding ways to use less rare earths in some cases. For instance, Japanese engineers found a way to use half the rhodium used to make catalytic converters. There are other experimental efforts ongoing that try different materials altogether. As Stratfor notes, the rare earths boom "means many industries are in a race against time to see if alternative REE supplies can be established before too much economic damage occurs."
So there is a window of opportunity here. I agree with Junji Nomura, who is in charge of research and development at Panasonic. "Rare earths will be a big problem for two-three years, but in four-five years, the problem will be gone."
That's a wide enough window to make good money speculating in rare earths. There are a handful of quality deposits out there that will begin production in the next few years.
You can find out more about four of them in our
Regards,
Chris Mayer,
for The Daily Reckoning
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