Are you reading this article on a mobile device? Have you watched any TV today? Do you drive a hybrid car? Have you used a computer today? These are just a few of the ways that rare earth metals affect our everyday lives. (They're hard to predict, but commodities cycles provide valuable information for traders. See Cashing In On A Commodities Boom.)
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You've probably never heard of dysprosium, gadolinium and praseodymium. These, and 14 other metals, can be found buried in the middle of the periodic table of elements but without them, your iPhone would be no more than a pretty medal box with little to no functionality and you would still be watching a black and white TV.
History of Rare Earth Metals
Rare earth metals were first discovered in 1787, but it wasn't until the 1940s that a chemist figured out how to separate the metals from the other unusable substances and then twenty years later, scientists started to figure out the metals' uses.
Rare earth metals are far from rare (they were considered rare back in the 18th century when they were first discovered). They are found everywhere in the world and are as abundant as tin and nickel but currently, 95% of the world's supply comes from China, although countries like the United States are said to have 13% of the world's supply.
The other problem with these little known elements is that they aren't easy to process. Until now, the world has been happy to let China supply these elements because Chinese labor is cheap and as they try to become the world's go-to country for green technology, they were happy to do the work to hold the monopoly on these metals.
Times are Changing
Those who follow the events of China know that sometimes the information flowing from the country is inaccurate or politically motivated. Anybody who has read the diplomatic cables provided by Wikileaks knows this to be true (that is, if you believe in the accuracy of Wikileaks). For that reason, it's difficult to say with certainty why China is crying foul over their production of rare earth metals.
According to Xu Xu, chairman of the China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters, China's rare earth industry produces at least five times the amount of waste gas, including deadly fluorine and sulfur dioxide, as all U.S. miners. Also, 13 billion cubic meters of gas and 25 million tons of wastewater loaded with cancer-causing heavy metals such as cadmium is a deadly byproduct of the production of these metals. Because of this, they no longer wish to pollute their environment in order to provide these metals to the world.
Diplomatic officials believe otherwise. China has cut their production quota by 30% during the first half of this year and they're doing it in order to drive up prices and have a diplomatic trump card when negotiating trade agreements. What scenarios is true is not clear and is sure to be the subject of debate for the near future.
Molycorp (NYSE:MCP), a company who owns a rare earth mine in California that has been closed since 2002 is now reopening their mine in response to the projected shortfall. In 2010, their stock quadrupled in value.
Why it Matters
Excluding China, the world will require approximately 60,000 tons of rare earth metals in 2011. For companies like Toyota, who use these metals in automobile production, or Vestas Wind Systems, makers of wind turbines, a smaller supply of rare earth metals could mean a serious rise in price, an expense that smaller businesses or startups could not handle. For the everyday consumer, the cost of everything from phones to TVs to batteries could see a serious rise in price and some experts believe that a shorter supply of these metals represents a national security concern.
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The Bottom Line
While most believe that this shortage is not an immediate problem, it remains a serious concern for the Obama Administration. Like most of these types of conflicts, diplomatic channels are sure to intervene, and, after that, supply and demand will take over. (Foresight and careful observation are the keys to trading this market. Check out An Overview Of Commodities Trading.)
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