China's Plan To Use Rare Earths As A Weapon

The Nikkei is reporting the Chinese government has developed plans to stockpile rare earths to artificially keep prices high and restrict supplies to Japan and the US. It is clear that China increasingly sees its monopoly of rare earths as a potential economic weapon to use against its enemies in political disputes. According to the report the government has allocated between $300-500 million to buy up and store the prized elements. Beijing believes that this action will give it greater control over pricing and distribution of rare earth elements.

It is estimated that China has 27 million tons of rare earths, which accounts for about 30% of the global supplies. It produced 120,000 tons in 2009. However, China now says it will reduce production to only 100,000 tons or less from 2010 onward and has allocated 40% less for export this year than last year.

With the introduction of clean technology and new consumer electronics, rare earth elements have become strategically important. China currently controls 95% of production and has leveraged this advantage for political purposes. A few months ago China took the drastic step of halting exports of rare earths to Japan over a territorial dispute surrounding the Senkuku islands. Within days of China's export ban, Japan caved and released the fisherman involved in the altercation. This incident shows revealed that China was willing to use rare earths as an economic weapon and the need for alternate suppliers.

This need for new suppliers has led to an investment boom in junior rare earth miners who have seen their stocks increase several hundred percent. I have an investment in Stans Energy, a junior who is planning to put back into production a previously producing mine in Kyrgyzstan. This mine used to supply 80% of the Soviet Union's rare earths so there is no exploration risk. The only real risk is financing but that should be minimal because of the deposits strategic importance. I have little doubt the Japanese will be willing to sign an off-take/financing agreement to get the mine back into production. Japan do not want to continue to be held hostage to China's belligerent use of rare earths. This will mean significantly less dilution, which is always good for shareholders.

My only concern about investing in rare earth companies is the risk of a price bubble which comes crashing down like dot-coms in 2000-2001. I do not think that we are at the point of a bubble yet, despite the large run up in some stocks. However, you really have to be prepared to get out before the mania collapses.

Black Swan Insights

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China's Plan To Use Rare Earths As A Weapon