Remember rare earths? And how prices of these metals, which are required raw materials for technologies such as wind turbines, hybrid cars and flat-screen displays, had soared? Technology manufacturers scrambled to find reliable sources of supply as China used its position as owner of 95% of global production of rare earths to restrict supplies to manufacturers outside of China. And investors scurried to find a rare earth stock or two to add to their portfolios.
And now?
Shares of Molycorp (MCP, news), the highest-profile U.S. rare earth miner, were down 33% in just one week (Sept. 16 through 23) recently. Lynas (LYSDY, news) (LYC.AU in Australia) dropped 17% in Sydney and 12% in New York on Sept. 26.
After falling an additional 3.5% on Sept. 30 to $32.87, Molycorp is 58% off its 52-week high. Lynas, at $1.07 in New York on Sept. 30, is 64% off its 52-week high.
Why the drop?
The plunge in the price of rare earth stocks is, of course, partly a result of macroeconomic fears -- of a slowdown in the Chinese economy, of a slide by the U.S. economy back into recession, of a chaotic default by the Greek government that will return the global financial system to the brink it faced in 2008.
Jim Jubak
Because rare earth stocks like Molycorp and Lynas are highly speculative issues -- Molycorp has just begun full-scale mining, and Lynas is still waiting on approval from the Malaysian government to open a processing plant to turn rare earth ores into useful forms of rare earth minerals -- their share prices are even more volatile than the highly volatile global financial markets.
The rare earth story isn't all macroeconomics. The drop in the price of rare earth stocks -- and the odds that these shares might not only recover but also move up to new highs -- is a result of changes in the rare earth market that have nothing to do with global macroeconomics. And the trajectory of any individual stock in any rally will be strongly influenced by company-specific news.
In other words, if you want to figure out whether to invest in what are currently very depressed rare earth stocks, you need to understand what's been happening in this once-hot sector since it dropped out of the headlines.
A short history of rare earth stocks
Let me take you back to days of yesteryear -- 2009 or so, for most of us -- when rare earth stocks burst upon the investment scene.
China, which controls about 95% of the global supply of rare earth elements, got the ball rolling with the threat of an export boycott. Because rare earth elements are a key ingredient in many of the world's emerging technologies, the threat was a big deal. Adding a bit of one of the 17 rare earth elements to a magnet in the engine of an electric or hybrid car increases the power and efficiency of the engine, because rare earth magnets are the strongest type of permanent magnets now made. Rare earths improve the color in TV screens and in lasers. You'll also find rare earth elements in tunable microwave resonators, and terbium, one of the rare earth elements, is a key ingredient in low-energy light bulbs.
We're not talking about trace amounts of these elements, either. The electric motor in a Toyota Prius uses about 2 pounds of neodymium in its permanent magnets. Each Prius battery also uses 20 to 30 pounds of another rare earth, lanthanum. And it takes about a ton of neodymium to make the big magnets used in each megawatt of wind-turbine capacity.
Fortunately, despite their name, rare earth elements aren't especially rare. They're found in relatively high concentrations in the Earth's crust, with one, cerium, coming in at the 25th most abundant element in the crust. Global production came to about 140,000 metric tons of refined rare earths in 2008.
But supplies of the rare earths that can be profitably mined aren't distributed evenly across the globe. Partly that's the luck of the geologic draw. But mostly it's a function of the huge environmental costs of mining these rare earths. The traditional method has been to bore holes into promising rock formations, pump acid down the holes to dissolve some of the rare earths, and then pump the slurry into holding ponds for extraction of the rare earths. That extraction leaves behind a lake of water mixed with acid and various and sundry dissolved minerals.
A mining challenge
It's much, much cheaper if a company can get away with spending just about nothing on controlling the resulting water and sludge. The world's low-cost producers of rare earth elements are not huge and efficient open-pit mines but small, completely unregulated mom-and-pop mining companies in China. (The Chinese government is now trying to force many of these companies out of business. The motive is some combination of a desire to limit environmental damage in China and to exercise greater control over exports. I'd say that the latter dominates.)
Over the past 20 years, the accidents of geology and the realities of unequal regulation gradually led to the closure of most of the rare earth mines outside of China. The Mountain Pass, Calif., mine, the world's richest proven reserve of rare earths, stopped production in 2002, for example.
Rising demand started to change that picture. Companies such as Lynas and Molycorp crept back onto the stage with plans to start new mines or resume production from old mines.
It took the Chinese overplaying their hand, however, to turn that modest trend into a speculator's dream. The Chinese started to reduce the amount of rare earth metals that could be exported. Companies outside China began to worry about the very real possibilities of paying higher prices and of not being able to buy needed raw materials.
This seems to be a key goal in China's strategy. By restricting exports, China would force high-technology companies that need these rare earths to relocate production to China, accelerating the transfer of intellectual property to Chinese companies. It's no secret that China wants to create major wind, solar and hybrid-car industries.
The restrictions on production have increased in 2011. Beijing just about closed down its industry in early August to assess pollution problems (at least that's the official story). China is also creating a government-controlled monopoly, Bao Gang Rare Earth, that would consolidate the 35 companies that now mine rare earths in northern China. Three similar government-controlled companies will consolidate production in the south of the country.
The growing demand for rare earths from new technologies, plus China's moves, had two immediate effects. First, prices for rare earth minerals, especially those of the heavy rare earth elements, soared. Prices for some rare earth elements climbed 10 times from 2009 into 2011. Second, the scramble was on for alternative sources of supply. Suddenly, there was plenty of capital available to restart mines that had closed because of low prices and stricter environmental regulation outside of China.
