http://blogs.forbes.com/gadyepstein/2010/10/29/names-you-need-to-know-in-2011-baotou-rare-earths-capital-of-the-world/?boxes=financechannelforbes
Once people learn more about the remote northern Chinese city of Baotou, China�s rare earths capital, they might get a little less excited about the stock darlings of the moment, like Molycorp, whose shares have soared on fears and hype about Chinese control of this high tech commodity. A closer look at Baotou (part of our Names You Need To Know In 2011 project) tells you that what investors should fear about Chinese dominance of rare earths, which is quite real at 97% of global production, is not that the Chinese will use this advantage to become our new overlords.
That kind of scaremongering is good for stock speculation and Washington lobbying but dramatically overplays the impact of recent events, which will not lead to a shortage of fighter jets for the Pentagon, electric cars for Ford or of iPads at the Apple store. Rare earth elements are important to all of these products, but there are very small amounts of them in each one, less than eight pounds in an entire Toyota Prius, for example, or maybe $100 worth.
What investors should really fear is that their speculative dollars may go straight down a bottomless mine shaft: China will continue to supply rare earths to the worldwide in relative abundance, whether as a raw resource or in finished goods, and the Molycorps of the world may well have trouble turning much of a profit on mining the resource for a long time.
That is in part because Baotou�s Bayan Obo mining region in Inner Mongolia is not only home to more than half of China�s current rare earths production (and thus half of the world�s production), with at least 55,000 tons expected this year. It also holds the largest estimated reserves of rare earth metals on the planet. By far.
What kind of dominance are we talking about? The Baotou reserves are believed to total more than 40 million tons of rare-earth oxides. That�s more than four centuries of production at the rate they are currently being mined globally � which is to say, of course, in China.
�Baotou is a significant portion of the Earth�s light rare earths accessible resource. It�s a monster deposit,� says Jack Lifton, founding principal, Technology Metals Research. �And as a businessman I�m saying, �And you�re telling me you�re going to compete with that?��
There�s more. This is what the other rare-earth wannabes are up against: Baotou�s mines, unlike most other potential rare earth mines outside of China, are perfectly set up to keep producing rare earths at a lower cost than elsewhere. They have all the logistical infrastructure of a mining region already in place, and it is open-pit mining, so no troublesome and costly deep underground digging to do.
Most important, Chinas rare earths industry has the backing of the state, and of some very large and profitable state-owned enterprises, and that means they can produce rare earths at a loss. In fact, they had been doing so for years, before the resource became headline fodder. In Baotou one of the nation�s state-owned giants, Baotou Steel Group, mines iron ore and hands the leftovers for its subsidiary, Inner Mongolia Baotou Steel Rare-Earth Co., to separate out rare-earth oxides like neodymium and lanthanum. Even with this integrated advantage, Baotou Steel Rare-Earth Co., easily the largest producer of rare earths in the country with most of Baotou�s production, operated at a loss for 11 years in a row until turning a profit in 2009. This year, the Shanghai-listed subsidiary is returning the favor, posting a stunning profit of nearly $90 million through three quarters, likely posting a larger profit margin than its parent company�s iron and steel operation.
Then there�s the matter of turning what you dig into what you can use in a car, a laptop computer or a jet fighter plane. The most important of these finished products are neo-magnets, and right now two countries dominate this and the refining in general of rare-earth oxides: China and Japan. That is why Japanese companies are actually most dependent on rare earth oxide exports from China, and most legitimately concerned with developing alternative sources � because they have mastered the rest of the vertical production chain.
U.S. industry, in contrast, buys for the most part not the mined resources but the completed magnets or finished goods that contain those magnets, the bulk of them from China, which has done nothing to limit exports of such value-added goods. So one way or another, there�s a bit of Baotou in your iPad and probably in your Lockheed Aegis SPY-1 radar. As China consumes more and more of the rare earth resources it mines to build these products and to meet a huge increase in domestic demand � for all those wind turbines China plans to make, to cite one example � the cost of this resource will go up long-term for everyone, and Baotou will be profiting.
What do you think? Have I convinced you that Baotou is a name you will need to know in 2011, before other major mines are ready to go online, and that it is a name your descendants may still be hearing in 2111? Do you think your descendants may be working in the Baotou mines themselves, under our Chinese overlords?
Or do you have other ideas? Help us produce the January 3, 2011 cover story for Forbes Magazine�The Names You Need To Know�by submitting your ideas here. What do you believe will be the big names, places and ideas in 2011? Names you need to know can be people, things, even places like Baotou. If you disagree with my suggestion or have other notions, be a part of our revolutionary effort to crowd-source the January issue of Forbes Magazine by submitting your own ideas here.
Interesting.....
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