thoughts on the low pricing of rare earths in

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Thoughts on the Low Pricing of Rare Earths in China' Domestic Market

The prices of the rare earths in China will have to increase soon or smuggling will become uncontrollable. That is human nature. In the long run the production of the rare earth metals outside of China will help the Chinese by increasing the global supply and reducing global prices and thus eliminating the need for export controls. This is doubly true when one considers that China itself is the world�s biggest market for rare earth metals, and its neighbor, Japan, accounts for almost all of the rest of the global demand.

The rare earth mining economy within China is tiny as a proportion of the GDP. However, the number of jobs dependent critically on the properties of the rare earth metals required to manufacture green, clean, communication as well as entertainment technologies, is not trivial. China�s central planners� dilemma is that it must keep rare earths cheap in order not to drive rare earth-based component jobs offshore to lower cost countries such as Vietnam or India. Its own entrepreneurs are already doing this, by the way.

The result for junior miners with rare earth claims is that the race is on to produce more of what China needs to be produced outside of China, to relieve the pressure on its two tier pricing economy for commodities such as the rare earths.

The Chinese government maintains strict overall control of China�s economy from Beijing. Chinese businessmen, however, have the same mindset as any other businessmen, maximize profit and reduce costs. In today�s China, the government wins. It just may use a meat ax rather than a scalpel to enforce its decisions- such as with the rare earths recently.

But to think that Chinese economists and central bankers do not see the problem is foolish.

I believe that the selling prices outside of China of the rare earths will continue to rise until there is significant non-Chinese production of the rare earths. Then if demand exceeds supply, which I think likely, there will be a massive culling of those companies not in production, or of those that are too large, or too skewed to light rare earths.

So long as China continues to maintain that its supplies are being exhausted, the prices of the heavy rare earths must continue to climb. One respected analyst is calling for a dysprosium price of nearly $2000/kg by 2020. If China does not find domestic new supplies of dysprosium, I think the analyst is on the right track.

Be cautious when investing in the rare earth sector. Very large forces are intersecting in it and will make it very volatile in the near term.

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