Trading China’s Tight Grip On Rare Earths (REMX, MCP, REE, AVL, QRM, FXI, TM)
Richard Rittorno: China’s (NYSEArca:FXI) failed appeal to the World Trade Organization (WTO) surrounding its rare earth export policies has renewed pressure on the Ministry of Commerce to open up this strategic class of commodities to global consumers.
The WTO appellate panel is reviewing a previous finding that export limitations by China on nine raw materials, including zinc, coke and magnesium, through quotas and tariffs broke global trade rules.
Many high-tech products use rare earth as a crucial ingredient, and China’s stranglehold over supply has led to protest from a number of U.S. lawmakers.
It is important to note that the WTO request only makes technical changes to China’s rare earth policy, rejecting most U.S. and euro zone appeals to Beijing to loosen its export rules.
The original appeal argues that China’s export restrictions on raw materials discriminated against foreign manufacturers, providing an unfair advantage to Chinese rivals that can effectively source as much rare earth components as they need.
Although rare earth deposits are actually fairly ubiquitous, China is the largest producer and controls 95% of global supplies. Rare earths are a group of 17 elements used in industries like hybrid cars. The government began to control output in recent years, citing resource depletion and environmental degradation.
China cites environmental reasons, which by all means should always be in the forefront for everyone. However, analysts point to comments made by China several years ago about using export restrictions to maintain price.
No matter what happens to the export restriction, the world’s appetite for rare earth material will continue to grow. Whether or not the restrictions are eased, rare earth companies around the world will be affected by oldest business rule around: supply and demand.
Traders can gain exposure either by companies traded on U.S exchanges like Molycorp Inc.(NYSE:MCP) and Rare Element Resources (AMEX:REE) or through an Market Vectors Rare Earth Strategic Metals (NYSEArca:REMX) ETF.
One other thing traders should keep in mind is that companies that depend on rare earth minerals will be on the hunt to reduce or even remove them from their products if supply tightens.
Just last week Toyota Motors (NYSE:TM) spokeswoman stated that the company is still researching ways to reduce the company’s need for rare earths.
Push price too high — or restrict access too much — and consumers will find a way to replace even “essential” commodities.
Related: Market Vectors Rare Earth Metals ETF (NYSEARCA:REMX), Quest Rare Minerals Ltd. (AMEX:QRM), Rare Element Resources Ltd. (AMEX:REE), Molycorp Inc. (NYSE:MCP), Avalon Rare Metals (AMEX:AVL).
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