China Aims To Tighten The Rare Earth Market (REMX, MCP, AVL, REE, SHZ)
Jim Trippon: China, the world’s largest producer of rare earth minerals, will try to push up falling metal prices by further restricting supply, according to a recent proposal for new rules in the industry as reported by Reuters. The rare earth minerals, such esoteric elements as neodymium, cerium, and others which are used as key elements in industrial production for many goods, have been falling in price from their recent highs of last year. Prior to that, China had exercised a policy a couple of years ago restricting exports of rare earths, which strongly pushed their prices up.
Rare Earth Mineral Prices
New Production Controls
The policy paper that suggests governmental changes for China’s industry includes a provision to require rare earth producers to mine certain minimum amounts. The amount suggested would be 20,000 metric tonnes a year, with smelting production at a minimum of 2,000 tons annually. This will likely put the squeeze on many of the smaller miners which comprise much of the rare earth industry, and could drive several out of business. Industry observers suggest that supply of the rare earth minerals would then drop by as much as twenty percent due to the new requirements. Consolidation and joint ventures with larger companies, however, might be another option for smaller producers, but the overall aim of tightening production of the rare earth minerals seems assured.
Rare Earth Stocks
ETF Market Vectors Rare Earth/Strategic Metal (NYSEARCA:REMX), which tracks a group of companies involved in aspects of rare earth metals mining and production, is a common way to play the rare earth space. The ETF shot up more than twenty percent early in the year when pricing and demand was high, but has since had a rough six months, and is now down year to date roughly 15 percent. One of the few well known names of individual stocks in the sector is Molycorp (NYSE:MCP), a US based company. There are surprisingly more than 200 US based rare earth companies, but many of these do not even have any production yet. Molycorp, while it is in production, has seen its stock pummeled by sixty percent year to date and nearly eighty percent in the last 52 weeks. It had negative earnings in the last twelve months, but did produce nearly $400 million in revenue in 2011. The stock has a $1.2 billion market cap, has traded in a range of $9.40 to $42.90 in the last 52 weeks, and recently closed at $11.50.
Molycorp Two Year Chart
Source: Yahoo Finance
With REMX or Molycorp or any of the other rare earth producers currently in the throes of a severe bear market, investors shouldn’t lose sight of the essential need for these minerals. They are necessary components in many of the high-tech products we take for granted, and even though global demand has fallen temporarily due to the economic slowdown– and there will be supply and pricing issues going forward given China’s aggressive response to the market– there are still opportunities in the sector. This is a highly volatile market, though, as this year’s stock performances tell, so be forewarned of the risk. This volatility, however, can be somewhat balanced by the essential demand long term for the rare earths. Investors who want exposure to this sector should monitor the names such as the ETF REMX, as well as individual stocks such Molycorp, Rare Earth Elements (NYSE: REE), General Moly (NYSE:GMO), Avalon Rare Metals (NYSE:AVL),China Shen Zhou Mining & Resources (NYSE:SHZ), and China Gengsheng Minerals (NASDAQ:CHGS), as well as the commodity rare earth mineral prices, to get a feel for the directions and trends in the industry. China’s policy moves may reinforce a bottom into this sector, which will lead to value opportunities when prices start to rebound.
REMX Two Year Chart
Source: Yahoo Finance
Jim Trippon, founder of Trippon Financial Media, Inc., is a maverick that has dedicated his investment career to helping investors make smarter financial and stock selection decisions. Trippon, an internationally recognized expert on global and value investing, has a deep passion for finding hidden value in global equity markets. Trippon started his career as a financial statement examiner with Price Waterhouse which allows him to dissect a public company’s financial picture and better identify hidden gems. Trippon’s savvy approach to investing and personal finance makes him in high demand by major media who seek his unique perspective on stocks and global economics. He has been featured in top publications both in the US and abroad including Bloomberg, Investor’s Business Daily, The New York Times, The International Herald Tribune, Stock Futures and Options Magazine, The Bull and Bear Financial Report and he regularly appears on broadcast television including as an on air contributor to CNBC, CNN, Fox Business, and Fox News.
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