China likely to keep rare earth supplies tight

By Scott Malone

BOSTON (BestGrowthStock) – China is likely to keep strict controls of rare elements used in wind turbines, batteries and high-tech devices, despite pressure from the U.S. and Japan to loosen export constraints, a metals analyst said.

The world’s most populous country has already tightened control on raw materials it considers critical to its its rapid economic development, and would have little reason to back down on the rare earths issues, said Charl Malan, precious metals and mining analyst at Van Eck Associates Corp, which on Thursday launched the first U.S.-listed exchange-traded fund focused on rare earths and other so-called strategic metals.

“The Chinese are hungry in many other commodities and they have looked after their own supply and security of supply in many other commodities first and foremost,” Malan said in an interview. “Why would it be any different in this event? Why would they not ensure that they have the sufficient supply of processed material for their own use before they send it out to the U.S., etc.?”

Beijing has slashed export quotas on rare earths — a group of 17 metals with useful properties that are found in small concentrations that make them expensive to mine and process — sending prices higher and raising worries in the West that it could use its supply dominance as a political lever.

A Chinese official said on Wednesday the government does not intend to use rare earths as a diplomatic tool. A top White House advisor on Thursday said the United States expected the issue to come up in upcoming meetings with Chinese leaders.

DEMAND SURGING

Rising demand for rare earths, driven by growing sales of products including hybrid cars and handheld consumer electronics like cell phones and handheld computers, will likely push past miners’ ability to produce the metals in the next five years, Malan said.

“We are in an environment where supply must, probably will be outstripped by demand,” Malan said. “We could see that side of demand outstripping supply by the year 2015.”

Van Eck’s Rare Earth/Strategic Metals ETF (REMX.P: ) fell 3 percent to $19.86 in its first day of trading.

While miners outside China, including Molycorp Inc (MCP.N: ) in the United States and Lynas Corp (LYC.AX: ) in Australia, are developing mines that they expect to step up production in the coming year, it will be extremely difficult for them to catch up with China, which produces about 90 percent of global supplies, Malan said.

The challenge, he said, is not just extracting the metals from the ground, but processing them at a reasonable cost.

“You get rare earth everywhere in the world. The problem is that the concentration is too small to make it economically viable,” he said.

China’s main advantage, he added, is not its reserves of the obscure metals, including cerium, erbium and ytterbium, but its large processing facilities.

“The Chinese have been a little bit smarter than the rest of the world about this in that they have overbuilt capacity,” Malan said. “They have big capacity that is sitting idle and that means that for the time frame that we are all talking about, between now and 2015, they will be the cost leader.”

(Reporting by Scott Malone; Editing by Derek Caney, Dave Zimmerman)

China likely to keep rare earth supplies tight