Don't count on REE prices staying low for long

The EU Commission last week announced that Europe has been suffering from bottlenecks in the supply of such key raw materials as rare earths. The malaise did not suddenly manifest itself and, in fact, REE shortages partly accounted for the geometric rise of are earth prices in 2010-2011. Rare earths were as difficult to come by as platinum, natural rubber or cobalt and most REE had to be imported from China, the DR Congo, South Africa or Brazil. The Commission has therefore asked that more spending be directed to REE research. The focus, admittedly has been on improving recycling; however, mostly on recycling rare earths and reducing waste. However, the technology for recycling rare earths is still largely in the realm of academia and it will have little impact on the actual mining of these resources for the time being. Japan has explored the recycling route with even greater impetus and still its technology companies rely on foreign supplies. The EU commissioner has launched a formal process to improve the supply situation. The proposed approaches, in the short term, have less to do with finding efficient recycling techniques than they do with simplifying trade legislation to speed up the import process.

China, which is still the largest rare earth producer, has continued to exploit this position and the delays experienced by the would-be challengers in Australia, Canada or the United States. China has used its dominance for years hampering, in particular, the electronics industry in industrial powers such as Japan, the USA or EU. Beijing has deployed the scarcity card to impose trade bans sending panic waves across what remains of the West’s electronics industry. Concerns with climate change on one hand and political pandering in the form of ill-considered bans on nuclear technology (especially in Germany) have raised the importance of renewable energy and materials based on the rare earth metals are essential to the future and present currently represents an omnipresent topic especially for manufacturers of such components as batteries or capacitors and the ‘invisible’ bits that allow for wind turbines or solar panels to convert sunlight or wind power to energy transfer and energy storage, opening up new business opportunities. Demography has also been playing its part in sustaining demand for the kinds of electronics and processes that require rare earths.

Estimates suggest that the number of internet users worldwide will grow from 1.9 billion in 2010 to 3.1 billion in 2015 relying on a multitude of devices and especially mobile ones, generating exorbitant need to manage the flow of data traffic with all that it implies in demand for secure transmission networks, chips, and of course batteries – ever smaller and more powerful. The Nobel winning economist Paul Krugman himself predicted an intensifying technological revolution, noting during an interview that the information age has yet to fulfill the full extent of its impact, meaning that technology is just starting to catch up. Inevitably, where rare earths are concerned, the conclusion is that more mining and more sources are needed. Admittedly, in the past few months, the market for rare earths has been quite turbulent approached and prices have quite a distance from their old highs; global economic woes have combined with ‘artificial scarcity’ – fueled by a series of Chinese production cuts and export restrictions – and even attempts (largely unsuccessful) to replace rare earths with other materials.

The perception in 2012 was that demand for REE’s fell, accounting for the low prices and the difficulty faced by the share prices of the emerging new producers to fulfill their promise; and there are more candidates running in the race. Russia has decided to intensify its sources of rare earth, launching a project in Murmansk. Another, and particular, cause for optimism comes from the fact that German researchers and industrialists have grown quite concerned by the persistent threat of Chinese rare earth supply disruptions, reflecting the general EU outlook described earlier. Being German, they have wasted no time and are approaching the problem from two different angles. Deutsche Rostoff AG has launched exploration of a potential 38,000 ton REE deposit in Storkwitz, which had been initially investigated by the former DDR (East Germany) in the 1970’s. The German Federal government is actively supporting the project given its vital importance to future economic development. German scientists have also been studying a second route involving the extraction of special metals such as indium and germanium and rare earths from tin mining waste products in a process that simultaneously provides for efficient and environmentally sound industrial practices.

Many specialists are involved including metallurgists, chemists, biologists and geologists. In a similar manner but closer to production stage, the Canadian Orbite Aluminae (TSX: ORT), last week announced the formation of a partnership with Veolia Environmental, a France based multinational specializing in waste management with projects all over the world has signed a joint agreement for the treatment and recycling of the ‘red mud’ from alumina production. More so than the rare earths themselves, Orbite’s real potential lies in its patented process, which it can sell to others to, both, resolve a well known and difficult environmental problem and find new ways to extract rare earths. Nevertheless, even as all this research continues and progresses, China’s dominance in the market remains structurally strong enough to cause more market disruption and whatever the drop in prices and its effects, the long term picture is more complex and rising prices will result from the likely revival of economic and industrial activity.

The share performance of ProEdgeWire Rare Earth and Critical Metals sponsors for the week ending on February 8 was overall flat at an average of -2.12%. There were few highlights to report and Matamec Explorations (TSXV: MAT; OTCQX: MHREF) saw the best performance at +13.43%. Matamec has a collaboration agreement with Toyota Motors and the favorable share price also reflects the Japanese car company’s desire to evolve its hybrid line-up by launching a new hybrid power Supra sports car in a plan set to increase sales of the entire and considerable range of its hybrid offerings. That should lead to more hybrid competition, prompting a tide that should lift many other ‘boats’…