Awaiting the Eventual Return of the Rare Earths Market

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China is putting the squeeze on rare earths…again. And unless you have a large stash of light bulbs around the house, you’re going to feel this one personally.

“China is temporarily shutting down most of the industry,” reports The New York Times – closing or nationalizing dozens of rare earth producers.

Considering China already accounts for 97% of world production, that’s putting a squeeze on the producers of everything from wind turbines to hybrid car batteries to ballistic missiles. Oh, and those new compact fluorescent light bulbs.

The average price of a CFL bulb has jumped 37% this year, according to the National Electrical Manufacturers Association.

The increase comes before a federally mandated phase-out of old-fashioned incandescent light bulbs. Come next year, the 100-watt incandescents will be illegal to manufacture or distribute. Come 2013, 75-watt bulbs go bye-bye. And in 2014, even the 40-watt varieties will be no more.

Strictly speaking, the old-style bulbs were not banned under the legislation signed in 2007 by President Bush. Rather, the law set “energy efficiency” standards that incandescents can’t reach.

Think of it as one of the many gifts Uncle Sam bestows on General Electric.

GE, for its part, is defending the rising price of CFL bulbs by pointing out that the price it pays for a rare earth called europium oxide has risen 1,128% in the last 12 months. Things are tough all over.

So what’s behind China’s “temporary shutdown” of rare earths production?

“They’re busting the rare earths mafia in China,” said Byron King in this space on Jan. 20 of this year. That is, many of the mines were operating illegally, dumping loads of toxic chemicals into the soil and the water supply.

What’s more, the black market accounted for up to 40% of China’s rare earth production.

“Both of these are entirely unacceptable” to China, Byron said, “especially in a communist state with a nominally ‘planned’ economy. China leadership truly views rare earths as a strategic center of gravity for national economic development, future tech of many forms and, of course, military power.”

Fast-forward to last month: “Most of the country’s rare earth factories have been closed since early August,” the Times reports, “including those under government control, to allow for installation of pollution control equipment that must be in place by Oct. 1.”

At the same time, the government is consolidating dozens of rare earth companies, public and private, under the umbrella of four companies tightly controlled by Beijing.

So rare earths supplies that were already tight are getting tighter. The shutdown comes on the heels of years of tariffs and export quotas that have forced rare earth prices to rise as much as 40-fold.

You might think recent developments are bullish for rare earth stocks. And if you did, you would be wrong. An ETF made up of rare earth stocks, REMX, got hurt worse than the broad market in the August sell-off… and it’s been far slower to recover.

So what gives? “I’ve reviewed pretty much all of the RE plays out there,” says Byron. “I’ve looked at the web sites, reviewed the technical data, perused the 43-101s [regulatory documents], attended presentations and even met with management of many firms.

“There are a lot of good, sincere people out there, all working very hard to build out their respective projects. Any number of these rare earth companies will pull through, eventually.

“But ‘eventually’ may be a very long time.”

Reprinted with permission from the Daily Reckoning.

Dave Gonigam [send him mail] joined Agora Financial in 2007 after a 20-year career as an Emmy award-winning writer, producer, and manager in local TV newsrooms nationwide.

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