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China controls 97 percent of the world's rare earth metals. It is cutting its exports to increase profits and stockpile resources.  (Source: Sun Bin)

Sony says that the cuts may eventually force it to raise the price of its electronics. Other Korean and Japanese electronics giants have made similar statements.  (Source: Mynjayz)

EVs like the Chevy Volt, and hybrid vehicles might also see price increases and shortages as China cuts off rare earth exports.  (Source: Car Buyers Notebook)

The shortages will also hurt the wind and solar power industries, which depend heavily on the rare earth metals.  (Source: Wind Power)
Meanwhile nation pockets big profits and builds up its own growing economic juggernaut

They sound like something from a mad scientist's laboratory -- Scandium, Yttrium, Lanthanium, Cerium, Praseodymium, Neodymium, Promethium, Samarium, Europium, Gadolinium, Terbium, Dysprosium, Holmium, Erbium, Thulium, Ytterbium, Lutetium.  Yet these "rare earth" elements -- which, as there name suggest, occur infrequently in the Earth's crust -- have become critical materials used by the electronics and automotive industry.

However, the market for rare earth metals is hardly an open one.  China, by expert's estimates, controls 97 percent of the world's rare earth refining capabilities.  And it's moved this year to cut exports.

I. Over a Barrel -- The World Stands Helpless as China Raises Prices

This month China announced that it would be slashing rare earth exports by 35 percent in the first half of 2011 from a year prior, and that it was considering cuts for the second half of 2011.  The country claims it’s making the move to maintain "ample" reserves.  Most experts, however, believe that the move is a bid to increase its profits and give its own domestic industries an edge.

The move has been met with outrage in Europe and the U.S.  The European Union has threatened that it may push the World Trade Organization, a powerful international arbiter to pass sanctions against China, if it doesn't restore supply.  A European Commission spokesman is quoted in Reuters as commenting that the EU "notes the latest quota figures and expects China to respect its recent assurance of a guarantee of rare earth supplies to Europe."

Japanese tech firms are also angered by the move.  Sony, which uses rare earth elements in its TVs and other electronics, says the move could damage it in the long run.  Writes a company spokesperson, "We cannot welcome rare earth export controls or any restrictions that hinder the system of free trade.  At this point in time there is no direct impact on our company. But further restrictions could lead to a shortage of supply or rise in costs for related parts and materials."

Some Japanese companies are vowing to cut their dependence on the rare elements.  But that may not be as easy as it sounds.  The elements have become widely used thanks to their plethora of desirable properties -- properties that aren't always seen in other elements and compounds.

As prices of rare earth metals soar, electrified vehicle (hybrid, EV, etc.) makers in the U.S. and Japanese are bracing themselves for price increases.  Hybrids and electric vehicles use more than twice the rare earth metal on average as a non-electric vehicle.  However, even non-electric vehicles may see costs rise, given the significant amount of rare earth metals used in their onboard electronics.

II.  The Future -- Some International Production, but Not Enough

The problem likely won't resolve itself anytime soon.  While Lynas Corp. (Australia) and Molycorp (U.S.) both hope to bring rare earth mines online next year, China will still control the majority of this rare resource in the foreseeable future.

For rare earth metal companies in the U.S. and elsewhere outside China, the opportunity is tremendous.  States, Molycorp CEO Mark Smith, "Any reductions China makes in its 2011 exports versus 2010 levels will only exacerbate the global supply shortfall of rare earths we can expect in 2011."

However, with demand expected to rise from 55,000-60,000 tons in 2011 to 250,000 tons in 2015, China will be in a prime position to score massive profits.  Increases in the price of electronics, alternative energy devices, and cars in the U.S., Japan, and Europe, barring significant unforeseen resource discoveries or technological breakthroughs, will likely reflect these profits.

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RE: Sound strategy
By glennforum on 12/30/2010 2:56:16 PM , Rating: 2
This has been an obvious priority of China for many years. The entire model that China is following is not dissimilar to the approach that the US took to become the world's superpower.

While our foolish and naive (Rodney King like - why can't we all get along) globalist politicians keep chasing the dream of one world government - China and Russia are laughing at us.

The end result the US will be #3 or lower and it will probably end in global conflict.

Our children our going to pay dearly for the mistakes of our generation and our apathy toward these big government progressives.

RE: Sound strategy
By Just Tom on 12/31/2010 9:27:46 PM , Rating: 3
Russia is an economic basketcase and China is a demographic time bomb with a standard of living barely above sub-Saharan Africa.

RE: Sound strategy
By SPOOFE on 1/1/2011 3:01:39 AM , Rating: 2
with a standard of living barely above sub-Saharan Africa.

True, but it used to be much worse, just a few decades ago. It's easier for a people to stomach lousy conditions if those conditions are A: still better than (relatively) recent conditions and B: are looking to get better still.

Compare it to America, where the standard of living is still awesome, at least compared to the rest of the world, but has declined slightly (let's be honest) and looks to decline slightly more.

RE: Sound strategy
By Just Tom on 1/1/2011 10:42:17 AM , Rating: 2
There are two China's: The affluent coastal cities and the increasingly polluted and still poor rural areas. The social stresses are enormous. Include a large number of young males who will never marry and are very aware of that and you have a situation ready to explode. Chinese investments have increasingly low returns, which is to be expected the low hanging fruit is picked first, and they are pouring money into government projects that are nothing but money pits.

Chinese demand is deliberately kept low to fost export growth. This is something that can be done for only so long. Their current growth will not continue and when the bubble bursts, and it will, it is going to be ugly.

"I modded down, down, down, and the flames went higher." -- Sven Olsen

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