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A good proxy on not only the continued and perhaps also subsidized demand across the globe for green, low-carbon technology, but also the desire among increasingly rich (in terms of income per capita), developing countries in particular for more ‘sophisticated’ products such as flat screen monitors, Ipods, and laptop and cell phone batteries, is the price of rare earth elements (REE).  The startling rise in the index (see graph, right), which covers ten of the seventeen metals in question, is a function of Chinese export reductions (China controls 97% of global REE production but has limited its quotas by 40% YTD) and more pointedly, per The Economist, its desire to “drive its manufacturers from low-to high-value goods.”  The immediate effect on market prices is understandle given just how essential REEs truly are to a bevy of industries.  Per the EU Times, for instance, “global demand has tripled from 40,000 tonnes to 120,000 tonnes over the past 10 years, during which time China has steadily cut annual exports from 48,500 tonnes to 31,310 tonnes.  Worldwide, the industries reliant on REEs, which produce anything from fibre-optic cables to missile guidance systems, are estimated to be worth £3 trillion, or 5 percent of global GDP.” 

Yet as any Econ 101 student could predict, this relatively sudden price rise (coupled with the obvious national security and other geopolitical implications) is quickly giving way to an almost equally rapid supply response, though admittedly there will be a time lag in exploration and production that could send prices even higher in the near-term before the inevitable snapback.  Molycorp (NYSE: MCP), an American firm that IPOed in late July (its shares are up over 20% since listing) and mines a previously unprofitable (due to the cost of correcting environmental concerns) mine in California that was once the largest source of REE in the world, will “start production by the end of the year and go full-scale by 2012,” per the MHFT and shares of Western Australia’s Lynas Corp. (LYSCF) have also risen as a Chinese-sponsored takeover was thwarted by the government (though please keep buying our iron ore, officials surely suggested).  Meanwhile, Japanese firms such as Toyota and Sumitomo have already opportunistically snatched up mines in exclusive deals in Vietnam and Kazakhstan, respectively.  Expect further mines across the frontier to go at premium prices.  If indeed we are in midst of a resurgence of the commodity super cycle, then rare earth elements will be one of the most heavily sought.  To what degree and how quickly suppliers meet this demand, however, will determine what path the index takes in the near term.

JGW

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