Prices for Rare Earth Metals Will Continue to Soar with China's Monopoly Intact

By David Zeiler

The discovery of a massive trove of rare earth metals at the bottom of the Pacific Ocean last week triggered a fleeting hope that China's monopoly on the materials would be broken.

Unfortunately, the discovery may not have the impact many had hoped, which means prices for rare earth metals will continue to soar. That's bad news for countries like the United States and Japan, which count on the scarce materials for high-tech industries.

Developed countries require rare earths to manufacture a wide range of high-tech products, including flat-panel displays, computers, hybrid car batteries, cell phones, solar panels and some advanced weapons systems.

For instance, there are more than 50 pounds of rare earth metals under the hood of a Toyota Motor Corp. (NYSE ADR: TM) Prius. Terbium can cut the electricity demand of lights by up to 80% and fractions of dysprosium can significantly reduce the weight of magnets in electric motors.

But China, which produces 97% of the world's rare earth metals, has drastically reduced its exports over the past several years, driving prices skyward.

Citing "environmental protection," China cut its rare earth exports to just 30,259 metric tons in 2010 from 67,521 metric tons in 2005.

That has caused runaway price increases for many of the 17 metals.

Over the past year dysprosium, used in specialized magnets, shot up from $300 per kilogram to $1,900 per kilogram and even higher. Neodymium has spiked to $450 per kilogram from $45 per kilogram late last year.

The Market Vectors Rare Earth Metals ETF (NYSE: REMX) is up 7.25% year-to-date and 32% over the past 12 months, as a result.

That's why many analysts - and Western companies - breathed a sigh of relief this week when the World Trade Organization (WTO) ruled that China's strict export policies on certain raw materials such as manganese, silicon carbide and yellow phosphorus, had broken global trade rules.

Although the WTO ruling did not apply to rare earth metals, most expect China to reconsider those export policies as a result of the decision.

That ruling was followed by the deep-sea discovery, which was made by Japanese scientists who found huge deposits of rare earth metals in the Pacific.

"The deposits have a heavy concentration of rare earths. Just one square kilometer [0.4 square mile] of deposits will be able to provide one-fifth of the current global annual consumption," Yasuhiro Kato, the University of Tokyo associate professor of earth science who led the team, told Reuters.

Kato estimated the rare earth deposits he discovered equal about ten times that of known global reserves. The metals were found in 78 locations in international waters east and west of Hawaii as well as east of Tahiti.

"Sea mud can be brought up to ships and we can extract rare earths right there using simple acid leaching," Kato said. "Using diluted acid, the process is fast, and within a few hours we can extract 80-90% of rare earths from the mud."

However, the mud containing the rare earth deposits lies in deep parts of the Pacific - under 11,500 to 20,000 feet of water - a daunting challenge Kato did not address.

Many analysts believe that finding a practical way to extract the metals at those depths would take years, if not decades. And the costs could be prohibitive, making mining economically unfeasible.

"Japan will need to build a giant set of SCUBA gear for Godzilla to use while scraping this stuff off the bottom, because there is zero chance they will be building any mines off the coast of Hawaii any time soon," said Money Morning Contributing Writer Jack Barnes, an expert in global-macro investment trends.

"The Japanese have no choice but to look for new on-land sources," Barnes continued, acknowledging the rare earth supply constraints facing the island nation. "Japan needs to consider the Chinese model of buying physical resources and developing it themselves. Greenland comes to mind."

That means Western countries will have to look elsewhere for a savior.

With any luck, Brazil's Vale (NYSE ADR: VALE) could fill that void, as it is considering entrée into the sector.

"Vale would bring big benefits to Brazil by entering into this rare earth market and I think it's an important thing for the west as a whole." Brazil's science and technology minister, Aloizio Mercadante told the Financial Times. "It would also benefit Vale as a company,"

After lining up a possible $12 billion investment by iPhone maker Foxconn Technology Co. in April, Brazil is looking for more ways to develop its technology industry. It's introduced tax benefits for foreign companies and laid groundwork for production of semiconductors. Establishment as a major producer of rare earth minerals could go a long way towards attracting even more investment.

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