Popping The Rare Earths Bubble

In recent decades financial bubbles have been plentiful. From the US housing to the global uranium markets, bubbles seem to be simply inevitable (and generally can not be prevented by regulation or other government interference). In fact bubbles occur even in simulated (experimental) markets (see this paper). Most major asset classes experience a bubble periodically. The tech bubble of the late 90s for example has been one of the better known ones in the equity markets.

Very few have been as spectacular as the one in the so-called rare earth metals that are used to manufacture all sorts of equipment, including LEDs, smartphones, and motors. The rise in prices was triggered by China's policy of limiting exports, creating a perceived shortage. From there hoarding and speculation took hold. And as often happens in commodity markets, the bubble burst almost as violently as it inflated.

Reuters (Scott Barber): As prices soared, new mining projects made it on to the front burner, and some of these are likely to come onstream before the end of the year, including an expansion to Molycorp’s (MCP.N) California operations. China remains by far the world’s largest producer of these materials, but as new supplies elsewhere hit the market while demand remains little changed, China itself also is changing its tune and has announced a higher export quota.

To put the magnitude of this bubble in perspective, the chart below compares the price action of 3 rare earths with gold and silver, which have also appreciated materially over over the same period.

And price declines are continuing. Nations and companies are simply figuring out how to reduce dependence on many of these materials - for example Dysprosium, a metal highly valued for its ability maintain magnetic properties under high temperatures (such as in motors). Japan in particular has been under pressure to adjust because of its loss of supply due to recent tensions with China, the largest producer.

The Asahi Shimbun: TDK Corp., which supplies magnets for motors, has developed a magnet where dysprosium is painted on its surface alone rather than being mixed into the entire magnet body, reducing dysprosium use by half. The company plans to start producing the magnet for automobiles in October.

In February, Panasonic Corp. introduced equipment to extract magnets made of neodymium, another rare earth element, from used home electric appliances at its home appliance recycling plant in Kato, Hyogo Prefecture. The neodymium will be reused in air conditioner compressors and in motors for drum washers and other products, Panasonic officials said.

Honda Motor Co. plans by year-end to start extracting rare earths from nickel-metal hydride (NiMH) batteries used in hybrid vehicles. The automaker's dealerships will collect NiMH batteries from disused hybrid vehicles, and a plant belonging to ferroalloy manufacturer Japan Metals and Chemicals Co. will dismantle them to extract rare earths. Honda will then use the collected material in new hybrid vehicles.

The industry ministry estimates domestic demand for rare earths dropped from 31,000 tons in 2010 to 23,000 tons in 2011.