August 12, 2014
China bought 10,000 metric tons of rare earth metals at above market prices to add to state reserves this month. Rare earth metals are a collection of 17 elements many of which are toxic, radioactive and environmentally hazardous to mine. These metals have some amazing properties. They can be used to produce some of the strongest magnets known to man. Rare earth metals have growing applications in technology and medicine. For example and just to name a few applications, we find Gadolinium in magnetic resonance imaging (MRI), Neodymium in computer hard disks, wind turbines and hybrid cars and Samarium in “smart” missiles.
The truly interesting thing about China’s recent purchases is that they already control the rare earth metal market. 30% of the annual supply is produced in China but, more importantly, through strategic investment and joint ventures China has purchased control of more than 95% of production around the world. China is firmly in control of these commodities today and for the future.
So why is China buying more on the world market today? Great question…the answer is there are two compelling reasons. First, the prices of these metals have moved lower.
The Market Vectors Rare Earth Metal ETF (Symbol: REMX) has moved steadily lower since peaking in 2011 at over $110 to close on August 8 at $36.66. A composite of rare earth metal prices have moved more than 65% lower over the past 3 years. These strategic metals of tomorrow have fallen, in many cases, below the cost of production. When commodities fall below production cost production tends to be cut back until demand reappears and prices move higher–simply the elasticity of supply and demand at play.
Second, China has invested in these metals at higher prices. China could be seeking to support prices at current levels and add to their dominant stockpiles. China knows that due to increases in technology the demand for rare earth metals will reassert itself in the future, At that time they will be in the perfect position to not only control the market but to dictate prices.
The bottom line is that the China, due to their population and economic growth, is the ultimate and dominant consumer of commodities in the world. China’s recent purchase of rare earth metals to add to stockpiles is a signal that prices may be bottoming and will ultimately move higher. Following China in the rare earth metals sector could turn out to be a very profitable strategy for investors and traders who realize the potential of these markets.
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