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In September 2010, a longstanding territorial dispute between Japan and China turned nasty. A Japanese coastguard vessel caught sight of a Chinese trawler off the coast of the uninhabited, Japanese-controlled Senkaku Islands in the East China Sea. The coastguard ordered the trawler to leave. But, within moments of the order, the two boats collided. A second collision followed 40 minutes later, leading the coastguard to seize and arrest the captain of the Chinese ship: in retrospect, not a wise move.
China’s response was furious and immediate. The government moved to cut off Japan’s supply of rare earths, a peculiar set of elements located deep in the periodic table, which form the bedrock of much modern technology. Such was Japan’s reliance on these materials that merely days after the export ban, which Beijing maintains it never imposed, Japan relented and the Chinese captain was released.
“The strategic importance of rare earths is huge and will only grow,” says Gareth Hatch, founding principal at Technology Metals Research, a provider of market intelligence and analysis on rare earths. More and more elements such as cerium, praseodymium and europium are being used to power and perfect everyday gadgets, from iPhones and headphones to microphones. Even in tiny quantities, they are also used as the driving force behind certain cancer treatments, nuclear reactors and X-rays.
“They fulfil a similar role to that of yeast in pizza,” writes David Abraham, author of The Elements of Power: Gadgets, Guns and the Struggle for a Sustainable Future in the Rare Metal Age. “While they are only used in small amounts, they are essential.
“Whole industries are built on just a few rare metals,” he adds. “The magic in [Steve] Jobs’ glass screen was due to a dash of the rare metal indium [a minor metal rather than rare earth], which serves as the invisible link, a transparent conductor between the phone and your finger. A dusting of europium and terbium provides brilliant red and green hues on the screen. Cerium buffs the glass smooth to the molecular level.”
For a long time, this importance was reflected in their price. Shortly after the Senkaku dispute, the price of rare earths rocketed over fears of a Chinese monopoly of the materials, creating a bubble that burst after just a few months. A $100 investment in the Market Vectors Global Rare Earth/Strategic Metals ETF in October 2010 would have been worth $148 in April 2011. That same investment is worth just $20 today.
This year, the price of rare earths, and many of the companies that mine and produce them, has fallen even further. In June, US miner Molycorp filed for Chapter 11 bankruptcy protection and in August it mothballed its operation in California, the only US rare earth mine. Australian company Lynas Corp, now the only rare earths miner outside China, blamed illegal operations and excessive Chinese exports for its 11 per cent quarter-on-quarter sales fall in September.
According to Anthony Lipmann, chairman of the Minor Metals Trade Association from 2003 to 2006, this price crash is representative of the huge levels of speculation in rare earth investment. “The rare earth hype convinced ordinary members of the public to invest in things they had no control over,” he says.
But with prices so low and demand growing, could now be a good time to invest in rare earths? Lipmann is adamant that people should shy away from investing.
“It’s . . . simply not an investment,” he says. “It would be delinquent in the highest degree for anyone to purport to attract investors into putting money directly into rare earths — metals which take a lifetime of professional involvement to handle and deliver to end users. [It is] an investment undiluted by any balancing factors — an investment that relies entirely on a bet. That is not wealth management, just irresponsibility.”
Abraham also sees the difficulties of investing in rare earths. “It’s hard to give an elevator pitch for something no one has even heard of,” he notes. “Relying on unclear industry jargon, many investors are often in the dark regarding the risks.” However, he does not rule out investment of any form. “It’s a risky investment. But the future is bullish — the price of materials will increase because scientists are just realising the properties that they have. Ultimately, if you understand Chinese policy and the processing of the materials, you can be comfortable investing into this space.”
Hatch agrees. “The conventional wisdom is that if Molycorp can’t make it, then how can anyone else? But that’s overly simplistic. [Rare earths] are not a lost cause, but investors must be more discerning.”
Compared with the boom of 2011, opportunities for rare earth investment are today few and far between. The Market Vectors Rare Earth Strategic Metals ETF remains a small possibility, with assets of just $33m, and its price has fallen 36 per cent since the start of the year.
Lynas Corp is regarded by many to be one of the few safer options in a sector beset with risk, though it is currently trading at A$0.08 against a high of A$2.60 in 2011.
As the obscure elements that sparked yet another dispute between Japan and China continue to fall in price at a greater rate than the rest of the commodities market, many are unsure where to turn.
Their low prices are attractive, particularly as their importance grows. For others, however, they pose too great a risk and the tremors of the 2011 crash are still too strong to ignore.
Cerium Ce (58)
The most abundant of the rare earths, cerium is a silvery metal that oxidises easily and is used in catalytic converters, alloys and magnets.
Gadolinium Gd (64)
A silvery-white and toxic metal, gadolinium is used to target tumours in neutron therapy. It is also used in MRI scans to make certain tissues and abnormalities more clearly visible.
Lanthanum La (57)
One of the most reactive rare earth elements, lanthanum is used to make carbon arc lights and to reduce the phosphate levels in the blood of patients with kidney disease.