Last week, Rare Earth Investing News reported that China has begun stockpiling rare earths for strategic reserves in a move that once again raises concerns over Beijing’s control of the rare earth element (REE) market.

China had previously announced its intention to build a strategic reserve system. State media reported that weak prices for REEs prompted the move and that reserves could be used to address future shortfalls.

Process well underway

Many feel that the move is being made in an attempt to rein in recent price declines and gain more control over the REE marketplace.

According to the state-owned China Securities Journal, the Chinese government is also awarding state funds for interest-free loans for the strategic buying of heavy rare earth oxides (HREOs) to stockpile on concerns that reserves are running low.

Jia Yinsong, head of the rare earth department at China’s >Ministry of Industry and Information Technology, confirmed that Beijing had already identified 11 rare earth mining zones that it aims to stockpile. State funds will be used to supplement companies that help secure the resources.

According to the country’s official news service, eight major rare-earth mineral production bases in Guangdong Province have already signed framework agreements with Guangdong Rare Earth Industry Group.

Backdoor strategy

The move to stockpile will once again add to concerns amongst downstream users of rare earths such as manufacturers of green technologies, that China is pursuing a backdoor strategy of hoarding commodities in order to influence prices. Some argue that China’s goal is to drive up export costs for manufacturers, to force them to relocate their facilities to the People’s Republic.

The move has also caused concern with China’s trading partners, which came to the fore last month when a group requested that the World Trade Organization (WTO) form a panel to resolve a dispute over China’s REE export limits after earlier consultations through the trade body failed.

The European Union, U.S. and Japan all claim that China is unfairly cutting off exports of rare earths to benefit its own domestic industries, while China, who produces over 90 percent of the world’s REE supply, has hit back stating that restrictions are aimed at protecting its rare earth resources, and the environment, which has been adversely affected by polluting and unregulated rare earth mines.

Gao Yunhu, vice-director of the rare earths office of the Ministry of Industry and Information Technology, underlined that the organization felt that its management of the industry was “in full compliance with WTO rules.”

“China is willing to cooperate with relevant parties to resolve the issue at an early date,” Gao told a news conference at the recent release of the country’s rare earth white paper, before adding: “China will actively use WTO rules to protect the legitimate rights and interests of the country.”

Manipulating the market

Some analysts have suggested that the move is wholeheartedly aimed at jump-starting a market on the decline.  Many are of the belief that Chinese rare earth companies are hoping that strategic buying might help stabilize prices, which have suffered significant declines over the first half of 2012.

“Rare earths prices are now at low levels, so China definitely wants to build strategic reserves at this time,” a Shanghai-based metals analyst  told  media sources recently. “The other reason is that China hopes to control rare earth prices within a reasonable range, so as to encourage the long-term, healthy development of downstream industries.”

Experts say Chinese stockpiling would also reduce its volume of REE exports – something it has been keen to achieve for some time. In May the Ministry of Commerce confirmed the REE quota for 2012 at 21,226 tonnes.

The country initially granted two batches of rare earth export quotas totalling more than 30,000 tonnes for 2011, followed by a first batch of 2012 export quotas of only 10,546 tonnes.

Body calls for non-China-dependent supply chain

The United States is paying close attention to the situation. The U.S. Magnetic Materials Association (USMMA), a body that promotes reliable production of rare earths, issued a press release stating it felt China’s announcement was further confirmation of the need for an REE supply chain that is independent of China.

It also highlighted that of those elements listed for the reserve, four of five are classified as “critical” including terbium, dysprosium, europium, and yttrium.

It concluded that its members “have long expressed their concerns to the U.S. government about the availability of and dependency on Chinese rare earth elements for national security and energy requirements.”

The elements are used in a variety of defense uses including missile guidance systems.

What next?

Investors will be watching the status of these strategic reserves with great interest.  If the Chinese were to succeed in reversing the current pricing trend, investors should view this as an opportune time to investigate new projects and companies that are able to take advantage of a potential market on the rise.

Many rare earth companies are indeed undervalued. As an example, Molycorp (NYSE:MCP), the only U.S.-based rare earth producer, has shed some 70.45% of its stock value in the past year, plunging from a 52-week high of $66.62 per share to its current trading price Friday of $19.69 in New York.

ASX-listed Greenland Minerals and Energy (OTCQX:GDLNF,ASX:GGG) was changing hands Friday at 40 cents, just under half its yearly high of $0.73, while Rara Terra Minerals (TSXV:RTX), which trades on the Toronto Venture Exchange, was 10 cents below its 52-week high of $0.23. Quest Rare Minerals (TSXV:QRM,NYSE:QRM), which trades on both sides of the US-Canada border, has dropped from $3.49 on Feb. 1 to $2.69 on Friday, a 129% decline.

Out of adversity comes opportunity, however, and if China is indeed attempting to hoard supplies for the sake of a price rally, there is a wealth of opportunity for companies willing to put in the hard yards to bring a mine to production.

 

Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.