by Lara Crigger – Hard Asset Investor – Published: September 3, 2010

Is the rare earths metals hype overblown? Yes, says Jack Lifton, co-founder of Technology Metals Research, who adds that although the panic over Chinese “hoarding” is misplaced, the U.S.’ dissolution of its domestic rare earth metals production has been equally “foolish.”

Jack Lifton is one of the world’s foremost experts on rare earth metals, and is a highly sought-after author, consultant and lecturer in the industry. With over 48 years’ experience in the metals business, Lifton continues to advise institutional investors and high-tech OEM companies worldwide on the complexities of the natural resource sector.

At the recent 21st Rare Earth Permanent Magnet Workshop in Bled, Slovenia, Lifton presented a paper outlining the steps the U.S. would need to take to reestablish a presence in the rare earths industry.

Editor Lara Crigger caught up with Lifton right before he began a two-week rare earth investing “road show” that would take him to Beijing, Shanghai and beyond. He shared with HAI some thoughts on the rare earth metals industry, including why the current rare earth panic is overblown, how China has managed to dominate the market and what the U.S. needs to do to make an REE comeback.

Crigger: Is the panic over securing our rare earth metals supply overblown? Do we need to worry about China “hoarding” rare earth elements [REEs]?

Lifton: Yes. China doesn’t consider itself to be hoarding anything. They figure that they’re using their own materials for their own needs. They question why we insist on using words like “control” and “hoard,” because they ask, “If you needed the material, why shut your factories?”

So it’s as simple as that. We really are foolish in America. We’ve shut down an industry that’s strategic and critical, and all in the name of low cost. Now we’re surprised that the consequences that are obvious in doing this have now come back to bite us. I’m not surprised, and neither is anybody else in China.

Crigger: The materials are still there, though.

Lifton: The utilities are still there. But we haven’t been doing this for awhile, and people don’t just sit around waiting for work. You have to reconstruct the intellectual basis of the industry, as well as the physical basis, and that’s the problem.

Crigger: Are the people in this industry generally heading over to places like China, where the importance of REEs is better acknowledged?

Lifton: Well, they die. They get other jobs. If you’re a chemical engineer specializing in separating rare earths, where do you think you’re going to get employment in the U.S.? There’s nobody doing it here. So if you’re deciding what to do in grad school, you get a different specialty. Or if you were already doing this, you have to retrain yourself, or find something in the home cleaning or Slurpee-mixing fields, because what you were doing is gone.

I don’t know what possesses politicians to think that they can simply invent intellectual capital. You can’t. It takes time. And once you fall behind in your specialty, you are behind. You have to catch up. It’s not a matter of reading the latest papers; you also have to go back to what happened between the latest papers, and when you knew how to do it.

So I find the politicians and financial minds in America seem to have no knowledge whatsoever of manufacturing or mining. They just think that money solves all problems.

Crigger: So what do we need to do to keep those knowledgeable people around?

Lifton: The first step would be to go ahead and fund the RESTART Act [a bill to reestablish domestic rare earth minerals production in the U.S.]. I didn’t say enact it. That doesn’t mean anything. They need to actually put some money in it. And they need to get it done while we still have a core of people at the point in their working lives where we could get this done, because that is a diminishing resource. If this doesn’t get done in the next decade, it will never get done, because we’ll have lost any ability to do it.

Crigger: How else do we need to adapt the way that we think about rare earth metals in this country?

Lifton: We have to decide that rare earth metals are as important as, say, bridges with no intended anchor point. And the only ones who can do that are the people in Congress, who hold the purse strings. But Congresspeople have notoriously short attention spans. When you have a television camera there, they say, “Whatever it is you support, so do I,” and the moment the camera switches off, they walk away.

This is sort of beside the point, but I think America needs national goals. Let’s say that, for argument’s sake, we’d like to restore our standard of living to what it was in 2008. To do that, we better start creating wealth and creating high-tech items that we can not only use ourselves, but sell to the rest of the world. For example, if you mine rare earths in California, you could actually mine a lot more than the U.S. needs, and have the rest for export material to make a profit.

So perhaps someone in Washington should go back and study basic economics, because they don’t seem to understand anything about wealth creation. There’s an anti-resource bias in Washington that’s palpable. Do we really think that energy creates itself, or metals just drop out of the sky?

Crigger: At least on the financial side, we see investors say, “Well, we don’t know what REEs are, but hey, let’s learn.”

Lifton: Exactly, and if the politicians had that much interest, we wouldn’t have that problem. My personal business is that I do due diligence for institutional investors looking into metal opportunities, and I can tell you that I have seen more interest among bankers and fund managers than I’ve ever seen in Washington. They’re the ones asking, “What are rare earths? How do they fit into the economy?” And they’re honest: They admit, “We don’t know what you’re talking about, so just start at the beginning.” Of course, that can be a problem in other ways.

Crigger: How so?

Lifton: Well, the problem for junior miners – exploration companies, I mean, not production companies – is that the institutional investors have an unfortunate requirement: They need to make a profit. They do not make investments that don’t return something.

But there’s a huge distinction between stock market plays and actual company operation. When the institutional investors that I have as clients take a look at a mining operation, they say, “When will $1 become $1.50, and is that a faster rate than if we put our money in gold or some solid paper?” The answer at the present time is, “No.”

And it’s true. The concentrates mine is just not profitable. Really, don’t believe anything about rare earth prices rocketing up. They may be rocketing up in pure metals, but not for ore concentrates, because the value is added after that. So your mine needs to be on a combined balance sheet.

Two or three of the junior miners in rare earths have adopted this strategy, and they’re the ones that are getting the most attention. Because if you just admit that you don’t make money mining rare earths, that you make money in producing products from rare earths, well, then you can get somewhere.

Crigger: How does this compare to what China has done?

Lifton: Well, the problem is the mining companies are small. They’re not big enough to buy a mine and finance a refinery, so you need the real end-user – the car company, the jet engine company – to come in and help.

In the case of China, the Chinese have simply put all the rare earths under the control of their large base metal companies. Those companies are now responsible for delivering high-purity rare earth metals, after they’ve restructured the industry over the next five years.

A few weeks ago, China announced that Baosteel, Jiangxi Copper and Chalco have now been given the assignment of geographically restructuring the rare earth production in their geographic regions. Today, there’s 129 official recognized rare earth miners in China – and god knows how many flying under the radar – and 79 refiners. That’s 208 companies. By the end of 2015, you will see three companies: Baosteel, Jiangxi Copper and Chalco. As far as they’re concerned, bigger – and more consolidated – is better.

Crigger: It’s all part of that same machine, that same philosophy, that’s driven the staggering growth we’ve seen in China over the past two or three decades.

Lifton: Well, 20 years ago, China was producing less than 50 million tons of steel a year. Today, they’re producing 650 million tons of steel. That’s 6.5 times as much as the U.S., 5 times as much as Europe, and more than all the rest of the world put together.

China has done more growth in metals production in a generation than the entire world put together. Rare earths are the tip of the iceberg. Frankly, you shouldn’t bother looking at them as much as you should steel, iron, copper, aluminum, tungsten, antimony – these are all metals where China is both the dominant demand in the world, and the dominant producer.

Investors say, “We’re not going to invest in mining, because you know what happens: The $3 price of copper becomes $.70, and we lose our money.” Well, if China’s demand continues, we will never see a commodity bust again.

Crigger: Of course, eventually we wouldn’t be able to keep up.

Lifton: Right, their demand is so high that the world is already straining. You know, we used to laugh about the Soviets and their five-year plans. “We’re producing more steel than anybody else!” they said. Of course, that steel was stockpiled, and they weren’t using it, and it was killing their economy. People say China’s doing the same thing. It isn’t. The Chinese are using these materials, and they’re producing like crazy. At this point in time, China’s producing some 53-56 percent of all the metals of all kinds in the world, and yes, they export some, but everything they export is value-added in China. They are creating jobs, wealth, industries.

The rare earths are a real issue, because China doesn’t think it has enough. That is, they think they have enough reserves, but not production. And their demand is outpacing their production at the moment. So there’s a window here for Western mining to supply China with goods it needs.

But the danger is that what happened before will happen again: China will then ramp up its production and come roaring back, and kill everyone else in price. They did this in the ’90s, and they killed the non-Chinese rare earth industry—by 2002, it was shut down.

Crigger: So then is it even worth it for any non-Chinese company to jump into this fray again?

Lifton: Well in the short term at least, absolutely there’s value. And for the heavy rare earths, the ones China doesn’t believe it has enough reserves of. That’s a good business to be in.

But you can’t produce one type of rare earth without producing all of them. So the big issue is, who’s going to be the lowest-cost producer of terbium, europium and dysprosium? Because those are the three materials China thinks it needs outside sources of.

An astute businessman might say to China, “Look, I have a deposit in Alaska or South Africa of material, and it’s got heavy rare earths in it, but here’s the problem – we’re going to produce lanthanum, cerium, neodymium, and all sorts of things you already have enough of. So I can’t sell you the heavies unless you buy the lights. You have to buy the entire cow; I’m not selling the milk.” The Chinese used to say no, but now they say, “Let’s talk about it.”

The Chinese are realizing they have to change the dynamic. Instead of saying, “We must control it,” they’re saying, “Can we invest enough money to develop something and then we can buy the output?” Because in a capitalist society, the risk is that somebody will out bid you. That’s not a problem for the Chinese. They need the material, they will not be outbid.

China is by far the world’s largest end user of copper, from which is constructed the nerve system of our civilization, the electric power distribution grid, as well as all of the devices that generate electricity and transform it into motive power or heat for individual or industrial end use.

China’s domestic mining produced just short of one million tons of new copper in 2009, a year in which the total global production of copper was 16 million tons. Yet China used in 2009 just short of 6 million tons of copper, nearly 40% of 2009’s total world supply of that metal. This amount used in China, 6 million tons, is one and one-half times the total annual copper production of copper by all Chilean sources. Chile is the world’s largest producer of copper at 4 million tons a year, which is 25% of global production.

China imports its copper mostly as a standard form of crude (impure) metal and then purifies it and fabricates it into forms for drawing wire and producing sheet and bar stock for manufacturing purposes. The crude – in the sense of too impure for electrical use – copper has usually already been processed at the originating mine, to remove most of its non-metallic impurities, but still very much carried in the ‘crude’ copper, as it goes into final electro-refining, are molybdenum, gold, silver, platinum, palladium, selenium, tellurium and rhenium. Some copper ores are even very significant sources of gold, but most are not. What is significant about China’s inflow and the processing to ‘purify’ it is the sheer volume of it. Even ‘impurities’ in the copper that are present only as traces, can be produced in relatively substantial quantities when the flow through produces 6 million tons of copper.

China, through this final purification step, is gifted with the world’s largest reliable supplies of the above named rare technology metals, some of which are critical to the green revolution in sustainable  alternate energy technology.

Take the example of tellurium, which in addition to being recovered from the vast volumes of copper processed in China, is also able to be recovered from the vast volumes of lead, zinc, bismuth, and antimony produced or refined in China. In addition to the low grade sources ( ie. the ‘traces’ in the base and more common other metals), a Chinese company operates the only mine in the world the primary product of which is tellurium. The mine’s avaerage grade of tellurium is an astounding 1.17%.

That company, Apollo Solar Engineering in Chengdu, Sichuan, which is listed in the USA, (ASOE.OB)  is the world’s largest producer of ultra-high purity tellurium, which it produces primarily from its mine, at a rate of 3-4 tons a month. The company is also the destination point for much of the crude tellurium recovered in China, from the refining of the ores, domestic and imported, of copper, lead, gold, silver, antimony, and bismuth.

There can be no cadmium telluride thin-film photovoltaic solar cells made without ultrahigh purity tellurium, ultrahigh purity cadmium telluride, and ultrahigh purity cadmium sulfide. The pre-eminent American producer of thin film photovoltaic solar cells, First Solar (FSLR), is already Apollo’s largest customer for its production of all of these items.

There is an International ‘New Energy’ Fair in Chengdu during September 28-30, 2010. ‘New Energy’ is the most common translation into Chinese of the term ‘Alternate Energy.’  I have been invited to speak on the future and the importance of the production of rare technology metals such as tellurium, selenium, indium, gallium, as well as of the ‘common’ technology metal, copper, to the thin-film photovoltaic solar cell industry both in China and in the world.

China is already the world’s largest producer or the largest end user or both of ALL of those metals! Those who want to invest in green technologies need to take note.  China now dominates the production and use of the specialized technology metals critical for solar. China should be the first place that anyone who wishes to invest in the future of thin film photovoltaic solar cell production looks.

Keep in mind that China is rapidly going green, even as the rest of the world just talks about it, and that if we in the West wait any longer it will be of no avail to us, because the critical raw materials production is already centered in China.

Disclosure: I am a business development consultant to Apollo Solar Engineering.

‘Pricing at the margin’ is a phrase heard in the marketplace to indicate that a recorded price is not representative of the totality of transactions for that commodity, but instead was the result of perhaps as little as one transaction occurring at the margin (the edge) of the range of transactions. Pricing at the margin is not representative of market pricing.

Recent actions by Chinese governmental regulators, have caused some confusion in the rare earths market with regard to pricing, production, and inventory levels.

First, the Chinese government reduced the allocation of Chinese rare earth production in the form of individual rare earth raw materials for the export market for the rest of the year. There was no differentiation among the individual rare earths covered by this allocation reduction, so immediately the 28 officially licensed Chinese trading companies with ‘allocations’ moved to export only the highest priced of the rare earths, such as terbium, dysprosium, and europium that they had in stock, so as to maximize their transactional revenue.

These actions, of course, reduced the normal outflow of the more common rare earths such as cerium, lanthanum, neodymium and praseodymium.

After just a few transactions occurred at the margin of the market and a whispering campaign was started about China ‘cutting off exports’, the prices for all rare earths rose. Those familiar with Economics 101 concepts such as supply and demand, knew that a price increase of 500% for the most common of the rare earth metals, cerium, which is in oversupply now as it has been for decades, was an aberration caused by some glass polisher caught short of inventory at a critical moment.

In the same way the sharp increase noted in a few transactions for the most important of the rare earth metals, neodymium, was also an aberration probably caused by a panicked Japanese magnet producer or his trading company procurement department.

Chinese businessmen in Beijing during this period of price rises, said to me that non-Chinese buyers had not seemed to notice that there were no export reductions on rare earths contained in finished goods or components. Of course, when I relayed this to some junior mining executives, they responded that this also was a part of a larger ‘conspiracy’ to drive manufacturing jobs to China. In the West at least, when I was a corporate executive we called this a business model, not a conspiracy, as we demanded tariffs (import restrictions) against our foreign competitors along with anti-dumping legislation and lawsuits.

I was also told that non-Chinese alarmists also did not seem to have noticed that the previous quotas had not even been used up, so that there was in fact material available. I think the alarmists knew this all along.

In any case, I think that investors should be very wary of junior miners that immediately repriced their business models using the ‘new higher rare earth prices.’ First of all, those prices were not at all meant to pertain to the low valued, undifferentiated concentrates that junior miners’ pricing models  seem to think have the same value as 99.9% individual metals. Second of all, the prices will come down as soon as pricing at the margin is subsumed into realistic multi-transactional market pricing.

This is a very brief summary of the my analysis of recent Chinese domestic activity intended to consolidate the Chinese rare earth metals production industry. This consolidation is a prelude, I believe, to the restructuring of the entire global metals production industry, so as to insure for China its security of supply of all metals for its domestic economy.

As I have said before, this marks the end of both Western-owned or -operated metals production hegemony, and of Western metals supply hegemony.

China has taken recent action to consolidate production of all of its domestic metallic and mineral natural resources, under the aegis of its largest producers of base metals, with each one of the three chosen allocated a geographic and political, not a geological, region. In analyzing this, I noticed a pattern that, in of itself, explains these actions as a process to ensure Chinese security of supply of its domestic demand for metals in general and of the technology metals in particular, at least as far as China’s domestically produced natural resources are concerned.

The successful failure of the Western business model, to provide long term security of supply of technology metals for the American industrial manufacturing economy, at any level, seems imminent. I mean that America has been successful through the operation of market capitalism in securing supplies of critically needed technology metals for the mass manufacturing of technology-based consumer products, at the lowest cost for the American domestic market. But the very movements required to accomplish this short term goal, have now resulted in both the production of the technology metals and the mass production of the products critically dependent upon them, moving out of the United States and into a region where the domestic consumer economy is growing so rapidly, that it has become economically impossible to return to the status quo ever again.

America, in order to achieve the lowest prices for consumer goods, has simply been priced out of both the natural resources production and supply economy, and the consumer products production economy, of the Southeast Asian market. It seems to me to be only a matter of time, before the American consumer products market is subjected to pricing pressures that will end its built-in obsolescence (otherwise known as waste) model once and for all.

For Southeast Asian manufacturers to give priority to export markets in the future, it will be necessary for those markets to be much larger revenue generators than they are today. Thus rising prices for imported goods in, for example, the USA, will now be the norm. This includes the components for green technologies. Such components can no longer be made in the USA without imported technology metals, and those imports are becoming increasingly harder to acquire, as China gathers to itself the ownership and control of the majority of the world’s natural resources, of not only technology metals but of all metals.

For China, this means the ascendancy of its version of capitalism in one country, as the foundation for its growth into the world’s pre-eminent industrial manufacturing economy by, at the latest, another generation.

China’s cornering of the supply chain for those technology metals known as the rare earths over the last 25 years, has been, in my opinion, an introduction to the world metals production and demand economy of 2035.

By that year, at the very latest, global corporations, most likely Chinese-owned and -operated, will be focused on producing the useful forms of those metals in the specific places where they can be used most economically. China’s long term planners intend that place to be the manufacturing centers of the PRC. That is the explanation for all of their planning in the short term.

The television commentator and former Jesuit, John McLaughlin, used to make me laugh when he would tell a panelist of an opposing political view: “Once again you’ve stumbled upon the truth, even though you don’t know how you got there.”

The New York Times recently reported the facts of a story entitled, “China to Invest Billions in Electric and Hybrid Cars,” but failed to stumble upon the truth. So let me do that for the Times and for your benefit, dear readers:

China, as part of its national plan, a goal centrally set by those in overall charge of its economy, announced yesterday that its motor vehicle industry will be required to build one million electric and hybrid motor vehicles in the next few years. I believe that this means that the industry will be required to reach a production rate of one million electrifed motor vehicles, the size of passenger cars, per year.

This is part of an overall plan to marshal and deploy China’s natural resources and its resources of intellectual property for the benefit of its own people, first. How much more logical can it get than that as a reason to conserve precious natural resources such as the rare earths?

The New York Times points out in the above story:

“The announcement, analysts say, is another example of how China seeks to marshal resources and tackle industries and new markets. The plan also underlines what China describes as its growing commitment to combating pollution and reducing carbon emissions.”

When I was in Beijing in the first week of August, three weeks ago, one of the other (I was a speaker at the plenary session) speakers at the Chinese Society for Rare Earths 6th Annual Rare Earths’ Summit, stated that a goal of the next two five-year plans, to be completed in 2020, was to have 330 GW of wind-turbine-generated electricity installed by that time. The speaker pointed out that this would take 59,000 metric tonnes of neodymium, calculated as 28% of the rare earth permanent magnet alloy, neodymium-iron-boron, since each 1.5 MW wind turbine generator will require one tonne of rare earth permanent magnet alloy.

The same speaker who was from the Chinese rare earth permanent magnet manufacturing industry didn’t mention how much of the heavy rare earths would be required for the project. I will estimate that at most it would be one thousand tons of terbium and three thousand tons of dysprosium.

In any case the total requirements for these new (not replacement) uses for neodymium, would be the total production for three years at the most recently achieved high production rate of neodymium, and as much as five years of terbium and two to three years of dysprosium.

If the neodymium demand is to be met, and this means that China, AS THE SPEAKER SAID, decides to use only rare earth permanent magnets for its wind turbine electric generator program, then it would require that three years’ production of the contained neodymium, at the rate it was mined in China in 2008, among all the rare earths mines there, be reserved for Chinese domestic magnet and wind equipment manufacturers and be targeted for the Chinese domestic market!

I think that it is crystal clear, that China is not reducing the production of rare earths on a long term basis and is not reducing their export on a short term basis. It is in fact pausing to:

• physically clean up the rare earth mining sector;
• eliminate illegal mining and smuggling of this precious green resource;
• consolidate the rare earth mining industry under the largest state-owned base metal producers of iron, copper, and aluminum, to prepare to ramp up the Chinese domestic production of rare earths both to meet and to guarantee the success of its long-term green strategy.

This is called long term strategic planning for those in Washington and on Wall Street who don’t understand why the Chinese are ‘depriving us’ of this vital resource. This process is also called ‘conservation of domestic resources’, by the way.

As to electric and hybrid cars, they require neodymium, dysprosium, and terbium for the magnets in the rare earth permanent magnet electric motors – both that drive them and that power their accessories. Some or all may also use lanthanum in nickel metal hydride batteries, as all hybrids made today currently do. A. In any case, whether or not the Chinese electrified cars use NiMH batteries, they are being designed to use rare earth permanent magnet electric motors. A million such vehicles will probably require just one million kg (1,000 metric tonnes) a year. Oh, did I mention that they will need also 10-20 tonnes of terbium and up to 50 tonnes of dysprosium. All of this new demand will be added demand not replacement demand, by the way.

I have no doubt that China will remain the world’s largest producer of the rare earths indefinitely. In the near term, perhaps over the next 5-10 years, China will need to import the ‘light’ rare earths lanthanum and neodymium, to make up any shortfalls created by its proposed quantum leap in demand in the face of the temporary reduction of production, for environmental and reorganization reasons. If the non-Chinese light rare earth miners get their acts together in time so that they can produce light rare earths at a lower cost than their Chinese competitors are able to do, then both Molycorp and Lynas have a good chance of success even in the long term.

The real issue for the future of rare earth utilization and therefore of mining, is the continued growth of the use and need for the heavy rare earths, terbium and dysprosium.

These ‘heavy rare earths’ are believed by the Chinese to be in short supply domestically. China today is the world’s only producer of heavy rare earths, mostly from southern Chinese deposits known as ‘ionic clays’, although significant quantities are also produced from the Bayanobo region (even though they report in Bayanobo only in small quantities) due to the overall massive amounts of rare earths mined there. Nonetheless, China believes that its own domestic supply of the heavy rare earths has between 5 and 30 years remaining at present levels of use.

This means that the real supply opportunity in the non-Chinese rare earth mining sector, is for those deposits that have above average proportions of heavy rare earths, to be brought into production as quickly as possible.

It is a horse race among those non-Chinese juniors with commercially (i.e. economically) recoverable heavy rare earths.

They are:

Canada

1. Great Western Minerals Group
2. Avalon Rare Metals
3. Quest Rare Minerals

(Note: some of my colleagues have urged me to add other Canadian juniors to this list, such as Matamec Exploration, but I know little about that company and will reserve my judgement on them for a future time, when I have had time to study Matamec Exploration and to visit its site.)

USA

1. Ucore Rare Metals
2. Rare Element Resources (a light rare earth deposit but with significant europium only)

Republic of South Africa

1. Rareco (in conjunction with Great Western Minerals Group)
2. Frontier Rare Earths (private at this time)

The success or failure of any of the above, will depend on the quality of their deposits, the efficiency of their extractive metallurgy, the ability of the global rare earth refining industry to service them, and the growth of the Chinese, Japanese, Korean, and Indian domestic markets.

Disclosure: I own shares in Great Western Minerals Group, and I am a paid consultant in business development to Ucore Rare Metals and to Frontier Rare Earths.

It has now been reported in the Wall Street Journal that China is in the process of creating a unform governmental policy to export chemical engineering processing technologies so that the non-Chinese production of vital raw materials can be done economically by enabling foreign (to China) owned and located mining ventures to move up the supply and value chains far enough so that they can be profitable.

The Chinese rare earth processing industry, for example, is working with several foreign rare earth juniors to make their business models economical. In return the Chinese processors will get access to rare earth metals produced overseas, and hopes that once foreign local demands are satisfied there will be ample surplus material to be sold into the Chinese home market as needed.

The production of the heavy rare earths, it is hoped in China, will be enabled by chemical engineering technology exports of this type.

Apocalyptic predictions on the future of US military security and its civilian economy, if China cuts off the export of the rare earth elements (in which it currently has a production monopoly) are masking an even more important dilemma. What will happen to China, if it cannot produce or obtain sufficient rare earth elements to maintain its rate of domestic growth?

The rare earth supply ‘crisis’ can and will be solved when there is sufficient production of heavy rare earths outside of China, to resolve the impending shortage that the Chinese perceive as a serious threat to the massive growth that they have planned, primarily for their domestic green technology industry, among others.

The recent hubbub about reduced Chinese export quotas for the rare earth elements, seems to not address the point that the quotas may in fact only affect  the export of raw materials, and not the rare earth elements contained in finished or semi-finished goods. If it is just the raw materials forms (separated and purified chemical compounds) the export of which are being reduced, then it may not matter so much at all, because China has been reducing its export of ALL such raw materials since the beginning of the 21st century when it openly decided to require that Chinese raw materials not be exported unless as much value as possible had been added in China first. This was a program to create jobs in China, and to bring new technologies and manufacturers to China in search of secure supplies of raw materials. It worked and seems to have simply become state policy.

I have been saying for some time that the rare earth elements supply issue is just the tip of a rare metals supply issue, that will grow to monumental proportions in this decade if China’s domestic economy continues to grow as a consumption-driven economy. China is already far and away the all time largest producer in history of steel; it today produces some 50% of the world’s raw steel. This has resolved the issue of supplying the necessary structural metal to advance China to a world class industrial power.

Now it is the time for China to begin producing or acquiring all of the technology metals, such as the rare earths, so all of those buildings can be electrified, the roads can be filled with high tech vehicles, and the people can have cell phones, flat screen television, and personal computers.

To the one billion of us in the Americas, Europe, and Japan who already live in the Age of Technology, we must now try to add one and a third billion additional Chinese, and to do this, apparently, in just another generation. Even assuming that non-Chinese technology utilization grows at only a small rate, if at all, from where are we going to get the resources of minerals, energy, and water to more than double the production of technology metals?  The answer is that we will not be able to do it. The world will now move towards higher and higher prices for technology metals. This and the geographic and geological distribution of metals, minerals, energy, and water may well lead to a world of have and have not nations. It may well be that geology becomes destiny, and those that do not produce their domestic resources, may wind up ultimately only being financially able to be suppliers to the others. I am not talking only of African nations. I am speaking also of the United States.

Without ad hominem attacks on me or on my patriotism, tell me please how we avoid America’s economic decline without now and immediately producing and conserving our own resources, and without going out into the world to find resources to sustain our standard of living and quality of life?

Japan and Korea have already begun to do just that in order to survive as industrial nations. Have we decided not to continue as one?

by Larry MacDonald – Canadian Business Online – Published: August 12, 2010

There are well over a dozen rare-earth elements on the periodic table, with names like neodymium, lanthanum and europium. Much is heard about the growing supply deficit in crude oil and other raw materials but the one developing in the rare earths could also have an adverse impact. On the positive side, there could be a range of opportunities for entrepreneurs and investors.

Rare earth elements are used to make miniature magnets, phosphors and other components necessary to the functioning of iPods, BlackBerrys, LCD screens, disk drives, MRIs, hybrid cars, wind turbines, catalytic converters, batteries, lasers, guided missiles, smart bombs and other consumer, green and military technologies.

Demand for rare earths is growing vigorously as penetration rates for these technologies catch up to those in developed countries. As well, ongoing technological innovation is augmenting demand. There is “a wild demand dynamic,” to use a phrase from John Kaiser, editor of the Kaiser Bottom-Fishing Report.

On the supply side, rare earths are not rare per se. In fact, they are ubiquitous in the Earth’s crust. What’s rare is finding them in high enough concentrations for economical extraction.

At present, the richest deposits are located in China — so much so that the country currently supplies more than 90% of the world’s demand. “There is oil in the Middle East; there are rare earths in China,” said Deng Xiaoping, the architect of China’s economic revolution.

As its internal needs grow, China is steadily reducing the amount available for export. And as trade frictions escalate, the West could be cut off sooner than expected, warns Jack Lifton, a rare-earths expert who publishes the Jack Lifton Report.

Indeed, China slashed rare-earth exports dramatically in July, leaving the quota for 2010 at 30,258 tons, 40% less than the 50,145 tons allowed in 2009. The squeeze on prices just got a lot tighter.

As prices climb for rare earths, there will be an incentive for mining operations outside of China to ramp up operations. But most are years away from production, so the rise in prices could potentially go far before supply catches up. In turn, the price and availability of products requiring rare earths could be negatively affected.

Entrepreneurs and investors might be interested in becoming more acquainted with the rare-earth sector, as well as the mining companies headed toward becoming producers in the West. The latter include:

• Avalon Rare Metals Inc. (TSX: AVL) has a project near Great Slave Lake in the Northwest Territories with an extremely high concentration in the more valuable “heavy” rare earths.

• Saskatoon-based Great Western Minerals Group Ltd. (TSX-V: GWG) has a South African interest that should be one of the first to reach production, says Mr. Lifton.

• Quest Uranium Corp. (QUC) has a deposit near Strange Lake in northern Quebec and is a favourite of Mr. Kaiser because it can be “open-pit mined for faster payback.”

• Molycorp Inc. (NYSE: MCP) was the most important rare-earth mine in the U.S. until it closed in 2002 due to low prices; it now has financial backing from the likes of Goldman Sachs and did an initial offering of shares on the NYSE in July.

• Australian company Lynas Corp. has seen strong price action in its shares on the Australian Stock Exchange since Chinese exports were slashed in July (also trades as an ADR over the counter in North America, under the symbol LYSDY).

Many of my readers have expressed surprise at my report of the non-appearance of practically all of the non-Chinese rare-earth junior-mining ventures, at the ’6th International Conference on Rare Earth Development and Application & China Rare Earth Summit 2010′, held in Beijing this week.

I personally decided to come to the English-language ‘China Rare Earth Summit 2010′ in the Spring of this year, when the Chinese Society of Rare Earths invited me to be a guest speaker during the plenary (general introduction and overview) session. I paid my own air fare, and the Society is covering my hotel room in Beijing. When I agreed to come, I did not know who else would be attending, but I assumed that the regular contingent of junior miners and sector analysts, who I see at all of the rare earth conferences I attend, would be there.

I admit that I now only attend conferences at which I am a speaker. Since my consultancy is focused on assisting institutional investors doing due diligence on rare metals related opportunities, I even narrowly select only those speaking opportunities where I believe I can improve my knowledge of a sector, such as rare earths.

I also admit that since late last year, I have been hearing that ‘conference fatigue’ is setting in among the attending classes of the rare-earth ‘space.’ It should be noted here, by the way, that institutional investors rarely attend the typical rare-earth conferences put on by information services and other professional conference organizers who cover the ‘sector.’ Institutional investors have their own gatherings which are for (high) paying clients only, such as private equity funds. I frequently speak at those and have meetings with the clients of my clients, who usually have specific questions about particular sectors and companies in which they are interested.

I give advice only on my assessment of the probability of commercial success of rare-metals-related opportunities. I do not presume to be a stock picker, because that requires knowledge of, and interest in, market psychology, which I possess only to a limited degree.

Having said that, I agree, however, that most industry conferences put on by information services and professional conference companies, are for stock promotion and networking among industry hopefuls and public relations companies.  They usually consist of endless ‘presentations’ by junior miners saying exactly the same thing over and over again. I am indeed fatigued by most of this myself.

The trouble for the serious junior miners, seems to be that they cannot distinguish between the forest and the trees. I agree wholeheartedly that there is and should be conference fatigue with regard to the financing of rare earth mining opportunities outside of China.  These conferences are pointless if your goal is to secure either long term strategic financing, or get access to technology to move your project forward. Neither the financiers, nor the providers of such technology, attend most of the stock-promoting conferences.

Serious junior miners need financing, supply-chain knowledge and technology, and marketing assistance. The ‘China Rare Earth Summit 2010′ was certainly a source of information on supply (and value) chain technology, as well as a source of knowledge of the largest rare-earth market in the world, Southeast Asia, primarily China. Even though Western institutional investors were not at this meeting, I did ask that successful Chinese miners, refiners and mining companies look at investing and opening operations in the USA, which would make the financing of smaller rare earth mining ventures in North America more economically feasible.

I will continue this dialog with the Chinese mining and mining finance community in November of this year, when I address the ‘China Mining 2010′ meeting – Asia’s, if not the world’s largest mining congress – on US contributions to the global rare-earth market. I will also chair a mining commodities forum there on lead and zinc.

What I want to say about the non-attendance of junior non-Chinese rare-earth miners at this week’s meeting in Beijing is that I think it indicates a lack of understanding of what is required to successfully bring a rare-earth (or any other metal or metals) producer to the marketplace. It underscores for me what seems to be only too common among junior miners: a lack of management skills, particularly obvious in the areas of long term finance planning and acquisition, business model development, supply-chain awareness, value-chain awareness, and marketing.

There were 300 attendees in Beijing this week. They represented, comprehensively, China’s rare-earth miners, refiners, metal-trading companies, academic and industrial research and development, related manufacturers, and government. The conference language was English. There were attendees from Mongolia, Kazakhstan, Bulgaria, Russia, France, the UK, Australia, Canada, and the USA, but the only non-Chinese junior miner, as I have previously said, was Great Western Minerals Group (GWMG), which was doing exactly what the others should have been doing; networking with Chinese companies that have the skills and technologies for sale or joint venture, which a company like GWMG needs to bring its project to a successful conclusion.

I marvel at the nonsensical braying of US promoters, about critical shortages and national security requiring massive public subsidies, for an industry that needs honed management skills in finance, supply chain interaction, technology, and marketing. A lot of what every rare-earth junior-mining company (US or otherwise) needs to be successful, was available in Beijing, but I guess they had ‘conference fatigue.’ Their general failures to understand their need for the skills in the Chinese rare-earth industry, do not bode well for the non-Chinese industry.

I’m tired of hearing about Chinese plans and conspiracies to control the rare-earth space. By the way, I was intrigued by the number of Chinese here who asked me why the USA is against Chinese investment in US mining. “Is there a conspiracy,” one gentleman asked me, “against the Chinese businessman?”

Also, by the way, the first response I got to my call for Chinese investment in the North American mining space was, “why would we want to create a competitor?” My answer? That refiners, metal and alloy producers should build facilities in North America, so that smaller mines can be put into operation with assured markets, and without the need to each finance a separation plant and refinery and metal production operation. This is the only way to make mining, on its own, profitable at the concentrate production stage. I suggest that Chinese supply-chain-operation providers support only those mines, which can produce a high proportion of heavy rare earths. Such mines in Canada or South Africa, would be producing into a no-demand local market and would be glad to sell to Chinese customers. Even in the USA, domestic demand is small and declining, so that materials produced in the USA would be mostly for export. Thus, I pointed out, Chinese investments in the USA would create US jobs and would produce both profits and valuable metals for the Chinese markets, as well as increased US exports.

The US military demand can be met through direct stockpiling and recycling, or by encouraging its own suppliers to do the same.

I cannot think of another way to make North American rare-earth mining profitable, within the core competency of the North American mining ventures I have studied.

GWMG, for one, is doing exactly the right thing. It has found a high-grade (though small) rare-earth deposit in a low-labor-cost country. The deposit in question is disproportionately rich in heavy rare earths, it was mined before by a major miner and there was therefore a developed metallurgy for the deposit in place. GWMG is seeking third-party assistance in refining and metal production to be carried out in South Africa. GWMG will produce magnet alloys itself, in the UK, in its existing facility there, now running using Chinese metals. They will sell into the market the more than 2/3 of its production that it does not consume internally, resulting in a production of 3,000 tonnes per annum of rare-earth permanent-magnet alloy worth, at today’s rates, approximately $150 million with a margin of more than 35%.

Even better, GWMG plans to use part of its proceeds from any financing, to explore the area of its South African claims, to try and find additional ore of the type it has already verified to be there, in relatively limited quantity.

These days I am only following five rare-earth companies in any great detail. Each of them has a heavy-rare-earth-rich deposit or one that has other valuable metals associated with the rare earth deposit. I am working with two of those companies as a paid consultant, to help them to find financing and to find what I call supply-chain-synergistic relationships.

My only connection with GWMG is that I am a small shareholder. Why wouldn’t I be?

Where is everyone’s business model for profitable operation??

In fact, where is everyone who isn’t Chinese?

I am in Beijing, where I am attending and have spoken at the 2010 China Rare Earth Summit, part of the 6th International Conference on Rare Earth Development and Application, run by the Chinese Society of Rare Earths. I was honored to be one of only three American guest speakers. The other two were America’s most well known academic experts on rare earths, Professor Karl Gschneidner of the Ames Laboratory at Iowa State University and Professor William J. Evans of the University of California – Irvine.

The conference has 300 attendees who are a comprehensive group, representing the academic, business, and governmental sectors of the Chinese rare earth research (academic and business), development, mining, refining, and end use manufacturing industries.

I was asked to speak about ‘The American Perspective of the Rare Earth Supply Issue.’ My presentation and commentary will be posted shortly here on the Technology Metals Research web site for review.

Although most of the nearly 100 speakers in the 6 technical tracks, and most of the 222 papers listed on the program were highly technical, interspersed among them were some that were purely descriptive of mines, processes, and important sectors dependent on the rare earth metals such as permanent magnets, batteries, phosphors, wind energy generation, and other clean-tech/green-tech applications.

My colleagues Dudley Kingsnorth of IMCOA and Judith Chegwidden of Roskill Information Services, were also both invited guest speakers and Ms. Chegwidden was the moderator of the introductory session at which I spoke. Their respective presentations might be available online in the near future.

I am here in China to find out what the Chinese rare earth industry is doing and where it is going. I have a scientific background, and was once a researcher myself. I also worked with rare earths in product development for phosphors and batteries, so I was interested in and able to understand most, if not all, of many of the technical papers I heard. THe biggest surprises though, came from the survey papers on clean-tech/green-tech applications of the rare earths.

It is obvious from the vantage of the rare earths’ sector in China, that China is simply racing ahead of the rest of the world in volume production, as well as development of state-of-the-art clean tech and green tech products.

For example, it was pointed out that China built and installed 13 gigawatts of wind turbine electricity generating capacity last year, using rare earth permanent magnets for efficiency and low maintenance. The astounding prediction was made that by 2020, China will install 330 gigawatts more wind power capacity, with each 1.5 megawatt generator require one metric ton of neodymium-iron-boron magnet alloys, which, if they contains 34 weight % neodymium, would mean that the Chinese wind power industry would need a further 70,000 t of neodymium, approximately 3 1/2 times the 2008 production of that metal – all as new added material – between now and 2018-19.

I plan to write much more on this topic during the next few weeks, but I believe that the trend is clear. China will be the driver for, and the home of, the most demand in the world for the rare earth metals from now on.

There wasn’t much talk about Molycorp in China, other than to hope that if it gets into production, Chinese customers will have an opportunity to buy its products. The only non-Chinese rare earth mining venture present was Great Western Minerals Group. Its chairman gave a talk on his ‘mine to market’ strategy, and he told me he was there both because he was invited, and in order to continue negotiations for a strategic alliance with a Chinese refiner, on an African project the goal of which is to supply Great Western’s UK alloy plant, Less Common Metals, with feedstock metals for its operations from GW’s South African venture at Steenkampskraal.

Japanese companies and academics were well represented and there were even French and Russian miners and refiners. I was disappointed that there were so few Americans, and as for the American media I saw only public radio’s Marketplace (who interviewed me) and the New York Times’ Asia correspondent.

If the rare earth supply issue is so important to America’s security, why then do so few Americans and almost no American media come to the world’s premier rare earth informational event? It is most likely because China is the center of the world rare earth industry, in all of its aspects.

The Chinese and Japanese magnet industries both need heavy rare earths. They may even need light, imported, non-Chinese, rare earths sometime before 2015, but I think it is clear that after 2015 they will both need heavy rare earths from outside of China. Japan may actually need both types of rare earths from the outside by 2015, if Chinese demand should exceed or meet its domestic supply capability by then, which is probable, so that China no longer is willing to export rare earths.

If all roads lead to Rome then certainly the home of all metals is now China.

Disclosure: I have a LONG position in Great Western Minerals Group stock.