Rare earth mineral companies had soared 4 years ago, as China used its monopolistic position to punish Japan. The country imposed an export quota and restricted REE shipments to Japan, leading to a desperate search for REE products by customers such as Mitsubishi, Toyota etc. USA, Europe took China to the WTO even as REE prices soared to unprecedented levels. This allowed western REE companies such as Molycorp and Lynas to raise funding and open mines in the west. Even junior REE miners saw their stock prices go up, as interest went up in their assets. However as WTO gets ready to give its ruling on Nov 21, the situation has changed radically for the REE industry. REE prices have come down by almost 80%, as users have drastically reduced their REE consumption through better efficiency and using substitutes. Mines have also come online increasing supply which means that China is no longer the force is used to be.

Read on GWI EU warns of shortage of of rare earth minerals even as China tightens control.

Why I think the prices will increase is that China is realizing that the environmental damage due to indiscriminate mining of the highly toxic REE minerals is catastrophic. There is danger that the Yellow river might see poisoning as the waste from the Baotao mines reaches the river. The area around the Baotao mines is highly toxic due to unorganized mining without safety or environmental restrains. The Chinese citizens are no longer putting up with environmental hazards and the government is being forced to act. They have already consolidated the industry and safety improvements will lead to an increase in REE costs. Note China had been able to undercut REE prices because they did not put environmental rules. This will increase REE costs and make the western producers more competitive.

I have been bullish about Molycorp since last year, even as the stock price has come down by 30-40%. I am still optimistic about the stock given the asset it holds and the potential to make a huge comeback. It is a speculative high beta stock and not for normal Microsoft type of safe investing. I would still buy it though.

From the NY Times

Arriving three years after an international tempest over the rare earths trade and 19 months after the World Trade Organization litigation was actually filed, the coming decision may not make a big difference to the rare earth industry itself, industry executives and officials said. But the case does seem to have had the unintended effect of helping to goad China into a major environmental cleanup.China, the world’s dominant producer of rare earth metals, quietly and unilaterally imposed taxes and annual tonnage limits on its rare earth exports seven years ago. It then gradually raised the taxes and lowered the tonnage limits in subsequent years, slowly throttling supplies to overseas manufacturers.

The Chinese export restrictions have become less important over the last several years for two reasons. Alternative rare earth mines have gone into production in the United States and Australia, reducing China’s share of global production to 85 percent, from 95 percent three years ago. And companies have become much more efficient about economizing on rare earths, especially the costliest ones, the so-called heavy rare earths like dysprosium.

Whole villages between the city of Baotou and the Yellow River in Inner Mongolia have been evacuated and resettled to apartment towers elsewhere after reports of high cancer rates and other health problems associated with the numerous rare earth refineries there.

On orders from Beijing, state-controlled enterprises have dismantled Baotou refineries and rebuilt them at an enormous mining complex at Bayan Obo in the Gobi Desert, which mines about half the world’s rare earths. Chinese state-controlled media have reported that tens of thousands of goats and other livestock there have died and many baby goats have been born severely deformed, possibly because of radioactive contamination from the rare earth industry.