Could China really be running out of rare earth minerals? That’s what the country is saying

On October 16 China’s Ministry of Commerce said that the country could run out of medium and heavy rare earth reserves in 15 to 20 years at the current rate of production.

Could this be true? Or is it simply justification for the country’s decision to cut export quotas by 72% in the second half of 2010 and to slap a de facto ban on rare earth exports to Japan in protest over that country’s seizure of a Chinese fishing boat. A New York Times story today says that Chinese customs officials have also started to stop rare earth shipments destined for Europe and the United States.

I’d vote Both are true.

China is using its current near monopoly in rare earth production to throw its weight around. It’s no coincidence that the clamp down on shipments to the United States comes just days after the United States announced that it would begin an investigation into charges that China is dumping alternative energy products at below cost. Saying “We’re running out” is great cover.

But I think there’s likely to be some truth to this announcement too. Look carefully at the language the Ministry of Commerce is using. Read more

It was something more than a threat but less than an actual embargo.

But China seems to be putting the clamps on exports of rare earth minerals to Japan.

The New York Times reported on September 23 that China had put an embargo on all exports of rare earth minerals to Japan in retaliation for Japan’s refusal to release a Chinese fishing boat captain who was detained by Japan’s coast guard after his boat collided with two Japanese coast guard ships while fishing in waters controlled by Japan but claimed by China.

Japan has now released the captain, but the two countries remain at loggerheads. China is demanding an apology and Japan is demanding compensation for damage to its patrol boats.

It’s not clear if that the embargo was real or simply a threat. Or whether or not what it was is now over. Figuring out exactly what happened (Is happening?) with rare earth exports to Japan is complicated by export quotas that China slapped on rare earth miners earlier this year. Those quotas look to be almost exhausted so exports to Japan might have been ending in any case.

But this embargo, threat of an embargo, or quota exhaustion, is a big deal for Japan. China mines about 93% of the world’s supply of rare earth minerals and controls 99% of the supply of some minerals in that group of elements. Rare earth minerals are essential to the batteries of hybrid cars, to the magnets that turn the rotation of the blades into electricity in wind turbines, and to produce the intense light of some lasers and to amplify that light as it travels through optical cables.

In other words, if you don’t have a supply of rare earth minerals, you’re pretty much out of business in key 21^st century technologies.

China’s strict new quotas—down 40% from 2009 levels—should have been a wakeup call to technology economies of the United States, Europe, Korea, Taiwan, India, and other countries that China wasn’t a reliable supplier of rate earths. When the quotas were reduced, technology analysts believed that it was a way for China to force more high-technology companies to move production to China. Want a supply of rare earths so you can make windmills? Well, you can have them if you move production to China.

But you’ve got to figure that last week’s threat has moved technology CEOs and national security leaders (since rare earths are crucial in modern defense systems) from worry to DefCon4.

The problem isn’t immediate. Most companies that use rare earth minerals have stockpiles of up to 6 months. But the search for alternative sources of supply just got a bit more pressing.

Which is why the stocks of the few non-Chinese rare earth miners have soared recently. Read more

Update Joy Global (JOYG)

Investors who bid up the price of construction machinery and mining equipment stocks in anticipation of Joy Global (JOYG) earnings announcement before the New York stock market opened on September 1 should be very happy with the company’s earnings report. (For more on the sector see my post http://jubakpicks.com/2010/08/31/if-the-economy-is-so-terrible-why-are-machinery-stocks-relatively-strong/ )

Joy Global announced July quarter (fiscal third quarter for the company) earnings per share of $1.13, 10 cents ahead of the Wall Street consensus. Revenue came in a little light at $850 million versus the analyst projection of $877 million

But the big deal was the company’s increased guidance for fiscal 2010, which since Joy Global’s fiscal year ends in October means a big bump in guidance for the fourth quarter of 2010. For the full fiscal year Joy Global now sees earnings per share of $4.10 to $4.15 a share. That’s above the $4.01 Wall street consensus. Revenue, the company projects, will be $3.35 billion to $3.4 billion. Earlier guidance was for $3.3 billion to $3.4 billion. The Wall Street consensus sees $3.41 billion.

And the results don’t look to be a one-quarter flash-in-the-pan. Read more

Iron ore prices retreat by 12% and iron ore mining stocks say, So what?, and move higher

It’s hard to imagine this happening with any other “product.”

The price of the product drops 12% for the next quarter.

And the stock market essentially shrugs it off. On a bad day for the market, August 30, when the Standard & Poor’s 500 stock index drops by 1.47%, the shares of the world’s biggest producer of this product fall by 1.29%. Shares of the second largest producer fall by 2.49%, it’s true, but that’s not unexpected since the beta of that stock (the measure of the stock’s volatility in comparison to the entire stock market) says that these shares are on average two-thirds more volatile that the stock market as a whole. (The drop in the shares is almost exactly what beta projects.)

And on a good day for the market, September 1, when the S&P 500 jumps by 3%, shares of the largest producer rocket upward by 5.5% and shares of No. 2 go up 6.1%

Guess when it comes to iron ore—and that’s the “product” in question—investors just don’t expect any price drop to last for very long.

Even after the drop iron ore prices would be120% higher than they were a year ago. So this disappointment would leave these miners still incredibly profitable. Read more

Platinum gets center stage in South Africa’s politics

Turmoil in South Africa’s mining industry.

The most immediate and obvious impact will be on global supply of the platinum group of metals. But since the big mining companies involved produce copper, gold, and other metals in their mining of platinum and palladium, the global market for those commodities will get tighter too.

At issue are laws designed to redress the inequalities of apartheid. The laws stipulate targets for black ownership, the employment of black mangers and women, and the economic development of communities near the mines. One goal of the legislation is to make up for the use of cheap black labor in the mines during white rule. Mining companies must sell a minimum 26% stake to black South Africans by 2014.

Mining industry leaders Anglo American (AAUKY.PK) and Lonmin (LNMIY.PK) say that the government has deprived them of mining rights. And that this threatens overseas investment (and therefore jobs—the two companies employ 100,000 in South Africa) in the country’s mining industry. (The industry as a whole accounts for almost 500,000 jobs in the country and for a little more than 5% of South Africa’s GDP.) With mine nationalization on the agenda of a September meeting of the ruling African National Congress, the disagreement seems headed to crisis.

The ore hit the fan in March when the national Department of Mineral Resources awarded a fifth of the prospecting rights in Anglo American’s Sishen iron ore mine to Imperial Crown Trading. Anglo American subsidiary Kumba Iron Ore filed suit to reverse the award.

The award to Imperial Crown Trading is the mining industry’s worst nightmare come true. Read more