Why China's REE Hoarding Matters

Source:

"China now exports less than the world consumes annually."

Over the summer, China cut export quotas for rare earth elements (REEs) by 72% for the second half of 2010.

Why does this matter? The two usual reasonsódemand and supply. On the demand side, these metals are important components in all the high-tech industries that we hope will drive the next phase of global economic growth.

On the supply side, China not only has the world's largest reserves of rare earths but it also accounts for almost all of the world's current production.

. . .And if you control the supply of the raw materials needed to drive an industry, then that gives you a great deal of power in determining the shape of that industry.

What This Means for the Rest of the World

Well, the price of rare earths has shot up. And no wonder. The cut in exports means that China is now exporting less than the rest of the world consumes each year.

Now this isn't necessarily the great disaster story that some are making it out to be. Despite the name, there's plenty of potential supply of rare earths elsewhere in the world. We're not at 'peak rare earths' yet.

As Reinhard Butikofer, a German MEP, wrote in The Wall Street Journal the other day, "several countries have considerable reserves of rare earths. Had it not been so easy in the past to import them from China, we would have focused on these alternatives."

How Investors Can Profit

As is standard with commodities, rising prices are encouraging more supply and will also make people find cheaper substitute materials. But, in the meantime, investing in rare earths looks like a good way to profit from the ongoing growth in high-tech industries.

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