I notice with interest that the popular media is ignoring the World
Trade Organization case against China for restricting exports of critical
materials (REMX). This reduction of supply of the critical metals has a
significant impact on the global economy.
These critical metals are not
only crucial for your iPads and smartphones, but for our top secret, most
advanced weaponry. Looking for substitutes for rare earths has proven to be a
poor return on investment. For 50 years, they have been trying to find
alternatives, only to find out that the chemical characteristics of rare
earths are inimitable.
I have been a major proponent
of advancing domestic strategic mines in the U.S. and Canada. Recently, the
U.S. Department of Defense partnered with one of our rare earth
recommendations to advance studies.
This move may show investors
that the our national security is dependent on domestic critical rare earth
production. I would not be surprised to see Canada make a similar move to
support rare earth mining and development.
Recently during the quiet
holiday season, China (FXI) announced that they were tightening exports again
on critical materials. Rare
earth export quotas for next year will drop again. China claims that they
are cutting back because of the weak global economy.
Nevertheless, stealthily China
continues to announce infrastructure plans within the country, and has been
stockpiling these critical materials for their own domestic demand. For
months, we have been predicting a rebound in China's economy as iron ore
prices began rising.
Now we read headlines that China's
exports are very strong, even with a rising yuan (CYB). Risk assets such
as the rare earths miners and uranium miners (URA) should rally on this news.
More smart money from the investment community is realizing that China is far
from a hard landing. In fact, they may be in the midst of a powerful
recovery.
Exports have jumped to a
seven-month highs despite the debt issues in Europe and the United States.
This rebound in China may be a spark for the undervalued junior miners
(GDXJ), which have been in a downtrend for close to two years as economists
predicted a Chinese hard landing.
Many investors have been
concerned about the recent Fed minutes, which indicated some sort of exit
plan from quantitative easing. These accommodative actions to expand the
Fed's balance sheet to record levels have boosted bonds (TLT), the housing
(XHB) and the financial markets (XLF) with easy money.
We may be witnessing capital
flowing to growing economies such as China. All these actions over the past
few years by Central Banks could be starting an inflationary cycle, which
could boost the undervalued commodities such as uranium and
industrial/strategic metals.
China's equity markets are up
around 20% in the past six months, far outpacing equity markets in Europe and
the United States. Many do not realize yet that not only is China the world's
biggest supplier, but their own economy has grown to a point where they may
become the largest consumer of these materials as major industries continue
to move their factories to China.
China continues to control the
rare earth industry despite attempts from companies like Molycorp (MCP) and
Lynas (LYSCF.PK) to begin production. Both companies have been plagued by
delays and obstacles. Mining and refining rare earths is not an easy
ballgame, as it requires advanced metallurgy and favorable geopolitics.
For decades, the world has
been relying on cheap rare earths from China. Nevertheless, this will change
rapidly over the next few years. The Chinese are especially short on the
critical rare earths needed for permanent magnets, wind turbines, guided
missiles and lighting, as they are building their own facilities to
manufacture these finished products.
Molycorp and Lynas should be
able to supply a large amount of light rare earths after they work out their
issues. However, Lynas is still dealing with protestors in Malaysia, and
Molycorp is dealing with delays and rising costs to start production. The
disappointing performance in these two equities has hurt the entire sector.
In 2011 and 2012, we
experienced a decrease in the price of the entire industrial metal sector as
QE2 expired and the U.S. and European debt crisis intensified. However, we
may be at a turning point for the undervalued rare earth and uranium miners
as China leads a rebound.
Large amounts of quantitative
easing in the U.S. were announced in the second half of 2012. The new
Japanese government is also devaluing the yen to boost the Nikkei, while
restarting nuclear plants. China is rebounding quickly, announcing
infrastructure projects and starting construction on nuclear reactors. China
is leading the world with building new reactors.
China's decreasing rare earth
exports, combined with declining production and rapidly depleting heavy rare
earth resources, could cause an even greater supply shortfall in 2013. China
is consolidating the rare earth industry and cutting down on critical metal
smuggling. This will help the Chinese have greater control of their own
domestic production.
I will closely follow in my free
newsletter both the critical heavy rare earth space and the uranium
sector as Asia rebounds, as these metals are crucial for China's domestic
needs. These rare metals are vital for our latest high tech devices, and
there are only a few viable companies that can get into production in a
timely manner.
In the rare earth mining
sector, geopolitical support and infrastructure is crucial. In the uranium
space, rising geopolitical tensions in Africa and the Middle East with Al
Qaeda could cause increased interest in junior uranium developers in the
Western Hemisphere.
Two ways of investing in these
sectors is through the Rare Earth ETF (REMX) and the Uranium Miners ETF
(URA). Both of these metals are critical for China's clean energy initiatives
and Middle Eastern energy independence. The ETFs were poor performers in 2012
as fears of a slowdown in China increased. Now, they may represent bottoming
situations, which I will be following closely for my readers.
Disclosure: Do not own any of the
stocks mentioned in article and do not have any business relationships
