Ever heard of the oxides of Lanthanum, Cerium, Neodymium, Praseodymium and/or Samarium? With price surges between 250% and 600% in one quarter, you may wish you have. The recent pissing contest between Japan and China, which culminated with a temporary export ban in rare earth metals such as those named above, translated in ridiculous price jumps in some compounds most have never even heard of, let alone traded, yet which would have made not only the year, but the decade for hedge funds invested in them. And with China producing more than 90% of the world's supply of rare earth minerals, coupled with increasing probability of escalating global (and regional) trade wars, it is distinctly possible that the gains recorded recently in gold will be dwarfed by the imminent Samarium Oxide bubble, which 3 months ago was trading at $4/kg and is now over $30.
Moody's has some interesting commentary on the rare earth situation in the context of one of the biggest developers and producers of specialty chemicals in the world: Rhodia.
While Japan and China quarrelled last week about shipments of rare earth minerals, Rhodia (Ba3 positive), a European chemicals producer whose activities include the separation and formulation of rare earths, was sitting pretty and its credit was unaffected by China’s alleged export ban on rare earth minerals.
On 24 September, Japan claimed that China had halted shipments of rare earth minerals, vital in the production of high-tech products such as hybrid cars and smartphones. China’s Commerce Ministry denied that Beijing had imposed an export ban. By late last week, Japan acknowledged that deliveries from China had resumed.
China produces more than 90% of the world’s supply of rare earth minerals. While Japan’s claims of a supply disruption spotlighted China’s control over the rare earths market, Rhodia escaped any significant credit impact thanks to three main factors:
- The minor contribution that the rare earths business makes to the group’s overall performance (around €200 million in annual sales, which is equivalent to about 4%-5% of 2009 group sales)
- Rhodia’s rare earths separation facilities in China are supplied by domestic producers, ensuring supply security, which puts the group at a competitive advantage versus competitors with no China presence
- Rhodia is in a position to pass on recent significant price increases (see exhibit below) to end-consumers thanks to their relative price insensitivity (rare earths account for a low percentage of end-product production costs), thus limiting any potential impact on Rhodia’s margins
In addition, Rhodia benefits from diversifying its supply of rare earths. Earlier this year, Rhodia signed a 10-year supply deal for rare earth minerals with Australia’s Lynas Corp. (unrated). Lynas’ Mount Weld project in Western Australia, which is currently being developed, is scheduled to be operable in 2011 and will over time supply 20,000 tons of additional rare earth products. According to Lynas, this will be the first rare earths supply project to come onstream outside China in recent years. Under the terms of the contract, Rhodia will provide technical support in the construction of Lynas’ Advanced Materials plant given that Rhodia operates similar plants.
Deposits of rare earth minerals exist in various regions of the world, including North America. However, several mines closed because of high extraction costs and environmental concerns. Given the recent price spike following the supply disruptions, several countries outside China are now considering restarting existing rare earth mines or developing greenfield mine deposits.