By Myra P. Saefong
TOKYO (MarketWatch) -- A sharp drop in Chinese exports of
rare-earth metals has fueled a rally in global prices, and Asian
miners of these commodities are poised to benefit.
And while Japanese manufacturers that use the metals have
managed to hold off the brunt of the price pain for the now,
shortages of the metals are possible next year, strategists
said.
Japanese companies have seen a large decline in imports of the
rare earths from China since July, according to The Wall Street
Journal, and the situation worsened after the Japanese detained a
fishing-boat captain in disputed waters in the East China Sea in
August, raising tension between the two nations.
"While investors watch the gold price touch new highs, metals
termed 'rare earth' that are used in a variety of industrial
applications have climbed far faster over the past month,"
strategists at Nomura told clients in a note issued last week.
Rare earths, comprised of about 17 elements, serve as vital
components in everything from lasers, optical fibers and petroleum
refining, to automotive parts, computer monitors and
televisions.
"The increasing need by the electronics industry for special
metals with defined characteristics, such as inertness,
conductivity and fusibility, has seen a revival in demand for [rare
earths]," Nomura strategists said.
That demand combined with the tension between China and Japan
last month to boost prices for the rare earths worldwide.
Shin-Etsu Chemical Co. (SHECF) in August announced a 20% price
increase for its main product, rare-earth magnets, noting that
prices for neodymium had climbed 2.5 times from the price seen in
the summer of 2009, while prices for dysprosium had doubled since
the beginning of this year.
Nomura reports that the price of rare earths has soared by 200%
over the past three months.
And with China the world's biggest producer, accounting for more
than 95% of global supplies of rare earths, it could be at an
advantage.
"China would withstand the inflation from higher prices due to
massive volume of capacity and output [of rare earths], and control
over most of the life cycle of the finished goods that the planet
can't live without," said Richard Hastings, marco and consumer
strategist at Global Hunter Securities. "All of this encourages
more investment into China, from abroad but especially internally
in China."
Nomura's rare-earths basket of stocks includes Aluminum Corp. of
China (ACH) , also known as Chalco, Inner Mongolia Baotou Steel
Rare-Earth Hi-Tech Co. , Jiangxi Copper Co. , and China Rare Earth
Holdings Ltd. .
In early afternoon trading, shares of Chalco fell 1%, and
Jiangxi Copper lost 2.2% while China Rare Earth Holdings tacked on
4.7% in Hong Kong, defying broader weakness in the Hang Seng Index
which fell 1.1%. In Shanghai, Inner Mongolia Baotou Steel
Rare-Earth fell 0.1%, though China's Shanghai Composite climbed
0.5%
Meanwhile, Australian companies are set to add more production,
Nomura strategists said, so the rare-earths basket also includes
Lynas Corp. (LYSDY) , which was trading flat in Sydney; Arafura
Resources Ltd. (ARU.AU) , which added 4.2%; and Alkane Resources
Ltd. (ALK.AU) , down 1.4%. The S&P/ASX 200 was 0.9% lower.
Not painful yet
China's cutback in rare-earth exports has played a prominent
role in world news.
"Slowly but surely, China has been squeezing rare-earth export
quotas," said strategists at Nomura.
The trade ministry in Japan, the largest importer of rare
earths, has said China cut its quota for rare-earth exports to
7,976 metric tons for the second half of this year, down from
22,283 metric tons in the first half.
And Sojitz Corp. (2768.TO) , one of Japan's largest rare-earth
importers, estimates that Japan will face a shortage of 10,200
metric tons of rare-earth metals in 2011 if China keeps its global
export quota at this year's level of around 30,000 metric tons,
according to a report in The Wall Street Journal.
"We have to be concerned that this is the beginning of more
trade disputes regarding critical raw materials," said Hastings.
"End users of tech gizmos might think they are holding onto a piece
of the future, but the future, for now, depends on minerals and a
few other commodities typically found in severe concentrations in
only a few places on the planet - a perfect mismatch."
Even so, Japan has intensified its efforts to find alternative
supplies of rare earths, and Japanese manufacturers, reportedly,
haven't yet suffered from any shortages.
On Monday, auto makers and technology stocks were among the
gainers in Tokyo, with the Nikkei Stock Average up 0.5%.
Shares of Sony Corp. (SNE) were up 1.%, while NEC Corp. (NIPNF)
rose 2.%, and Toyota Motor Corp. (TM) added 1.9%.
Tokyo plans to allocate 100 billion Japanese yen ($1.2 billion)
to improve rare-earth supplies this fiscal year and will help
develop rare-earth metals in Mongolia.
And so far, the cuts in China's rare-earth exports "have not had
[a] serious impact on Japanese manufacturers, thanks to stockpiles
that can last anywhere from a few months to years," Andrew Pedler,
an analyst at Wilson HTM, said in research note.