Yesterday was by far the most hectic day I’€™ve had since coming onboard RareMetalBlog. In the AM, for a time, everything was quiet and relaxed. Not in a serene ‘sink into a warm bath with a glass of Glen Rothes€™ way, but in an eerily relaxed, something’€™s about to go wrong manner. Perhaps nervous energy is clairvoyant.

Then the phone started to ring. And ring. People justifiably excited, curious, concerned. The Shin-Etsu release outlining their drastically rising rare earth prices, which my colleague Robin Bromby already discussed here, seemed to be just the beginning. Movement in the majority of rare earth stocks, the big Molycorp sell, China’€™s consolidating 35 REE companies in Inner Mongolia under Baotou. These would have all been justifiably large points of interest in and of themselves.

But they weren’€™t what everyone was focussing on. Or, rather, they weren’€™t people’€™s primary focus. Reports of rare earth prices in China raising by 50%, 90%, 125%, all in the course of Tuesday evening, were what everyone was talking about. 500$+ raises in Dysprosium kg prices, within a couple of hours, were bandied about.

Unsurprisingly, I spent almost all of yesterday on the telephone, and well into the evening (bloody time zones). I spoke with analysts in Tokyo, someone from the US Department of Energy, CEOs, a fellow at the Royal Institute of International Affairs (Chatham House) in London, renowned REE specialists. I even stayed up until the wee hours and rang a few connections from Beijing.

Using a typical supply and demand Smithian economic model, the most natural assumption for drastically raising prices is an influx in demand. However, Chinese REE market experts I spoke with told me that trading volumes have been low (with the caveat that separation plants seem almost loath to sell anything).

Opinions differed greatly, but, in the end, it seems to boil down to this.

The Molycorp share sale announcement, with insiders reportedly selling up to 24% of outstanding shares (referred to in the aforelinked article as “€œan abandonment” by Byron Capital Markets analyst Jon Hykawy) was responsible for the slight dip in share prices in many rare earth companies, which has already stabilised and corrected itself. No great surprises there. A major player in any field has a serious selloff thrust upon itself, and, for a couple of hours at least, the bulls start screaming bear. This frequently wanes quickly, after an Advil (or a Red Bull) and a quick look at why they were bull on the market in the first place. This was no exception.

The much more interesting aspect of all of yesterdays news was the spectacular price increases, and the Baotou consolidation. The Chinese Ministry for Information and Technology’€™s statement yesterday that they had consolidated, restructured, or closed down 35 REE companies, giving Baotou Steel Rare Earth Group a monopoly on Inner Mongolian rare earths.

This has been anticipated for some time, and a similar move with the companies in the south would also not come out of left field.

The consolidation, and the price increases, are in no way autonomous events. To be honest, the word communique© springs to mind. China is lightyears ahead in the REE space, and they’€™re well aware of it. Sun Tzu wrote: “€œOne hundred victories in one hundred battles is not the most skillful. Seizing the enemy without fighting is the most skillful”,€ and here one can see the associative application.

It’€™s a demonstration of strength, to be sure, but also a suggestion. China wants foreign REE companies to work with them. Open offices and plants in the Middle Kingdom, give credence to Baotou’€™s newly approved Rare Earths Product Exchange, and generally feed into the world’€™s quickest growing economy.

This is going to be quite the summer. Best check to make sure my subscriptions to the People’s Daily and the SCMP are up to date. Seems I’€™ll be needing them.

Thursday, June 09, 2011
by Byron Hawes