Before we delve into the reasons behind all the publicity, here’s the basic skinny on REEs: One, they are rare, at least sort of. Two, they are indispensable to modern technology. Three, the number of active, dedicated producers is tiny, with more than 90% of the world’s supply coming from China.

If you took high school chemistry, you probably remember the periodic table of the elements. But if you’re like most of us, even if you pulled a 95 on the chem final, you may not recall many of the details today. And there’s a better than even chance you never bothered to memorize the names of the REEs. It’s time to get reacquainted.

They’re generally clustered in a separate grouping at the bottom of the table, are known collectively as the lanthanoids, and these are their names, in order of atomic number (57-70): lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, and ytterbium. Yttrium (39) and lutetium (71) are also sometimes included.

Need to Know, Point 1: Rarity

Fact is, we begin with something of a misnomer. These elements are not, strictly speaking, rare. Earth’s crust is full of them. True, they’re not as common as iron, carbon, or silicon, but are about on a par with nickel, copper, and zinc. Even the scarcest is way more abundant than gold, platinum, or palladium.

What is rare about them is that they’re widely dispersed. Very seldom are they found in economically exploitable deposits. Complicating matters further is that there are so many of them, and they clump together. They have to be separated first from the ore and then from each other.

Thus REE production comes primarily from other mines’ byproducts. The miner strips off the metal he’s really after, then sends the REE clusters to a specialty refiner.

Need to Know, Point 2: Applications

It’s safe to say that life as we know it would be very different without the REEs. The more our technological accomplishments pile atop one another, the more crucial these metals become. Because of their unique properties, there are generally no substitutes for them.

Of all the REEs, the one people may have heard of is neodymium. Alloys containing it have revolutionized permanent magnet technology, allowing miniaturization of all sorts of electronic components in appliances, A/V equipment, computers, communication systems, and military gear. Your hard drive probably has neodymium in it. So does your DVD player.

Liquid crystal displays depend on europium. Fiber-optic cables can’t function without erbium. Virtually all specialty glass products, from mirrors to precision lenses, are polished with cerium oxide. Several REEs are essential constituents of both petroleum fluid cracking catalysts and auto emissions-control catalytic converters. Half a dozen REEs go into the manufacture of the energy-efficient fluorescent bulbs that will soon be mandatory. Lanthanum-nickel-hydride rechargeable batteries are replacing older ones based on lead or cadmium. And no REEs, no electric cars. Nor next-generation wind turbines.

That’s only a partial list. But what makes REEs an increasingly sensitive topic is their role in national defense. Here are a few small items that have become dependent on them: jet fighter engines, missile guidance systems, underwater mine detectors, range finders, space-based satellite power plants, and military communications systems.

Think the Pentagon is very, very interested in maintaining a steady REE supply?

Need to Know, Point 3: Supply

95% of the world’s REE production originates in China. If you’re looking for reasons why we’re so nice to the premier Communist power left standing, this is a biggie.

We weren’t always so dependent. Not long ago, mines such as Mountain Pass in California made us nearly self-sufficient in REEs. But in the early ‘90s, China flooded the market with cheaper product, until it had driven all of its competitors out of business.

Today, Mountain Pass is being revived, but the start-up of an old mine is a lengthy and costly process. There are also some from-scratch REE development projects under way in the U.S., as well as Canada and Australia. But for the moment, China holds the hand with all of the high cards in it.

Forget your hard drive. Forget 11th-grade chemistry experiments. This is a national security issue. The American government cannot afford to lose that supply source, period. Maybe someday, but not now.

And that’s what’s behind the recent furor over these obscure elements. Because China threatened just that, a cutoff. The one thing that really gets Washington’s knickers in a twist.

In August, the story broke in the mainstream press. Sources in China leaked news of a draft copy of a report from the Ministry of Industry and Information Technology. It allegedly calls for a total export ban on five of the rare earths, with the rest restricted to a combined export quota of 35,000 metric tons a year, far below annual global consumption of 125,000 tons, and rising fast.

This doesn’t look like a move they’d follow through on, if only because of the lost trade revenues. And it’s only a recommendation; final approval rests with China’s State Council. But consider it an opening shot across our bow, if you wish. Or perhaps they’re telling us they need their REEs for the domestic economy, and we’d best go find our own supplies. Either way, the scramble is on to find alternatives.

That could backfire. REE prices and demand were already dropping last fall as the recession deepened, and China maintains a decided competitive advantage beyond control of supply: lax environmental standards (many REEs are highly toxic). Thus the new companies could spend the fortunes required to come on line, only to find themselves victims of yet another market glut engineered by the Chinese. Still, these metals are so important, it wouldn’t surprise us if the U.S. government subsidized domestic production, rather than risk a squeeze.

The Market

The market took due notice of the China story, driving the stocks of Western REE producers, and would-be producers, nearly straight up. Since late August, Avalon Rare Metals (TSE:AVL) has gained 120%, Arafura Resources is up 75%, Rare Element Resources has added 72%, and Lynas Corp. (ASX:LYC) is 50% higher (China, ever the master strategist, exploited the credit crisis to grab 25% of Arafura and more than 50% of Lynas). Lurking in the background is Molycorp, the private company redeveloping Mountain Pass. It’s planning an IPO that may well come out of the gate red hot.

With market action this frantic, the sector is on the frothy side at the moment. The heady market caps being awarded to these companies are obviously not based on fundamentals, and a savvy investor takes care not to get caught on the wrong side of a bubble.

Even though the Chinese export ban may never materialize, the ever-growing need for REEs is dead serious. And while the current bubble may pop any day, the long-term prospects for successful miners are outstanding.

Regards,
Doug Hornig

Source: Why All the Fuss Over Rare Earths?

Nickel fell off a cliff in the pre-dawn hours, falling below the $9 mark, then came roaring back in New York before slipping again late to close at $9.1618/lb., down 3 cents. Zinc was a sharp up and down, ending little changed at $0.7967/lb., down three-quarters of a cent. Aluminum had a slow, steady slide, dropping to $1.2077/lb., down three-quarters of a cent, while lead was off steeply, shedding more than 3 cents, to $0.8955/lb.

Copper declined as traders’ concerns about rising stockpiles continued to drive the market.

Inventories monitored by the LME added to Thursday’s 2,200 metric ton gain by shooting up another 2,875 tons, to 173,375 tons. That’s a fresh 6-month high, and marks an increase of 57% since the end of April.

No question, “LME stocks are rising briskly,” said Edward Meir, of MF Global.

Also factoring in was the rally in the dollar, which will notch its biggest monthly gain against the euro since the European currency began trading in 1999. That strength has savage commodities, with the Reuters/Jefferies CRB Index down 5.5% in August.

“If the dollar’s climb resumes against the euro, we could see copper weakening at a faster clip as we start the new week,” Meir said.

There was also evidence of a slowing global economy from the International Copper Study Group, which reported that world copper usage increased only 0.2% in the five months ended May 31.

Source: Base Metals Still Mired in Red

Nickel had some sharp ups and downs before closing in positive territory at $10.0939/lb., up 8¾ cents. Zinc had a long series of ups and downs before ending where it started at $0.8584/lb., unchanged. Aluminum shot higher during the pre-dawn hours then traded sideways, eventually adding a penny and two-thirds, at $1.3957/lb., while lead finally had a good day, advancing 2¾ cents, to $0.8323/lb.

Copper pushed higher on supply concerns and a declining dollar that makes the metal cheaper for holders of foreign currencies.

Inventories monitored by the LME were down 225 metric tons, to 124,000 tons, yesterday. Stockpiles monitored by the Shanghai Futures Exchange fell by 575 tons, to 33,417 tons, in the week ended Thursday.

The advance came despite reports of the end of strike action at Southern Copper’s Cuajone mine in Moquegua province, Peru.

Edward Meir, of MF Global, sees conflicting tendencies. “Technically,” Meir said, “look for two days of closes above $8,350 a ton to set up an advance to the old highs, but fundamentals argue otherwise, and suggest we are quite overextended here.” Yesterday’s close was $8,388/ton.

Aluminum vaulted to a three-month high on supply concerns. Alcoa said on Thursday it would temporarily idle half the production at its Rockdale, Texas, smelter because of local power supply problems.

Three of the plant’s six operating potlines – which produce about 120,000 tons per year – have been shut down as a result of the electricity supply interruptions.

“The Alcoa news has reminded the market of the highly dependent nature of aluminium supply on both the price and supply of power,” said David Thurtell, analyst at BNP Paribas.

Some are unconvinced by the rally. “We argue that the recent strength in aluminum and copper is unjustified by fundamentals and that investors should not get carried away (or out) and buy these moves,” wrote analyst John Reade. “There will be tactical opportunities to buy both metals this year, but not here.”

Source: Base Metals Are Strong

Nickel prolonged Wednesday’s slide, briefly falling below $10 before recovering to close at $10.0259/lb., down 39 2/3 cents. Zinc was off during the pre-dawn hours and never recovered much, ending at $0.8586/lb., down 2¼ cents. Aluminum was down for most of the day, but edged back to wind up essentially unchanged at $1.3794/lb., while lead sagged through the whole day, eventually shedding 3¼ cents, to $0.8051/lb.

Copper held up, on a mostly down day for the industrial metals, due to the labor unrest in Peru. A strike at Southern Copper’s Cuajone mine in Moquegua province has severely curtailed output, while the company’s Ilo smelter will have to close soon if supplies can’t get through roadblocks in the area. Strikes and protests have also broken out at other mines in Peru.

In addition, Norddeutsche Affinerie, Europe’s largest copper producer, said that China may have recently responded to high prices by selling part of its strategic copper stocks. That would account for diminished Chinese import demand for the metal in recent months.

Meanwhile, nickel oversupply grew in April to the widest in eight months as demand receded for the third month in a row, according to the International Nickel Study Group.

Supply exceeded demand by 13,700 metric tons in April, the INSG report said. Production increased 6.1%, year over year, while consumption was 112,800 tons, off 0.9% from March.

Zinc struggled as stockpiles of the metal jumped to a 21-month high. Inventories monitored by the LME rose 5.8% yesterday, to 152,175 tons, the highest level since September 20, 2006.

Zinc production outpaced demand by 64,000 tons in the first four months of this year, the World Bureau of Metal Statistics said.

Lower zinc prices have led to production cutbacks at smelters in China, according to researcher CBI China Co. The average operating capacity of the country’s 28 largest zinc smelters dropped from 83 to 78% in May year over year, CBI China said.

Source: Copper Rallies on Peru

Nickel’s multi-day run ended abruptly, as it sank from its pre-dawn high to close just off of its intraday low at $10.8378/lb., down 25 cents. Zinc had a day of violent ups and downs to little effect, as it ended at $0.8386/lb., up a quarter of a penny. Aluminum was also little changed, shedding a quarter of a cent, to $1.3122/lb., while lead’s freefall still showed no sign of ending as it dropped another 2 2/3 cents, to $0.7966/lb.

Copper benefited from some optimism generated by the unexpectedly strong US retail sales reported a day earlier.

“With some positive economic data and some bullish insight into China’s likely demand following the tragic earthquake, plus disruptions in metal supply, the fundamentals seem tighter if anything,” said BaseMetals.Com analyst William Adams. “Indeed with lead and zinc now down heavily from their earlier trading levels some value does seem to be in these metals, as has been seen in nickel.”

Adams added that, “We would not be surprised if these lower prices attract a mixture of bargain hunting and restocking.”

Nickel prices retreated from a three-week high after the market reconsidered the potential for supply disruption because of BHP’s closure of an Australian smelter.

BHP reported it was hoping to export more nickel concentrates to other processing plants over the next four months, and that was enough to dampened interest. “Taking into account shipping delays, there will be a modest loss. Output will ultimately be pushed back from 2008 to 2009,” said David Thurtell, analyst at BNP Paribas.

“I suspect that with recent softness in demand … There will be plenty of spare refining capacity to take BHP’s material, but it depends on port capacity,” Thurtell added.

Meanwhile, lead’s extraordinary freefall, which has now driven the metal to a 16-month low, continued as stocks rose. Inventories monitored by the LME have grown by 70%, to 79,300 metric tons, since early March.

Some are beginning to question whether the selloff has been overdone.

“We expect prices to rebound to an average of $2,950/t in (the third quarter of 2008) on the expectation of a strong pick up in Chinese buying over the summer,” Barclays Capital analysts wrote. Lead closed at $1,775/t yesterday, a 54% plunge since its record high in October, 2007.

Source: Base Metals Stuck

Zinc declined the whole day, barely coming off its lows to end at $0.8363/lb., down 2½ cents. Aluminum was modestly lower, shedding a bit more than a third of a cent, to $1.3145/lb., while lead’s freefall shows no sign of ending as it dropped another penny and two-thirds, to $0.823/lb.

Copper was weak in the wake of the rising dollar.

“The stronger dollar is impacting prices for copper today,” said Patrick Chidley, an analyst at Barnard Jacobs Mellet in Stamford, Connecticut. “Copper looks set to continue to fall.”

Traders are taking note of all the talk about the possibility of increased interest rates in order to support the dollar and fight inflation.

“The Fed should be much more willing to act to keep the economy going and prevent it from entering a recession,” Chidley said. “If they go ahead and start raising rates, that’s not going to happen. They run the risk of putting the U.S. into a recession, and that’s going to affect copper very negatively.”

But nickel rose to a three-week high after BHP Billiton, the world’s third-largest producer of the metal, said it will shut down an Australian smelter and refinery that produces about 2% of world supply.

BHP announced that it will rebuild of the Kalgoorlie smelter furnace, reducing nickel sales by 28,000 metric tons.

“It’s a positive driver for the market,” said Adam Rowley, an analyst at Macquarie Group in London. “With the disruption in Australia, nickel is moving to a balance from a surplus.”

The Kalgoorlie closure followed word from Minara Resources, Australia’s second-largest nickel producer, that it was cutting its output forecast by as much as 23%.

Supply may be an ongoing concern, as nickel inventories monitored by the LME have fallen 8.2%, to 47,220 tons, since April 30.

Source: Strong Dollar Hits Most Base Metals - But Nickel Rallies on Smelter Closure

Nickel had a good day, falling from $10.50 in the pre-dawn hours but getting almost all the way back before closing at $10.475/lb., up 14 1/3 cents. Zinc spun its wheels, ending at $0.8612/lb., down a half-cent. Aluminum was modestly higher, adding less than a half-cent, to $1.3184/lb., while lead was pummeled, plunging to its intraday low of $0.8393/lb., down better than 3½ cents.

Though it was up for the first time this week, copper had a pretty unimpressive day, considering the action in the precious metals and energy markets, and that the Reuters/Jefferies CRB Index increased as much as 2.7%. Traders cited concerns that Chinese demand won’t be able to make up for declining US needs.

China’s imports of unwrought copper and semi-finished products fell 19.2% in May as compared with April. They were also off 9.8% in May, year over year.

Analysts expect that Chinese refined copper imports data, due at the end of the month, will show a drop of more than 6% from April to May as demand growth slows and domestic output ramps up.

Tighter monetary policies in the country are also likely to affect demand prospects. China’s central bank has raised the amount that lenders must hold in reserve by a full percentage point, suggesting authorities are anxious to hold down inflation that could develop as reconstruction work after last month’s earthquake begins.

On the supply side, inventories monitored by the LME rose 725 metric tons, to 121,275 tons, on Wednesday.

Protesters yesterday blocked roads leading into Southern Copper’s Ilo smelter and Cuajone mine in Peru, as mining companies throughout the country face escalating demands from workers and local communities.

Meanwhile, Freeport-McMoRan said output at its Peruvian copper pit Cerro Verde was as yet unaffected despite workers having gone out on strike over a contract dispute on Tuesday.

Source: Base Metals Remain Stagnant

Nickel plunged from the pre-dawn hours straight through the morning, only coming off its lows late to close at $9.939/lb., down more than 32 cents. Zinc was up and down all day with a slight upside bias, ending at $0.8818/lb., up three-quarters of a cent. Aluminum also pushed higher, adding a penny and two-thirds, to $1.3166/lb., up a penny and a quarter, while lead inched higher, adding a bit less than a penny, to $0.8769/lb.

It was a surprisingly good day for the industrial metals, modestly up though it may have been, considering that the economic numbers point definitively to recession and the decrease in demand that that will bring with it.

However, the upside for the metals is that the plunging dollar makes them cheaper for holders of other currencies, and that provoked a bit of buying in the markets.

On the supply side, copper inventories monitored by the LME were depleted for a change, dropping by 950 metric tons, to 122,550 tons, on Friday That came after they had risen by about 10% since the start of May.

Copper inventories monitored by the Shanghai Futures Exchange were also down, falling 13% to 38,829 metric tons in the week ended Thursday.

From a technical viewpoint, chartists say that copper holding at the key support level of $3.50 is a good sign, and they expect a test of the next level of resistance, $3.75.

And in the latest of a spate of labor problems, BHP Billiton reported that operations at its smallest copper mine in Chile, Cerro Colorado, had been hit by a truckers’ strike. Its larger mines have been unaffected as yet, Billiton said.

Source: Base Metals Mostly Higher

Nickel soared to near $10.50 in the pre-dawn hours, fell sharply into the New York open, but rallied from there to close at $10.2603/lb., up 8 1/3 cents. Zinc slumped straight through, only coming off its lows at the end to finish at $0.8745/lb., down a penny and a third. Aluminum was flat until New York opened, then pushed higher all day, ending at its intraday high of $1.301/lb., up a penny and a quarter, while lead sagged without much relief, shedding 3 2/3 cents, to $0.8679/lb.

The pattern seems firmly in place at this time, days of no major changes in industrial metals’ prices, but with an overall down bias. Maybe this is what we’re in for until the U.S. economy gives an unequivocal signal as to which way it’s heading.

The negative sentiment was bolstered again yesterday as the Organization for Economic Cooperation and Development reported that it has cut its growth forecast to 1.8% this year and 1.7% in 2009. Those are the weakest numbers since 2002, reflecting the belief that the U.S. housing-led slowdown is spreading around the world.

Concurrently, London-based researcher CRU cut its estimate for this year’s demand growth in China, the world’s largest copper user, to a “high single digit,” compared with the 11% earlier projected. In contrast, China’s copper demand expanded 19% last year.

“Manufacturers of copper products are experiencing tight cashflow because of rising debt servicing costs after higher interest rates,” CRU said, the result of China’s central bank having raised rates to a nine-month high in December to try to curb inflation.

On the supply side, inventories monitored by the LME rose 1,250 metric tons, to 123,500 tons yesterday, after four days of decline. Including New York and Shanghai exchanges, stocks are equal or 3.5 days of global consumption, less than last year’s average of 4.9 days, but well above the 2-day supply they’d fallen to earlier in the year.

The Chilean Copper Commission is still projecting a shortfall of 46,000 tons this year, but predicts a huge surplus of 450,000 tons in 2009. That would be the first such surplus in seven years.

William Adams, of London-based Basemetals.com, summed it all up by saying, “I’m generally bearish now on metals for the rest of the year … The housing-market downturn and credit crunch will move around and affect Asian demand as well.”
Source: Base Metals Continue Weak – Huge Copper Surplus Predicted for 2009

A small rally ensued that continued into early New York trading on the Comex, but got capped…for the third day running…at 9:00 a.m. New York Time. From there, it got sold off gently for the rest of the day and into early trading in the Far East today.

Silver suffered the same fate, but managed to rally back into positive territory for the second day in a row…but was capped before it could get anywhere near its 20-day moving average, which is $17.14.

It’s still an open question whether the boys will try to take out the 200-day moving averages on this cycle, or have they already collected all the tech longs they can? I wouldn’t like to see it happen, because of the psychological damage it would do, but if the bullion banks want to do it…they can. Time will tell. Everyone talks about the ’summer doldrums’ in the precious metals. As you can see, there are forces out there that contribute to it.

Not surprisingly, gold open interest on Tuesday fell 5,490 contracts on the $17 swan dive in the gold price…and with silver squeezing out a few pennies of gain, o.i. rose 120 contracts. It would be wonderful if this gold o.i drop was in the COT tomorrow, as there has been huge liquidation since the Memorial Day long weekend…none of which was in last week’s report.

In the Bill King Report last night, there was the following comment…”At the end of 2007 the eight largest banks/brokers had over $500B of Level 3 assets, which represented over 90% of their capital. The amount of Level 3 (Mark to Myth) assets has increased in 2008.” This “Level 3″ debt isn’t worth much. Check out the ABX chart. For the first time, some of these “assets”…if you wish to dignify them with that name…are now worth less than a nickel on the dollar. The chart is here.

I have three stories today. The first is a short one about oil…and some comments that T. Boone Pickens had about the CFTC investigation into crude oil “manipulation” by “speculators”. The Bloomberg link is here.

The second story is about the Fed’s Treasury Auction Facility. As of May 1st, they are providing $150 billion/month in short-term loans to banks and brokerage firms to prevent a total melt-down. Their latest auction for a $75B tranch received 71 bids for $96.62B! From this, it’s easy to see how solid the US financial system really is…LOL! The link is here.

In another sure sign that all is not well, here is a story from The Telegraph in London entitled “Banks’ credit crisis solutions have echoes of 1929 Depression.” The link is here.

“I am enclosing two tickets to the first night of my new play; bring a friend…if you have one.” – George Bernard Shaw to Winston Churchill…followed by Churchill’s response: “Cannot possibly attend first night, will attend second…if there is one.”

Let’s see…Lehman was raising capital on Monday, and was rumored to be buying its own shares on Tuesday trying to support its stock price. Bernanke says that inflation is “significantly higher” than the Fed wants. And lastly, Moody’s has put Ambac’s Aaa credit rating up for review…after their stock has fallen from $95 to $2.50. Everything is fine.

See you on Friday.

Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.

Source: And Then There’s This…Thursday, June 5th, 2008