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?

How do you measure these things? In yields. This, by the way, is how you’ll know the bubble is popping. When that happens (bond yields rise like a rocket ship) it’s going to unleash financial chaos. But for now, the bubble just keeps on getting bigger and yields on short-term U.S. bonds keep approaching-and even reaching-zero.

“The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent,” reports Bloomberg. It’s, “the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.”

How do you think that conversation goes?

“Thirty billion you say? For four weeks? And you’ll pay me how much interest?”

“Nothing.”

“I’ll take it!”

“If you invested $1 million in three-month bills at today’s negative discount rate of 0.01 percent, for a price of 100.002556, at maturity you would receive the par value for a loss of $25.56,” reports Daniel Kruger.

Yes. That’s how much investors currently prefer government backed bonds to equities at the moment. It implies there will be hardly any inflation at all over the next yen years. But that notion should make you spew milk through your nose as you laugh, unless you’re unfamiliar with the growth in the global monetary base. If so, let us remedy that.

Source: Federal Reserve Bank of St. Louis

You can see that in the U.S. alone the adjusted monetary base is…growing. So why isn’t the increase in the monetary base showing up in the kind of inflation that would terrify bond investors and lead to a rebound in commodity prices and equities? That’s another question we got last night.

The answer is that so far, the huge liquidity injections have been quarantined in the financial sector, mostly on bank balance sheets, or on deposits by banks at the Federal Reserve and other central banks. In other words, all the new money is going into bonds and central bank accounts, not into new business or consumer lending.

Put another way, the quantity of money is increasing, but its velocity is not. That’s because the new money isn’t getting into the hands of people who are just itching to spend it. But it will soon enough. And when it does, look for bond yields to rise and the great inflation to begin. Also, televisions and hookers.

“I think this will be the greatest time in my life to buy stocks at these prices. I just wish I had more capital,” said one of the attendees at the Doomer’s Ball last night on Southbank. We heard this sentiment time and again over the course of the evening. And there is no doubt that the valuations are good.

There is doubt, however, about what the Australian resource sector will look like in a world where capital is scarcer. Will it lead to a contraction in the number of viable firms? Is the credit crunch like a meteor strike that kills all the giant reptiles that fail to adapt to the new conditions? If it does, there will be a huge survivor bias favouring the stocks that remain.

But there was also some anxiety about further falls in stocks, especially the longer the bar was open at the Ball. One reader is forecasting another 20% fall on the ASX before the lows are in. In fact, if the All Ords reaches the 2003 lows (2,673) it’s a decline of 24% from today’s levels. If it overshoots that low-as markets tend to do when they correct-you’re looking at a thirty percent fall from current levels.

If you treat it as a thought experiment and ask yourself what would have to happen for the ASX to fall that much, you get some alarming possibilities. The liquidation of Oz Minerals? The dismemberment of Rio Tinto? The fall of a major investment bank or leveraged institution?

Or perhaps it’s something simpler: more falling prices for commodities. That’s what the World Bank seems to think anyway. As reported in the FT, the World Bank’s Global Economic Prospects report says the commodities boom has, “come to an end.” It adds that, “Over the longer run, the price of extracted commodities should fall.” It reckons slower population and income growth will contribute to slower resource demand growth.

Naturally, this is diametrically opposed to the logic of the boom that began in 1999. Then, you had 200 years of falling real prices for tangible goods seemingly reverse itself, mostly because of growth in global population and per capita income. So which thesis is right?

Well you know what we think. We think the Money Migration is the long-term transfer of the world’s wealth from the debt-based consumption economies of the West to the world’s savers and producers, roughly in the “East.” This certainly favours Aussie resources for at least a generation.

But the migration has been massively disrupted by the credit crisis, which is really just an epic attempt by the U.S. and other English-speaking economies to avoid their Day of Reckoning. But don’t you worry. That day is coming. It’s just taking longer than we originally thought. Ben Bernanke is a creative man. And he’s desperate too.

But why don’t we ask China what it thinks? After all, it’s a pretty important party to this discussion. China? What do you think? Hello China. Are you there?

Hmm. China is not taking our calls. Maybe that’s because some Chinese firms are too busy looking for ways to take advantage of the current situation by securing long-term supplies to resources at lower market prices. And maybe actions speak a lot louder than words about Chinese desire for Aussie resources.

“Shenzhen Zhongjin Lingnan Nonfemet Co., China’s fourth-biggest zinc producer by output, said it agreed to acquire a 50.1 percent stake in Australian miner Perilya Ltd. through a private placement,” reports Bloomberg. And Forbes reports that Chinese steel-makers are set to push for a major reduction in iron ore prices to reflect the fall in global steel prices.

The average price in October for a metric ton of iron ore fines, according to Forbes, was $US90.60. But Chinese steel makers reckon that with steel prices back at 1994 levels, iron ore prices should roll back to. In 1994, a metric ton of fines was US$20.40.

A lot has changed since 1994. Supply of ore is up. Demand is up too. But costs for resource producers are way up too. It’s unlikely the steel-makers are going to get a price cut that large. And if they do, it will put some smaller ore producers under enormous pressure (even harder to with stand if you don’t have access to credit).

Where are we then? A year ago BHP held the whip hand and chased Rio in a dream of grand ambition. Now BHP is reconsidering its strategy. Rio is reeling. And pricing power has switched back to resource consumers in China, who are eager to use the whip as well, it appears. There’s been a lot of whipping going on, hasn’t there? More on what it means tomorrow.

Finally, yes. We too saw the reports circulating that the International Monetary Fund is getting ready to dump a bunch of gold on the market. So far, we haven’t found anything to substantiate them. We’re looking around, and will report back on what Diggers and Drillers editor Al Robinson digs up as well. Until then…

Source: The World Bank Goes Nuclear on Commodities

Nickel hit a steep slide early, falling below the $5 mark shortly before New York opened, and staying there the rest of the day to close at $4.9804/lb., down more than 56 cents. Zinc was also off early, but a spirited morning rally propelled it $0.5036/lb., up more than a penny and a half. Aluminum followed much the same path but failed to break even at $0.8964/lb., down less than a half-cent, while lead was modestly lower, ending down just under a penny and a quarter, at $0.6747/lb.

Copper suffered through another down day as steeply rising stockpiles signal the global dropoff in demand.

Inventories monitored by the LME gained 7,275 metric tons (3.2%) yesterday, to 237,925 tons, forging a fresh high since mid-March, 2004. Nickel stocks are at their highest level since May of 1999.

Not only are prices “a bit weak,” said Simon Toyne, an analyst at Numis, but the “copper stock builds that have been going on the LME — the last few days have seen a number of thousands of tonnes … is a bit unnerving.”

On the slightly brighter side, “Copper as with most other spot traded commodities, is now into the cost structure, but probably a lot less deeply than some of the other metals,” Toyne added.

Copper is “looking a bit directionless,” says Gayle Berry, an analyst at Barclays Capital. “When prices are coming off quite a bit, you do tend to see the shorts beginning to look for a bit of cover.”

Berry believes that that “is what you are going to see much more of going forward—these violent swings in prices, given the size of the short positions being built in some of the metals.”

Meanwhile, “Until we either see some further large cuts in production or more importantly some signs of improvement on the demand side, it’s too early to get bullish” on nickel, said Adam Rowley, of Macquarie Group in London.

Some such cuts are already on the way. Nickel producers including Brazil’s Vale will slash production by about 140,000 tons this year and probably another 100,000 tons next year. That will narrow the global supply surplus to 20,000 tons next year from 30,000 tons this year and 95,000 tons last year, Macquarie said.

Source: Base metals mostly lower -  Nickel producers cutting production as demand slows and stockpiles rise

Zinc plummeted in the late morning and never found its way back, ending at $0.4885/lb., down nearly 2 cents. Aluminum had a very strong day, pushing to an intraday high of $0.9402/lb., up better than 4 cents, while lead raced to $0.6402/lb., up just over 7 cents.

Copper led most of the industrial metals higher yesterday as it followed equities markets up in anticipation of a rate cut by the Fed today.

“We’ve seen some signs of life coming back to the market with equities rebounding and commodities rising today across the board,” says Matt Zeman. “Copper could rally pretty hard for a few days if the equities hold up.”

Zeman added that he “wouldn’t be surprised to see it rally higher or for several days in a row, perhaps even testing that $2.00 level again,” but that’s it. “I’d expect it to roll back over from there.”

With copper down 35% in October, and headed for its worst month since trading began in New York in 1988, there is beginning to be some concern that supply will soon be affected.

“When prices fall below the cost of production, high-cost producers shutter projects” and trim expansion plans, said Catherine Virga, an analyst at CPM Group.

Aluminum got a boost for just that reason, as Aluminum Corp. of China (ACH), the world’s No.3 alumina maker, said it will cut capital spending by 20% in 2009.

And Rio Tinto (RTP) CEO Tom Albanese said his company is rethinking its capital investment projects “across the board” to see if it could cut costs or delay them.

Albanese also brushed off the notion that the stock market pummeling of resource companies might force it into the arms of rival BHP Billiton, whose hostile bid is now worth some $70 billion. Rio’s shares have lost 2/3 since May and are down 35% just in October.

Source: Base metals mostly higher -  Producers begin shuttering projects

Zinc was off sharply, then up equally sharply, ending little changed at $0.7888/lb., down three-quarters of a cent. Aluminum rallied strongly off its pre-dawn lows, winding up with a loss of less than a penny at $1.1995/lb., while lead was off significantly, shedding 4¾ cents, to $0.8475/lb.

Copper led the other metals downward as traders reacted to the rising dollar, falling oil, and their concerns about lackluster demand going forward.

Bears were crying the blues, for sure. “It’s gloom and doom [out there],” said Sean Corrigan, of Diapason Commodities Management. “The world has woken up to the fact that economies are weakening pretty much across the globe.”

Technicians were peering at their tea leaves, searching for direction as copper hit an intraday low of $7,150/metric ton, its lowest price since August 13. Corrigan said it was vital copper holds at $7,000.

“If it breaks [through that level] then the next move could be to $6,600 and all the way down to $5,800,” he said.

Also factoring in were rapidly expanding stockpiles. Inventories monitored by the LME were up yesterday to 179,800 metric tons, a gain of 6,425 tons since Friday.

And zinc dropped as various supply threats dissipated. Yunnan Chihong Zinc, China’s fifth-biggest producer, said it wasn’t affected by the August 30 earthquake, and Nyrstar NV (NYR), the world’s largest producer, said its U.S. smelter in Tennessee was unaffected by Hurricane Gustav.

Source: Base metals moribund -  Copper stocks continue to climb.

Zinc rose slightly in early trading, but soon succumbed to the downward pressure of the day to close at $0.7959/lb., down over 3 cents. Nickel fell badly throughout trading Monday, ultimately ending just off its intraday low, at $8.0603/lb., down 15½ cents. Aluminum also trended down all day, dipping below $1.27/lb. just before noon.

While prices recovered slightly, aluminum still finished the day down 3 cents, at $1.2796/lb. Lead was not immune to the base metals’ woes on the day as it dropped over 5½ cents, to $0.9143/lb.

Copper’s second straight day of sharp declines was largely due to rising stockpiles of the metal and continuing concerns of poor copper demand.

According to the LME, copper stockpiles have risen by 19% in the past month, to the their highest levels in six months.

Copper is just looking ugly,” Matthew Zeman of LaSalle Futures Group remarked. “With the global economic slowdown, and a steady rise in stockpiles, it’s hard to see any reason that copper won’t continue to drop. Prices could fall quite a bit fairly quickly.”

Source: Base Metals Lose Again, Plunge is the Result of Rising Copper Stockpiles

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

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