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Commodity boom and commodity blues

Cornelius Adebahr - 10th May 2011

Rarely were the price increases so enormous, rarely was the helplessness of the industrialized countries so great as in the rare earths sector. While precious metals like silver or energy sources such as oil last week crashed on the stock exchanges, the boom in these special metals holds. Some have risen within the year by more than ten times, not least because the demand has increased constantly. The dominant provider, China can at will reduce the production or, most recently in late April, increase production rates slightly generous. „Tough luck, self-blame, can’t do anything“ – that is the formula that currently best fits the commodity dilemma.

It is tough luck for companies worldwide, as no one could have precisely predicted this development. Rare earths with colorful names such as neodymium, europium or yttrium are mainly used in high tech applications. Especially „green“ technologies such as wind turbines and electric cars depend on these metals. The short development cycles in this sector do not correlate with the long response times of the extractive industry. From exploring a new mine to actually producing raw materials, it can easily take a decade – the time by which a new technology may already be out of fashion.

Western countries also have to blame themselves, however, because they allowed China to achieve a dominant position, with a production share of 97%, in the first place. Less than ten years ago, the Mountain Pass mine in California was shut down as it was no longer profitable, because processing companies since the early 90s prefered buying cheap Chinese metals. That their production could only be so low-priced because the mining took place without regard to any social or environmental standards, did not concern anyone in corporate headquarters. The former American monopoly on rare earths turned into a Chinese one. Thus, the irony is that the Chinese government officially justifies the current production limits with environmental concerns.

But is there really nothing one can do? At least not in the short term. While rare earths exist in sufficient quantities worldwide, new mines are not created overnight. The planned reopening of the Mountain Pass mine will not take place before 2012. Efforts to increase production in Australia have suffered a setback, after new environmental regulations were imposed on the processing plant in Malaysia currently under construction. And the initially promising attempts of Japan to recycle electronic waste from rare earths have so far not been successful. Therefore, at least for another year or two Western companies will have to live with the dominance of China and pay the appropriate prices. Because rare earths are only needed in homeopathic doses for each product, the recent price increases were bearable. Without these metals, however, no smartphone or touchscreen in the world would work.

It is only in the medium term that businesses and governments in industrialized countries can act. First of all, Western governments need to recognize that China will continue to further its industrialization, and indeed the global economy has benefited greatly from this fact until now. In this respect it would be advisable to support this technological catching up, and in exchange press for compliance with legal rules from free trade to intellectual property rights. Secondly, Western companies should focus on long-term contracts and storage, hedge against supply shortfalls, and – if necessary with political support – invest in joint procurement in order to reduce the monopoly power of China. Finally, government and business together should invest in the raw material that is sufficiently mineable in any country: the gray matter of the people. Then there is no reason to fall into commodity resignation.