Implications of Rare-Earth Exchange In China (MCP, AVL, REE, REMX)

A Rare earth metals exchange?  In China?  Reports were out last night that Baotou Steel Rare Earth has won has won an approval from the local government to actually start an exchange that will trade the rare earth metals. Molycorp, Inc. (NYSE: MCP), Avalon Rare Metals Inc. (AMEX: AVL), Rare Element Resources Ltd. (AMEX: REE), and even the Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX) are all trading higher.  Our question is simple, even if this is a bit arbitrary… Should U.S. rare earth metals be up on this?

The simple answer is “YES, but…”

The City of Baotou is where a local exchange will eventually be set up.  As far as whether or not central government approved of this is something that needs to be watched.  The aim is to allow maximum prices and to allow local producers to avoid leverage of foreign buyers.  What needs to be known is that the markets are said to be small, and the individual markets for these in total are very small globally compared to regular commodities.  The aim here is a spot market rather than a futures contract.

What is interesting is that reports differ on what is really being exported out of China, both on rare earth elements in general and even on the exchange.  China is clamping down on exports and the official rates were far lower, but the actual rate of exports seems to be perhaps not as tight as considered on an ‘unofficial’ basis. 

The report from People’s Daily Online shows what the exchange will look and act like, but further noted that it could take six months to set up. Reuters noted a discrepancy between the decline seen in the customs reports and a rise in the official reports.  The Financial Times reported that China’s rare-earth prices saw a “gravity-defying leap” and that there are fears that prices could soar further.

So, here is the take for investors.  Molycorp, Inc. (NYSE: MCP) is already producing rare-earths, but it remains a late-2011 and 2012 story.  Molycorp shares are up 3.5% at $62.67 on light volume today.

Avalon Rare Metals Inc. (AMEX: AVL) and Rare Element Resources Ltd. (AMEX: REE) are still both very speculative companies and they are “juniors” in a field where technically all players are juniors.  Avalon shares are up 2.5% at $7.59 and Rare Element shares are up 5% at $12.34. Neither gain is on substantial volume.

Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX) is an odd ETF but it is the mechanism that investors are using for a sector-tracker when there is news.  That ETF is up 0.95% at $26.90, also on light volume.

The fact that a spot exchange is being set up is a positive for prices.  This won’t likely turn into a feeding frenzy though.  A spot exchange with better regulations probably won’t act like a futures exchange without limits.  That is our take as of now and based on the available information.

JON C. OGG