What happened to the rare earths boom?
As the iron ore bubble subsides, it's worth recalling an earlier boom that went bust much faster.
In early 2011 two questions occupied the minds of investors: what are rare earths and how do I get some? The boom was already well underway with the groups of 17 previously unheard of substances clocking enormous price gains in a short amount of time.
China, which controls 95% of the supply of rare earth elements, was threatening to limit exports and use its market power as a political weapon. With rare earths essential for use in telecoms, autos, batteries and renewables, it was thought prices would stay – you guessed it – stronger for longer. A new paradigm of high priced rare earths was upon us, said the bulls.
As a result of this conviction, any business with a plan to mine the elements was given a rocket under its valuation. Largest of all was US listed Molycorp, the biggest non-Chinese producer and operator of the sole American rare earth mine. Its share price, swept up in the euphoria, at one point valued the nascent miner at US$6bn.
Last month, Molycorp filed for bankruptcy. Predictions of sustained high prices proved well off the mark because high prices are the best solution for high prices.
As prices for neodymium, scandium and yttrium soared, users did not simply wear the higher cost, they innovated. Users became efficient and substitutes were found; Toyota released a battery that used no rare earth elements at all. There was a supply reaction too as high prices encouraged new production.
Speculators didn’t realise that rare earths were given that name because it was once hard to separate elements into their constituent parts. The ore itself is relatively abundant. With new technology and processing techniques, rare earths no longer deserved their name and businesses once dedicated to gold and base metals turned their attention to the new market.
We warned of the dangers of the rare earth bubble (you can read that prophetic piece here) and prophesised in 2010 that ‘in a few years’ time, this tiny market will be flooded with new supply that will force a spectacular price crash. And like all booms, it will seem obvious after the bust that this was all folly’. It’s worth thinking about the next time you hear the words ‘stronger for longer’.
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