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The rare earth minerals have risen to the surface again, as China announced its first batch of export quota’s for the 2011.  China produces 97% of the worlds supply of rare earth elements, so their quota is the defacto world consumption rate.  Reuters is reporting that the quota was 11% lower than it was last year at this time.

China’s Commerce Ministry allotted 14,446 tonnes of quotas to 31 companies, which was 11.4 percent less than the 16,304 tonnes it allocated to 22 companies in the first batch of 2010 quotas a year ago.

The Ministry said in a statement on its website at www.mofcom.gov.cn that it had added more producer companies to the quota list, but cut volumes allocated to trading companies for the metals used in high-tech goods.

It does not take a genius to see that China is slowing the “usage” of  raw Rare Earth’s world wide, so that it can increase the processing of them domestically. This allows China to increase the value added portion of the manafacturing process, before allowing them to be exported.  This makes China the go to source in the future for rare earths that have already been pre processed, which was Japan’s niche market.

It is already suggested that China will run out of Rare Earth supplies for exports by 2015 as they ramp up their internal demand.  This has significance, as the silicon valley high tech industry will be 97% reliant on Chinese supplies, in order for consumers to enjoy the latest in IPAD screens, or Hybrid Cars.  This is also important if you are a manufacture of windmills that is not based in China.  This makes every hybrid car on the road, a Chinese product, in reality.

China has no choice but to constrain the world wide supply of Rare Earth minerals as its own demand grows. The world has no choice but to rush out and throw money at the current rare earth projects, to get them up to speed and in production before 2015.  This is an honest capital allocation event.  The don’t happen very often, and when they do fortunes are going to be made and lost speculating on who has an edge at any given time.

A modern day gold rush for supply is happening in front of you and I.  In the next 5 years, Chinese exports will be realistically gone, and if you do not have a supply already lined up, there will not be a commercial spot market available.

The US has a couple of the largest deposits of Rare Earths available, the first is a historic mine in California, which used to be the largest rare earth mine in the world during its production run.  At one time, it produced over 40% of the worlds supply.  In the chart to the right, the US portion of the graphic is from the Mountain Pass mine.  Moly Corp symbol: MCP is the new corporate owner of the mine.  They have raised funds in an IPO last July to recondition the mine.

In August, China and Japan got into a tiff over a fishing island between them.  At the time, China cut off Japan’s imports of Rare Earth minerals.  This generated a significant demand in Japanese businesses needing to find a new source of supply.

Last week, Hitachi Metals Ltd (5486.T) signed a joint venture with Molycorp to help ensure a steady supply.

That followed word earlier this month that Sumitomo Corp (8053.T) agreed to invest $130 million in Molycorp to secure a seven-year supply of the materials.

The only other mine in the world that is about to go into production is owned by Lynas Corp. It can ramp up production in the near future and is based in Australia. They have already started to pre sell its own supply of minerals before they are mined.

The US Government is a huge consumer of Rare Earths, as they are built into technology like combat radar and cruise missiles. Between these two western mines, there is enough rare earth supply for the US military needs, and for some manufacturing needs, but it is not enough to meet world technology growth expectations for Rare Earth in the middle to long term.

Hitachi has also started to invest in a rare earth recycling program, to generate a new supply from already used elements.  This strategy is one of a couple that Japan is undergoing to increase its supply of rare earths.

“We need to make sure we have a stable supply of these materials and recycling is part of that,” Kenji Baba, general manager of Hitachi’s resource recycling office, said this week at a test site north of Tokyo. “We have to work on bringing costs down.”

The increase in rare earth raw prices will drive a longer term expansion in capacity.

“China’s monopoly isn’t going to hold up because prices are high enough now to make it worthwhile for other people to get into the business,” said Mitsushige Akino, who oversees about $450 million in assets at Tokyo-based Ichiyoshi Investment Management Co.

Stocks of Interest: MCP & Lynas

Disclosure: None