Rare earths are vital, and China owns them all

TOKYO (MarketWatch) -- Rare earths may not be on most investors' radars, but they are certainly in almost any high-tech item they use -- and in the world of rare earths, China is king.

The U.S. Geological Survey recognizes 17 different rare earths, materials with science-fictionesque names like lanthanum and gadolinium. They are used in everything: glass polishing and ceramics, automotive catalytic converters, computer monitors, lighting, televisions and pharmaceuticals.

'China is the Saudi Arabia of rare elements ... [and] like oil, rare elements will flow to the highest bidder.'

Mark Williams, Boston University

"We are addicted to rare earths as much as we are addicted to oil," said Byron King, editor of Energy & Scarcity Investors, published by Agora Financial LLC. Yet "none of these elements are famous like gold or silver. None gets shipped in giant ore freighters like iron, aluminum or copper."

"Without these elements, much of the modern economy will just plain shut down," he said.

And yet, King said, "the only people who really study these elements are master's- and PhD-level chemists and solid-state physicists ... and national leaders in places like China."

In fact, China has all but cornered the market. The rare-earths space is like a Monopoly game, in which Beijing owns Boardwalk, Park Place, and well, pretty much all the properties, while the West owns St. James Place.

"China is the Saudi Arabia of rare elements," said Mark Williams, a risk management expert and finance professor at Boston University. And "like oil, rare elements will flow to the highest bidder."

China accounts for about 97% of global rare-earth production -- 139,000 metric tons of material in 2008 -- and it also consumes about 60% of the world's rare earths, according to Sean Brodrick, a natural-resources analyst at UncommonWisdomDaily.com.

Meanwhile, the U.S., which is also a major buyer of rare earths, mined no rare-earth elements last year, USGS said.

"China is consuming more of its own rare earths all the time, so it's exporting less," Brodrick said.

That fact could pose a significant problem for the world market, given that rare earths are used in so many products and gadgets.

Without these elements, "you can say goodbye to much of modernity," said King. "There will be no more television screens, computer hard drives, fiber-optic cables, digital cameras and most medical imaging devices. You can say farewell to space launches and the satellites ... and the world's system for refining petroleum will break down too."

Technology play

Indeed, rare earths are also critical in the cutting-edge technologies promised to create a new green economy and save the planet from a climate-change apocalypse.

"Really, if there are limited rare-earth supplies in world markets, then there will be a very limited 'green' future," King said. "There will be a limited future, period."

The electric motor in Toyota's (TM 70.82, -0.31, -0.44%) (JP:7203 2,859, -22.00, -0.76%)market-leading Prius hybrid, for example, requires 10 to 15 kilograms of lanthanum for the battery, according to William Gamble, president of Emerging Market Strategies in Rhode Island.

The Prius' battery also uses 1 kilogram of neodymium, the key component in the alloy for permanent magnets, he said.

In fact, neodymium is the only element that can create strong permanent magnets, although engineers have tried to find a substitute, King said.

And it's a little-known fact, he added, that strong magnets "are critical to the guidance systems of every missile in the U.S. defense inventory."

Meanwhile, lanthanum, the most commonly used rare earth, has been a key substance for petroleum refining over many decades, so even "non-green" cars depend on the rare earths