Does the rare earths market lie?

There is a lot of press about the scarcity of rare earths, but what is the market saying, and does it really lie? Compare these three points of view. First, America (and by the way MolyCorp is the only rare earths company in the U.S.):

“The pricing of the rare earths doesn’t make sense — they’ve been way too low for way too long,” grumbled John Benfield, the square-jawed senior chemical engineer at the [currently non-operational] Mountain Pass mine.

Then China:

Low prices for rare earth elements from China contributed to cuts at the Mountain Pass mine before it closed in 2002. They also discouraged most entrants to the industry until the last two years, when prices began to climb because of strong demand.

Then financial investors:

The Kaiser Bottom-Fish Online Index of share prices of rare earth companies soared eightfold last year, and has kept most of its gains. That has encouraged worries about a possible bubble.

“Most of them will get nice share prices for a while and then what goes up, comes down,” said Judith Chegwidden, a managing director and longtime rare earth specialist at Roskill Consulting Group in London.

I recognize that mines like these have long lead times, but when financial investors are worried about a bubble and prices are still not high enough to make American production viable, the worries start sounding to me more like supply chain security concerns (particularly for sensitive applications like defense) than commercial concerns about an aggregate supply shortfall. Also, if the rare elements are extremely valuable in minute quantities, they would be much easier to store than oil, for example (in which large-scale physical speculation has recently occurred), so why aren't savvy investors or countries doing this already?

While I'm critiquing, I also don’t really agree with this analysis:

With each start-up typically raising $10 million to $30 million and signing up one or two long-term customers, the ventures are fragmenting the market’s search for reliable supply sources beyond China. A result could be that few mines actually open outside China, which would remain the dominant supplier.

“The customers and the industry are not being discerning enough, and we’re going to end up with 70 rare earth companies employing geologists and rare earth directors and no more than five new mines by 2020,” predicted Dudley J. Kingsnorth, the best-known consultant in the industry and an adviser to some of the start-ups.

I would characterize that not as fragmentation, but as “competition”, which is generally believed to have positive effects in bringing supply to market in an economically efficient way, and without conceding rents to dominant suppliers.

Some other fascinating tidbits are that Molycorp was owned by Unocal when CNOOC made its famous and ultimately unsuccessful bid (farsightedness only now detected?), and its currently owned by a PE consortium, of which Goldman was a member but has recently sold its participation.

Not so fast

Looks like Exxon’s Jubilee bid isn’t a done deal yet, with talk of a counterbid from China’s CNOOC and discontent within the Ghanaian government and national oil company.

China National Offshore Oil Corp. is in advanced talks with the Ghana National Petroleum Corp. to make a rival bid challenging Exxon Mobil Corp.'s $4 billion offer for a stake in a giant oil discovery off of West Africa, said people familiar with the matter.

A GNPC-Cnooc bid, which one person said "will be competitive to what Exxon has offered," reflects both the Chinese government's desire to secure access to more of the world's oil and the Ghanaian government's to be a larger participant in the discovery, known as Jubilee.

News of the Exxon agreement infuriated the Ghanaian government and GNPC, which had been trying to negotiate to increase its 13.8% stake in the field. "I don't see the Exxon-Kosmos deal as done," said GNPC chief executive Thomas Manu said in an interview this weekend. The Ghanaian oil minister also expressed his unhappiness with not being notified that Kosmos had made a deal with Exxon and said he believed the country had the right to block the offer.

Kosmos thinks it can sell to anyone, but even with Ghana attempting to hold itself to a higher level of sophistication and investor friendliness, it would be unwise to count out the host government so soon. (That said, Blackstone and Warburg will probably still make out like bandits.)

This is also getting boringly repetitive, but China is really leaving no stone unturned in its quest to secure resources in Africa, Guinea being the latest target (or beneficiary, depending on how you view it and whose interests you're rooting for).