This past November, natural resource investors flocked to the San Francisco Hard Assets Investment Conference. Immediately following that conference was a more specialized summit focusing entirely on one sub-sector of metals – Hard Assets Rare Earths Investment Summit.
There were several speakers at the summit and although the focus of the summit was rare earths, one key topic was referred to time and time again: China. Dr. Michael Berry gave a speech entitled Rare Earths, Critical Metals, Energy Independence and National Security. According to the bio provided by the Summit, Dr. Berry "publishes Morning Notes. The Notes discuss geopolitical, technological and economic trends and their effect on capital markets. In addition, he identifies opportunities in the area of natural resources, high technology and biotech."
During his speech, Dr. Berry talked about the US's lack of rare earths and how China has taken over the rare earths market, and he revealed that it is a threat to US national security. We've summarized his speech below. Where possible, direct quotations have been provided. After a quick introduction, he jumped right in and pointed out rare earths were only part of a larger discussion. "I'm going to talk about rare earths and I'm going to broaden it to critical metals. I'm interested national security," he said.
Critical metals include some of the industrial (and military) metals that are well-known. However, there are other metals that are only now becoming critical: "Events are occurring around the world today that are pushing some metals – that we haven't used or don't mine or haven't cared about – to becoming strategic and indispensable." He listed several others, including metals that are more difficult to find and mine than rare earths.
Next, Dr. Berry described two curves in every market – the mystery curve and the history curve. "When things are mysterious, you get really high prices. We saw it in uranium in the middle of the decade. But now more metals, including the rare earths, are morphing into critical or unattainable commodities." He also said that we are now in the history curve -- a section of the market where high prices are typically harder to get.
Dr. Berry described all of the research, testing, and intellectual property being developed in the rare earth space, all of which is uncovering new markets and new opportunities for these metals. "I expect many more applications to be developed in the next few decades. I think there will be a lot more demand for new applications."
After walking summit attendees through these preliminaries, Dr. Berry then moved into the main part of his speech and turned his attention to the one country that dominates rare earths: "I think China and the emerging world is where the action is. That's where all of the supply chain is going to. China has the choke point on rare earth elements and a number of other metals. And it's going to stay that way for a while."
The US is behind on a variety of rare earth supply chain areas, he explained, including mining, separation, refining, fabrication, and manufacture of magnets. "We're behind because we've allowed China [and other countries] to take away our supply chains by underpricing the market and stealing these supply chains from us."
It hasn't always been this way. As Dr. Berry described, America stockpiled a number of critical metals for decades and then sold them off a few years ago. Now they are realizing they need to resupply these stockpiles and Dr. Berry warns that American citizens will bear the financial brunt of the resupply. He listed several countries around the world that are stockpiling critical metals. "We've never stockpiled rare earth metals. We've sold off our strategic metals. That is a strategic problem for the US. China is supplying 97% of the world's supply. We have a dangerous dependency."
Next, Dr. Berry outlined seven strategic rare earth issues facing the US, and why each of these issues is a threat. The first issue is: "Forced migration and downstream REE technology is in China." He explained that American companies moved their plants to China and China was able to learn from those companies to add to their own intellectual property.
The second issue Dr. Berry described was: "The Department of Defence and the Department of Energy will have the first 'say' in rare earths. Rare earths won't be spread around the economy equally." This will result in many consumer products scrambling for rare earths.
Third, "it's relatively easy for another competitor to destroy a supply chain but it is hard to build one. It takes years to build a supply chain. That's the issue we should be talking about more." That will be the case for the US, Dr. Berry explained.
Fourth, "there is a new arms race in China. China spent $81 Billion (a 358% increase on her military). Everybody in Asia is building [a military] and you can't build a modern military without rare earth metals."
The fifth issue, according to Dr. Berry, was: "There is no stockpiling or extractive resource policy in the US at this time." The US is increasing its dependence on other countries for critical metals.
Sixth, "there is a quality of life convergence. Our quality of life is going to fall and the rest of the world's quality of life is going up. They want the iPods and cars that are made from rare earths, and that's why China wants the supply chains in China."
And the seventh issue was: "Global recession [has reduced] government spending to build supply chains."
Dr. Berry then summarized his own speech while urging the summit's attendees to be aware of how the above seven issues were affecting the US. "Rare earths are important but we've got to focus on supply chain and we have to realize that the rare earth part of it is the part sticking up out of the water," he said. "US resource discovery isn't happening. [This leads to] insufficient natural resource production in the US. [This leads to] loss of supply chain infrastructure. Over a period of time, if you're not producing raw materials, your supply chain goes away. [This leads to] insufficient intellectual property development. [As a result, this] impairs strategic capability and leads to a lower quality of life."
For investors, rare earths may present an opportunity but perhaps not in the way they were thinking. Investors should consider the larger picture and start finding American companies that are trying to get into the rare earth supply chain because they might see some growth as the US government wakes up to this serious national threat.
Dr. Michael Berry: http://www.discoveryinvesting.com/
Hard Assets Rare Earths Investment Summit: http://www.hardassetsres.com/