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The investment thesis for rare earth elements has hinged on headlines of China cutting exports of the elements to the rest of the world. We were thrown for a loop not only because there aren't any major mines in operation outside of China but because demand for these products is inelastic, meaning the prices have gone through the roof.
In turn, shares of Molycorp (NYSE: MCP ) , Rare Element Resources (AMEX: REE ) , and Avalon Rare Metals (AMEX: AVL ) have been soaring since mid-2010 in anticipation of cash flow from their mines. But it turns out these elements were more common than the market thought even as China cut its export quota.
China was supposed to cut exports by 40% in 2010 to 30,000 metric tons, except that never really happened. It turns out, China actually shipped 39,813 metric tons last year, according to the China Customs Statistics Information Center. That's only 9.3% lower than 2009, not nearly enough to justify the run we've seen rare earth stocks go on.
I've been punching holes in the rare earth thesis for some time now, but this is the icing on the cake. Sure, supply is short right now, but over the next few years there is a lot of supply coming on the market. Yes, demand is high now, but manufacturers are showing a willingness to modify their products to cut the use of rare earth elements. Now that we know China is shipping more rare earths than even it anticipated, the investment thesis for rare earths has taken another blow.
The wildcard going forward is word that China's Ministry of Land and Resources has taken control of 11 rare earth mining districts in China. The agency has taken over the mines because illegal mining is pushing more products into the market than China would like. Maybe this year we won't see China bust through its quota like it did in 2010?
A Foolish reminder
Tomorrow is the first day Molycorp insiders can sell shares after their IPO lockup period ends. Stocks have been known to fall on the day the lockup period ends, so be aware of this if you're looking to buy or sell Molycorp in the next few days.