Here's What You Need to Know with China's Government Tinkering Again

China's growth led to aggressive expansion in select industries that the country's leaders have been trying to mop up—it just started tinkering in rare earth metals specialist Molycorp's backyard.

Jan 10, 2014 at 10:46AM

China's growth over the last decade or so has created huge imbalances the world over. That includes everything from trade imbalances to an oversupply of key natural resources. The giant nation is slowly starting to work through some of its own internal issues on this and recent efforts are likely to be particularly good news for Molycorp (NYSE:MCP).

Too much of a good thing
China's growth has turned out to be too much of a good thing. As the country's ascent has started to slow, not stop—just slow, the world has been left with too much coal, iron ore, and other commodities.

That's wreaked havoc on megaminors like BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RIO), both of which count China as a major customer. Although low iron ore prices is the big one for each of these companies, coal and other commodities are also pulling results down. The pair has largely shifted gears from rapid growth to cost cutting and deliberate expansion.

There's still a need for steel, which is made from iron ore, it's just not as great as it was before. That's why China is looking to trim its own steel production, pushing less efficient producers out of the market. In the end, that should solidify the iron ore business and help get BHP and Rio back into growth mode.

Another dramatic example is China's plan to close coal mines. Over a thousand dirty, dangerous, and less efficient mines have already been shuttered. And there's plans to take out many more. Rio and BHP, which also mine for coal, will see the long-term benefit of this, as well. So, too, will coal-focused Peabody Energy (NYSE:BTU).

In fact, Peabody recently inked a deal with Shenhua Group to provide China with thermal coal. So, to some extent, it looks like this global player is already seeing the benefit of the country's efforts to right-size its natural resource industries.

The impact of such moves is logically greater for Peabody than either Rio or BHP because of Peabody's sole focus on a single commodity, coal. And now that China is looking to clean up its rare earths metals market, look for industry specialist Molycorp to see a big benefit, too.

China, which supplies around 90% of the world's rare earth metals, orchestrated the sale of nine Chinese producers to the country's largest player, Inner Mongolia Baotou Steel Rare Earth Group. This is a big win for Molycorp because it will help mop up the oversupply situation that has been holding down prices.

And rare earth metals are key to important industries from electronics to military gear. So Molycorp offers customers important diversification. As a small example, General Electric (NYSE:GE) is an important player in the wind power market. The turbines that create energy from wind use magnets made from rare earths metals—that's a key market for Molycorp.

Relying on China for all of a key input for a growing industry isn't a good call for an international player like GE or its competitors. So Molycorp, which is focused on rare earth metals like Peabody is focused on coal, fills an important industry need.

Things are getting better
In fact, Molycorp already believes the industry is on the mend, with CEO Constantine Karayannopoulos discussing the positive trends in the third quarter conference call. Now that China is taking a crack at its own excesses in the space, the industry's prospects can only improve. And while Molycorp has nothing to do with China's efforts (and won't likely see a Peabody-like deal), it should feel the benefit as supply and demand more quickly realign.

Molycorp shares jumped on the news out of China. But the real benefit isn't a one or two day affair—it's long-term demand being supplied in a rational fashion. And that could make Molycorp a long-term winner for your portfolio.  

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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