At one time in the late 1980s, the US was the largest swing producer of the minor metals and particularly the rare earths (REs). However, the end of the cold war and increased supply from new mines in China undercut North American producers. The increasing need by the electronics industry for special metals with defined characteristics, such as inertness, conductivity and fusibility, has seen a revival in demand for the REs. Further, as more global electronics production was placed into the mainland to take advantage of the domestic consumer appetite for mobile phones and PCs, China has found it necessary to curb exports to feed the insatiable demand from its home-grown electronics industry.

Since the September diplomatic tension between China and Japan, which saw China temporarily withdraw RE exports to Japan, countries have begun to seek alternative supplies. Unfortunately, both Japan and Korea have found that they will need to seek support from governments in Mongolia, Vietnam and India to develop local resources. Toyota's affiliated trading company Toyota Tsusho is likely to bring production from a Vietnamese mine 2012, but other projects (eg, in Mongolia) are not slated to start production until 2014. Interestingly, the main source of fresh supply will come from secondary or recycled scrap, but this may not be necessarily efficient and may also
have environmental consequences.

While the US, Japan and Korea initiate programmes to create stockpiles and find independent means of obtaining RE ore, the EU recently completed a detailed study highlighting the need for diversified supply. The report, "Critical raw materials for the EU", published in June this year concluded that 14 raw materials should be considered as critical due to their high relative economic performance and high relative supply risk.

The EU report rounded up by commenting that 'for the critical raw materials, their high supply risk is mainly due to the fact that a high share of the worldwide production comes from China (antimony, fluorspar, gallium, graphite, indium, magnesium, rare earths, tungsten), Russia (platinum group metals), Congo (cobalt, tantalum) and Brazil (niobium and tantalum). Interestingly, the report also concluded that the concentration of metals in the above countries was compounded by "low sustainability and low recycling rates".

Eoin Treacy's view Rare Earth related shares have enjoyed an impressive advance as fears about the availability of Chinese supply have fuelled investor interest in a sector most had not heard of until recently. However, the potential that demand will outstrip available supply over the medium-term remains a very real prospect and should help to put a floor under related shares during reversions towards the mean.

Lynas Corp reasserted its impressive uptrend two weeks ago following a relatively similar sized consolidation. A reaction of greater than A30¢ would now be required to question the uptrend's consistency.

Arafura Resources continues to extend the break above A$1 and a clear downward dynamic would be required to check momentum beyond a brief pause.

Alkane Resources pulled back somewhat today but the reaction has so far been limited to about A20¢ and a sustained move below A$1 would be required to indicate a larger reaction and possible onset of a reversion towards the mean, defined by the 200-day MA.

Jiangxi Copper broke upwards from a yearlong range this week and a sustained move back below HK$19 would be required to question medium-term upside potential.

Aluminium Corp of China has a relatively similar pattern to the Shanghai A-Shares Index and continues to extend the breakout from the short-term range. A sustained move back below HK11 would be required to question potential for further higher to lateral ranging.

Inner Mongolia Baotou Steel Rare Earth Hi-Tech continues to accelerate and posted another new high today. A reaction of greater than CNY20 would be required to question uptrend consistency.

China Rare Earth Holdings also remains in a consistent, albeit steep, uptrend where reactions have been limited to HK70¢. It needs to hold above HK$4 if the eight week advance is to remain consistent.

A number of additional companies involved in the rare earth metals sector were last profiled in Comment of the Day on September 30th.