Trade War Isn't Good for Molycorp
Word came out yesterday that the Obama administration will be adding rare-earth-mineral-market manipulation to its long list of Chinese trade practices it's trying to change. The U.S. will join the European Union and Japan in asking the World Trade Organization to open talks with China about its export restrictions. More likely than not, this will become a WTO case in the future.
It's China's restriction of rare-earth-mineral exports that have sent shares of Molycorp (NYS: MCP) , Rare Element Resources (ASE: REE) , and Avalon Rare Metals (ASE: AVL) into the stratosphere in the past year and a half. If the WTO were successful in getting China to ease restrictions, it would add more supply to the global market, something miners should not be excited about.
It's no secret that China marches to the beat of its own drum when it comes to WTO rules. This rare-earth dispute is no different. China has kept the price of rare-earth minerals low in China as they have crept up around the world, giving a distinct advantage to Chinese manufacturers. The stakes for U.S. businesses are high.
Who is pushing the issue?
If more supply would be bad for Molycorp and other miners, who would it help? The hybrid vehicle, computer memory, and wind turbine markets would be the first winners. Toyota (NYS: TM) announced last year that it was attempting to build motors that relied less on rare-earth minerals because of the spike in prices. Seagate Technology (NAS: STX) has also been under pressure from rising raw material costs. An increase in supply and a drop in prices would certainly be a welcome sight for rare-earth-dependent manufacturers.
Foolish bottom line
Rare-earth-mining stocks are up today, probably on the speculation that a dispute could take years to resolve and China would be less likely to open up the rare-earth-mineral market. But I really see no upside for miners today. The only upside is if China cuts exports further, something it may not do under the current scrutiny, which means China is more likely to increase exports, hurting prices. Miners need prices to remain high or their mines may end up being mothballed, which has happened before.
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At the time this article was published Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.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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