COMMODITY BUBBLE? Rare Earth and Pouring Pain: How They Lost the Bet

By: Tim Loh, Tatiana Darie, & Simon Casey

In late 2010, two questions were on the minds of many commodities investors: What are rare earths? And where could they buy some?

The group of 17 obscure, difficult-to-pronounce minerals used in hot-ticket items like smartphones, electric cars and wind turbines were beginning to post the kind of price gains not seen even in the traditionally volatile energy and metals markets. For many investors, the only way to get in on the action was to buy shares of US producer Molycorp. Its market capitalisation had shot up to $4 billion after an initial public offering earlier that year.

On Thursday, Molycorp filed for bankruptcy protection, having run out of cash after a precipitous and sustained slide in rare-earth prices. The company has become a cautionary tale for investors looking for the next hot thing, a lesson in how excessively high commodi ty prices can quickly reverse.

“In hindsight it was an absolute commodity bubble,“ said Jon Hykawy, an analyst at Stormcrow Capital in Toronto, tracking the rare earths industry. The trigger for the rally was the decision by China in 2010 to suddenly restrict exports, sending users scrambling for supplies of lanthanum, neodymium, cerium and other rare earths.

Yet, grave predictions of a shortage of these critically important materials proved to be flawed. Rare earth consumers such as Toyota Motors simply switched to cheaper alternatives.