By David Forest, editor, International Speculator
Monopolies worry people. The most recent, high-profile case is concern about tech giants like Facebook and Google controlling the online space.
Some people want these monopolies broken up by the government…
But I prefer to let these monopolies run their course – and profit from them.
The Life Cycle of a Monopoly
The thing is, monopolies usually fall apart on their own. And when they do, the investment opportunities are absolutely huge.
Some of the biggest monopolies on Earth right now are in a space you wouldn’t think of…
And that’s the mining sector.
Right now, many of these mining monopolies are crumbling.
Check out Vale, for example. It’s the world’s largest iron ore miner. Vale controls 15% of global iron ore output. Historically, this company has set prices however it pleased.
But Vale has big problems…
In January, a dam at one of its Brazilian mines collapsed. This unleashed a flood of debris that tragically killed about 270 people.
Since then, regulators have shut down several of Vale’s mines. With this giant wounded, global iron ore supplies tightened fast.
Prices shot up 30%.
And the same thing is happening in platinum…
South Africa has a near-monopoly on platinum mining. Over 70% of the world’s platinum comes from South African operations.
But South Africa is in chaos. The government is threatening to nationalize assets… the local currency is freefalling… and capital is fleeing the country.
The result will be an implosion of the mining sector. And when that happens, platinum prices are going to the moon.
But there’s another monopoly – one falling apart right before our eyes today.
It involves the 17 metals known as the rare earth elements (REEs).
The rare earths are used in high-tech applications like magnets and batteries. From iPhones to rockets, REEs are a vital component of today’s technology.
And they’re also produced by one of the biggest monopolies on Earth…
A Tight Grip on Rare Earths
Chinese miners historically produced as much as 90% of the world’s REEs supply. That’s an even bigger market share than South Africa has in platinum.
In the past, that dominance caused huge price spikes. Just look at the surge in 2010 and 2011. That happened when China threatened to cut off exports of these key metals.
Now, it’s happening again.
Just look at some of the big jumps in REEs stocks recently:
China Rare Earth Holdings rose 116% in three weeks.
Lynas gained 96% in a matter of two months.
Rare Element Resources is up 500% in less than a month.
Once again, this action is all about China – but not in the way most investors think.
The official story is this: Rare earth stocks are spiking because of the trade war. On May 21, China threatened to cut off rare earth exports to the U.S. in retaliation for President Trump’s tariffs.
China provides 80% of U.S. REEs imports… so the threat of a ban sent prices soaring.
Or did it?
What Investors Are Missing
Here’s the intriguing thing most investors missed: Prices of rare earths in China began rising on May 16.
That’s a week before any mention of a trade war ban.
This makes little sense. If Chinese insiders knew a trade ban was coming, they would have sold their rare earth holdings. An export ban would reduce sales for Chinese producers. Local prices would drop.
So why were Chinese investors buying?
Because the real story has nothing to do with the trade war.
Prices are rising because of China’s next-door neighbor: Myanmar.
The Southeast Asian nation is a major producer of rare earths. Mining in Myanmar ramped up fast over the last few years.
But most of that production is smuggled into China. Estimates say that up to 50% of “Chinese” rare earth production actually comes from Myanmar.
Chinese companies imported Myanmar ores, then shipped out the finished rare earth metals as their own. That was fine up until last year.
But late in 2018, things changed.
The Myanmar government cracked down on illegal Chinese REEs mining. Unauthorized mines were closed.
In protest, the Chinese government closed the border between Myanmar and southern China. On May 15, all shipments of rare earths stopped.
That disruption sent local REEs prices rising in China on May 16. Remember, without Myanmar, China may be losing 50% of its rare earth supply.
The truth is, China may not have enough REEs for its own use, let alone to export to the U.S. and other countries.
China’s trade war threat to cut exports is a paper tiger. The government knows it doesn’t have the supply. Exports are going down anyway, so it might as well get political leverage.
But Chinese buyers know exactly what’s going on. That’s why local REEs prices have continued to soar.
Rare earth stocks in North America had an initial spike. But they’ve pulled back on fears the trade war could be solved – and exports could be restarted.
This is completely wrong. Even if Washington and Beijing make peace tomorrow, there simply aren’t enough rare earths in China to export.
The monopoly is crumbling. And when the market realizes what’s happening, the rally could match – or be even more powerful than – the one we saw in 2010-2011.
Editor, International Speculator
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