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China Produces 99% of Two Rare Metals Needed for Hybrids

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China Produces 99% of Two Rare Metals Needed for Hybrids

Toyota Motor Corp. (TM) has the best-selling Prius, General Motors Corp. (GM) will soon roll-out the highly anticipated Volt, while Honda Motor Co. (HM), Ford Motor Company (F), Daimler AG (DAI) and every other large automaker either has hybrids on the market or is planning to introduce them – but a key component of the electric motors in hybrids is almost completely controlled by China.

The New York Times today published a story titled “China Tightens Grip on Rare Minerals.” It is a little known, but increasingly important fact, that China produces “more than 93 percent of so-called rare earth elements,” and specifically more than 99 percent of two particular elements, dysprosium and terbium, that are key components in hybrid cars.

Despite increasing demand, China appears to be ready to tighten worldwide supply in a move to get manufacturers into China as well as ease the incredible environmental burden China has so far allowed its mining practices to take:

China’s Ministry of Industry and Information Technology has drafted a six-year plan for rare earth production and submitted it to the State Council, the equivalent of the cabinet, according to four mining industry officials who have discussed the plan with Chinese officials. A few, often contradictory, details of the plan have leaked out, but it appears to suggest tighter restrictions on exports, and strict curbs on environmentally damaging mines.

Beijing officials are forcing global manufacturers to move factories to China by limiting the availability of rare earths outside China. “Rare earth usage in China will be increasingly greater than exports,” said Zhang Peichen, the deputy director of the government-linked Baotou Rare Earth Research Institute.

The move to tighten control of rare earth metals, is also, according to some, born of sheer necessity:

“Sometime in 2011 to 2012, Chinese domestic demand will surpass Chinese domestic production,” says Jack Lifton, an analyst and consultant who specializes in what he calls the “technology metals” and advises mining industry clients developing rare earth projects in North America. “This means no more Chinese exports of rare earths, other than in finished goods made in China that they allow to be exported.”

A Toyota Prius requires between 2 and 4 pounds of rare earth metals for its electric motor – a requirement that may become increasingly difficult if not impossible to meet. Concern about a crippling shortage may seem overly dramatic, but the United Kingdom’s Times notes that about 20% of Japan’s imports of rare earth metals are already believed to enter through the black market because supply is so scarce.

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Implications of China as the World’s Top Auto Market

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Implications of China as the World’s Top Auto Market

As measured by first half sales, China has just eclipsed the United States as the world’s largest auto market with total passenger sales for the first six months of the year up 17.7% to 6.1 million while U.S. sales dropped to 4.8 million. This marks the first time since the birth of the mass-produced automobile in 1908 that America is no the world’s largest auto market.

China was inevitably going to overtake the U.S. in auto sales as it has more than four-times its population and unprecedented economic growth, but the severe economic slump and carmaker turmoil in the U.S. combined with China’s aggressive auto sale stimulus package accelerated the process.

Most industry watchers expect China’s passenger auto sales to surpass 10 million for the full year – though it is important to note that China’s sales figures include heavy trucks while U.S. figures do not.

The implications of China’s new primacy for auto makers worldwide are most likely a shift towards cheap, small, fuel-efficient cars. The cars sold in China as the market continued to grow will have to be cheap in order to access the country’s gigantic but relatively impoverished, by Western standards, populace – cheap like the highly-anticipated Tata [[TTM]] Nano, priced at $2,500, not “cheap” like American sedans priced under $20,000. Regardless of concerns about global warming, the cars will also have to be fuel efficient, upwards of 45 miles to the gallon, to be affordable not just to purchase but to use. Similarly, the cars will also have to be small not only so they can be inexpensive and fuel-efficient but because of severe road congestion due the sheer number of drivers and the country’s underdeveloped infrastructure.

The clear point is that European and Asian auto makers, at least currently, are the only ones seemingly able to begin producing the car being described, with an emphasis on Asian auto makers. This leaves U.S. auto makers like Ford [[F]] and the reborn General Motors [[GMGMQ.OB]] out of the picture when the Chinese “middle-class” is tapped.

Mumbai, India-based Tata Motors could be poised to benefit with its previously mentioned Nano. China’s so-called “Big Five” auto makers – First Automotive Group Corporation, Dongfeng Motor Corp., Shanghai Automotive Industry Corp, Chang’an Motors, and Chery Automobile – could also be very big winners. Unfortunately, none of the Big Five are publicly traded on U.S. exchanges and only Dongfeng, with shares available on the Shanghai Stock Exchange, is not privately held.

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