When you think of REOs, you probably think of bank-owned real estate (real estate owned). However, another type of REO is having an impact on the price of real estate, thanks to a surprise “squeeze” by China on their export. REO also stands for “rare earth oxides.” REOs are used in electronics and other types of “high-tech and renewable energy devices,” and their prices have risen dramatically over the past twelve months. Samarium, cerium and lanthanum have led the rise, increasing in value on the open market by more than 1000 percent. That’s not a typo: one thousand percent.
The source of the spike is due nearly entirely to China’s decision to cut the exports of these minerals over the past two years. Since China produces nearly all of the world’s rare earths – around 97 percent – when the country cut export quotas first by 40 percent and then again by another 35 percent, this created a fear of a short term supply squeeze. This has not only driven up the price of the elements, but also the price of the lands where they can be mined. As a result, some experts fear that a bubble could develop as companies and investors are willing to pay more and more for a secure, non-Chinese source for these important elements.
Right now, some companies believe that they have found this source in South Africa, but production in this area will not start until 2015 at the earliest. East African nations also may have these resources, but for now, it is largely speculation. Should China adjust its export policies before investigation and production are underway, the REO market could self-correct and continue much in the same vein that it is today. Do you think that it is safe and appropriate for China to have such a dramatic influence on world markets?
Thank you for reading the Bryan Ellis Real Estate Letter!
Your comments and questions are welcome below.