Buying at the Point of Maximum Pessimism: A Rare Opportunity
- Demand for Global Technology Remains Strong
- It's Not Easy Being Green
- There Is Oil in the Middle East; There Are Rare Earths in China
This chapter is from the book
This chapter is from the book
This chapter is from the book
In 1992, Deng Xiaoping, the man who led China into its free-market reforms, made a rather arcane statement: "There is oil in the Middle East; there are rare earths in China." While only some observers might have understood the implications of this proclamation a few decades ago, chances are that nearly everyone will come to view Deng's words as prophecy in time.
To begin, a reasonable question may be, What is rare earth? Depending on your perspective, rare earth could refer to a rock band that had a few Top 40 hits for Motown in the early 1970s, or a set of elements clustered on the periodic table that you probably studied in high school chemistry. Not to take anything away from the band, but this chapter focuses on the rare earths from the science classroom. In practical terms, rare earths are actually nothing more than some ore materials that are mined from the ground. Rare earths, or rare earth metals as they are also called, are found in the third column of the periodic table. Typically, they are identified by their silvery to gray color, luster, and high electrical conductivity.
What makes them so relevant to the world we inhabit is that in spite of their "rare" name, they in fact are highly ubiquitous to the daily experience of most humans. Incidentally, rare earth applications comprise some of the basic raw materials of technology and have done so for decades. In a trivial sense, people may have marveled back in May 1953 at how scientists at RCA came up with the first color television. However, the answer is simple: a new application of the rare earth europium was used to form the red phosphors of the TV. Likewise, many people have seen video footage or photos of the early computers, which appeared to be the size of 18-wheelers, consuming an entire room, weighing many tons versus pounds, and containing thousands of vacuum tubes, flashing lights, and controls. Today, people have computers that are exponentially more powerful that sit discreetly on their desks, thanks in part to advances in rare earth applications such as neodymium, which drove the miniaturization of the magnetic disk drive. Far from even recognizing the critical role these metals play in their lives, people might be surprised to discover that without the rare earth europium creating the red phosphor in the cathode ray tube and the LCD display, there could be no color televisions or computer screens. In a similar vein, without the rare earth erbium, there could be no fiber-optic cables connecting the world in a dazzling web of efficient, high-speed communication. Most developed-market consumers take for granted their cell phones, TVs, and iPods, even as these devices become increasingly miniaturized. Miniaturization in consumer technology devices is often the result of a new rare earth application such as neodymium magnets in the iPod. The medical field uses rare earth applications in its MRIs and CT scans, and sophisticated defense departments use rare earth applications in their guided missiles, lasers, and smart bombs. With that said, it should be apparent that people come into contact with rare earth materials daily whether they realize it or not. Much of our modern economies and societies would be crippled without their applications. We have all heard someone proclaim that he does not know what he would do without his cell phone, or he could not live without his computer. We can see that a critical rare earth application lies behind many of the technological advances and devices that citizens of the twenty-first century now take for granted.
Demand for Global Technology Remains Strong
To be sure, we can expect demand for technology, and therefore its raw materials, to continue to grow at a steady pace. This will be particularly true as we look to emerging-market consumers as a source of future growth. Consider a simple proxy for technology demand, such as cell phone handsets. We can see that in large developing markets such as China and India, cell phone penetration rates remain well below developed-market standards and still have much room for future growth as their economies continue to advance. For example, cell phone penetration rates in China and India are approximately half those of the developed-market levels found in North America and Western Europe, as shown in Table 11.1.
Table 11.1. Selected Global Cell Phone Penetration Rates
|
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
|
|
India |
6% |
11% |
17% |
24% |
31% |
39% |
44% |
|
China |
28% |
32% |
37% |
43% |
50% |
56% |
59% |
|
Northern America |
68% |
76% |
82% |
86% |
89% |
91% |
95% |
|
Western Europe |
85% |
89% |
95% |
98% |
97% |
99% |
99% |
If we turn to other major consumer-driven technology categories such as LCD panels, we discover a similarly low base of penetration. Based on research from Morgan Stanley,1 the rate of LCD panel penetration is currently about 10% in China, and the installed penetration base of other televisions is closer to 80%. This suggests that there will be much additional room for growth in this industry as consumers over time replace their CRT TVs with LCD TVs.
Irrespective of the compelling data that suggests continued technology demand growth in the emerging markets, these are just two simple proxies for future growth in consumer technology devices. In the cases we just discussed, we highlighted the demand for technology among emerging-market consumers who are still entering the modern economy through the process of globalization. Still though, even within the broader confines of technology across all profiles of economies, whether developed or developing, there is scope for continuous new demand thanks to the critical role of innovation in the field. So although the developed markets may possess cell phone penetration rates of around 100%, we would be remiss to think that product demand does not ebb and flow on the basis of innovation in these markets. One fine example comes from the emergence of the smartphone within the mobile device space, since these products are continuing to redefine the capabilities of handheld technology productivity. Technology producers continue to bring new value propositions to end users by offering them increased computing power, messaging capabilities, video and audio capabilities, and mobile Internet. As long as this happens, it is probable that even within a mature market such as the United States, demand can be created anew for rare earth applications on the basis of these devices. So in this sense, technology is a unique industry because of its constant upheaval and obsolescence. This reality poses challenges and risks to investors who are unable to detect or anticipate these technological advances. At the same time, the constant drive toward product innovation generates a steady demand for the rare earth materials that drive innovation or that remain essential to the device's construction. So in other words, no matter what device comes into the fore of industry demand, there will likely be a continued new source of demand for rare earths, since these materials are often essential to the device. In the case of the smartphone, Figure 11.1 shows that, based on a collection of industry sources, this product is projected to represent 24% of global handset volume, or more than twice its 2007 level. From the perspective of a rare earth supplier or fabricator, even demand in the mature markets will continue to grow thanks to the role of innovation alone.
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Based on our discussion of demand drivers, we can now appreciate that technology demand can occur from two principal backdrops: increased access from new users, and upgrades from existing users as new technologies unfold in the market. Thus far, we have discussed rare earths and their end products only from the standpoint of consumer handheld devices and TVs, which is, incidentally, a narrow focus. This does the materials a disservice, because they are critical components of yet another developed-market demand driver that has taken on greater social significance. With that said, these raw materials are also significant because of growing demand from a trend that is under way in the developed markets relating to energy conservation, eco-friendly practices, and, generally speaking, all the manifestations of environmentalism in the form of technology application.