The rare earth element (REE) sector has experienced a roller-coaster ride over the past 12 months. Coming off record highs, prices plunged in 2012; many attribute this drop to the reintroduction of new sources of production outside of China.
Rare earth investors are watching with increasing concern as prices react negatively to news of market-changing fundamentals. These include long-term forecasts of a substantial increase in global REE production as well as uncertainty surrounding the world’s primary supplier, China, which is currently being investigated5 by the World Trade Organization.
China is far and away the largest player in the market and responded swiftly to accusations that its export and tariff policies break global commerce rules.
Where did it all go wrong?
At the industry’s peak, prices of certain REEs surged more than tenfold within the space of a single year, encouraging a number of mining firms to allocate resources to small operations.
In 2010, China made this model even more appealing when it drastically reduced export quotas on its REEs, resulting in significant price rallies.
Sure enough, mining companies began to ramp up production, leading to the supply glut we see today — which many believe was induced by China.
The average Chinese export price of rare earth oxides (REOs), a subset of REEs, surged 537 percent in 2011 from 2010, and was 10 percent higher in the first five months of 2012 than it was only a year earlier, according to data reported by Global Trade Information Services and compiled by Bloomberg Government. However, after a positive start to this year, prices began to fall as data revealed that Chinese REO exports fell 56 percent in the first five months of 2012.
Not all about China
China’s influence is not the only factor that has caused the market to suffer. Investors and analysts have long been forecasting a surge7 in supply as a result of new projects coming online.
These predictions came on the back of announcements from companies such as US-based Molycorp (NYSE:MCP8), which confirmed earlier this year that its Mountain Pass9 mine’s proven and probable reserves have increased by 36 percent, and Lynas Corporation (ASX:LYC10), which stated that its temporary operating license for its Malaysia-based processing plant would be granted by mid-2012.
In what has been one of the most dramatic court processes in recent memory, or indeed corporate history, the Australian firm has suffered multiple delays11 in getting its licensing grant — something that will no doubt play into the hands of rare earth bulls hoping for a price rally leading into 2013. The plant, which has the capacity to meet a fifth of global demand, is still awaiting a license to operate. Receipt of the license would break China’s near monopoly on the sector and increase the glut of some of these strategic minerals.
China’s response to a market in free fall
In response to calls for more clarity as to how it sources its REEs, and also to try to halt the decline in global prices, China announced12 that it will shut down approximately 20 percent of its rare earth production capacity through the implementation of new industry rules.
It set about creating stricter legislation relating to mining and safety licenses and also began stockpiling13 REEs for strategic reserves. At that time, state media reported that weak prices for REEs had prompted the move and that reserves were being created to address any future shortfalls in the commodity.
In what has probably been China’s most effective move so far in its attempts to stabilize14 a market that is in free fall, a number of firms were forced to suspend production in the hope that global demand might surge. Aluminum Corporation of China’s Jiangsu company confirmed that it has halted operations at four smelting and separation factories, while a similar stance15 was taken by Inner Mongolia Baotou Steel Rare-Earth (SSE:60011116) last month.
Has this response had an effect?
While a number of analysts initially criticized the move, local media reports now suggest that the partial shutdown has already led17 to a 20 percent increase in market prices.
An article published in China Daily last week notes that neodymium-praseodymium oxide was already trading back up between $54,604 and $57,718 per ton, while dysprosium oxide was trading in the $480,000 per ton range.
While it remains to be seen whether these halts can maintain higher price levels for any significant length of time, investors will note that this industry is still very much at the mercy of a Chinese monopoly.
Although the outlook for the REEs/strategic metals industry remains seemingly uncertain, there is no shortage of those that believe the commodity is still a viable and potentially lucrative investment.
Considering that one of the world’s leading projects is being held up by a seemingly never-ending political showdown in Malaysia, and given the fact that the market is growing increasingly concerned by the constantly shifting REE production landscape in China, investors would do well to seek out stable projects at advanced stages that are ready to take advantage of any notable rally in prices.
Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.