Rare Earth Prices Plumit But Is Recovery in Sight?

on Nov 20, 2012
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**Investors’ Concerns Rise as REE Prices Fall**

Over the past year, the rare earth element (REE) sector has experienced a rollercoaster ride. After previously reaching record highs and marking a relatively strong start to 2012, prices of the minerals subsequently fell sharply. According to some analysts, the slump has been caused by the emergence of new sources of production outside China, the world’s premier supplier of REEs. Fears of overinvestment and a supply glut in the sector have driven down prices of some rare earth elements by as much as 80 per cent. As a result many investors are now watching with increasing concern and even cancelling REE investments or switching attention to other commodities.

Trent Allen, an analyst at stock broking firm Bell Potter Securities, told The Wall Street Journal last week: “Some projects looked viable 18 months ago, and they don’t anymore.”
Many rare earth investors have also been spooked by uncertainty around China, whose production of REEs accounts for about 95 per cent of the total global output. The country has been accused of breaking global commerce rules with its tariff and export policies and is currently being investigated by the World Trade Organisation.

**Where Did the Rollercoaster Ride Start?**
At their peak, prices of some rare earth elements had jumped more than tenfold in little more than a year, triggering a number of new mining projects in China. In 2010, the top producer of the minerals reduced its export quotas drastically, which resulted in significant price rallies and made REE investments even more appealing. Due to the increased interest, mining firms began to boost production, leading to today’s supply glut and the present drastic decline in prices.

**China’s Influence not Only Trigger for Price Slump**
Although the REE industry is still very much at the mercy of a Chinese monopoly, its influence is not the only factor affecting the market. Analysts and investors have long been predicting a rise in the minerals’ supply due to the emergence of new projects. These forecasts came after announcements from companies such as Australia’s Lynas Corporation (ASX:LYC), which said that its temporary operating license for its Malaysia-based REE plant would be granted by the middle of the year, and US-based Molycorp (NYSE:MCP), which confirmed that its Mountain Pass mine’s proven and probable reserves have increased by 36 per cent.

**China’s Response to Market in Free Fall**
!m[REE Prices Appear To Be Reaching Sustainable Levels after Sharp Fall Over the Past Year](/uploads/story/854/thumbs/pic1_inline.png)In an effort to stop the free fall REE prices and in response to calls for more clarity as to how it sources its rare earth elements, China announced that it will shut down approximately 20 per cent of its REE production capacity. This move will be achieved through the implementation of new rules including stricter legislation relating to mining and safety licenses as well as stockpiling REEs for strategic reserves. As a direct result of this action by China to stabilise the REE market, a number of mining companies in the country are now being forced to suspend production.
While many analysts and market participants initially criticised China’s move, state media suggests that the partial shutdown has already led to a 20 per cent increase in some of the rare earth elements’ prices. According to a report by China Daily last week, neodymium-praseodymium oxide was already trading back up between $54,604 and $57,718 per ton, while another mineral from the group of 17 rare earth elements, dysprosium oxide, was trading in the $480,000 per ton range – sustainable levels which may be signalling a market recovery.
**Despite Uncertainty Investment in REEs Remains Viable**
Although the REE market uncertainty remains and it is still to be seen whether China’s move can maintain higher price levels for any significant length of time, the commodity is still a viable and potentially lucrative investment, according to industry experts. With demand for rare earth minerals expected to grow significantly on the back of the rising demand from the hi-tech industry, where REEs are predominantly used, analysts say that those investors who seek out stable projects will be able to take advantage of the potential rally in rare earth prices.

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