Rare Earths to post sizeable price gains, says research firm
A good sign for the rare earth sector – and it needs it. The news is that the commodities team at London’s Capital Economics has produced a note on rare earths. More importantly, this is the first of series of notes they intend to issue on the subject.
This is significant. Back in 2001, and leading up to it, analysts (like junior explorers looking for a story that would allow them to raise money) jumped on the rare earth (“REE”, rare earth elements) bandwagon. When prices collapsed, the analysts quickly lost interest (so did many small explorers, but exiting was more difficult for them).
Even better, perhaps, is Capital Economics’ conclusion: “We expect the prices of most REE to post sizeable (my emphasis) gains in the coming years, even if they are unlikely to regain their 2011 peaks any time soon”.
Commodities economist Melanie Debono’s paper is initially an introduction to rare earths, and there is much here with which anyone who has been following the space for any length of time will be familiar. But it is no less welcome for that: for one thing, it serves as a reminder of why the industry is in the shape it is today. And we should all be reminded from time to time, as Debono does here, that it is only 30 years since the United States was the dominant player when it came to rare earths. But then China was able to use its lower (much lower) labour costs, lax environmental laws, subsidies and tax breaks to create the situation in which we now find ourselves. China may be tightening up on environmental regulations, but it is no less tenacious in its determination to remain the world’s REE super power (as its consolidation of producers amply illustrates).
But the paper does take a look at REE pricing. Debono has found that there is a strong correlation between the prices of REE and the price of silver: the latter’s 2011 spike to $48.34/oz (it is $16.17/oz today) was eerily similar on the graph chart to those big gains by both cerium and lanthanum (in metal form) at about the same time. She will examine this relationship in a future note and adds “but in short it presumably reflects the intrinsic volatility and higher risk profile of both”.
“Just as silver often behaves as a higher-beta version of gold, so REE often behave like higher-beta versions of industrial metals,” she writes. “In other words, the prices of REE or silver tend to move further in the same direction as those of industrial metals or gold, whether up or down.” I think it is fair to say that InvestorIntel readers will be eager to hear this point elaborated on by Capital Economics; after all, we have tended to focus on supply-demand issues and their effect on pricing, and rather leave the issue at that. We’ll keep you posted.
In the short-term, Debono says increases in REE supply may add to the downward pressure on prices, especially if the U.S. dollar remains strong. On the other hand, Capital is relatively positive in respect to the U.S. and China economic outlooks, which will be good for REE demand.
“What’s more, over longer horizons, technological demand is set to keep on rising,” the note concludes. “Moreover, there is growing interest in REE as an asset class.”
And that will be something that will please emerging rare earth producers outside China. The only easy way to invest in this particular asset class is buying shares in REE companies.
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