EDITOR: | July 2nd, 2015 | 27 Comments

Rare earth price falls: they are temporary, says analyst

| July 02, 2015 | 27 Comments
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Prices for neodymium and dysprosium have each fallen by about 30% since May 1.

Neodymium

InvestorIntel reader Jeff Thompson a few days ago posted a question asking why Chinese rare earth prices had slumped so greatly. Well, Melanie Debono has an answer: the removal by China of its export tariffs which, so far as REE (rare earth elements) are concerned, has had a far greater effect on prices than the elimination of the quotas.

Two weeks ago, Debono, of Capital Economics in London, issued her initiating report on rare earths, saying that Capital expected “the prices of most REE to post sizeable gains in the coming years, even if they are unlikely to regain their 2011 peaks any time soon”. Now we have her second note on the subject, and the bottom line? Just this: “The recent price falls may prove temporary”.

In a client note entitled “China still controls its REE, despite ‘looser’ regime”, she sets out in brief the background to this story, along the lines that China still dominates the global supply and demand of REE. That country had managed to control supply by having a strong hold on both domestic production (via production quotas, a mining licence regime and resource tax) and exports (via a quota and tariffs). As we know, the World Trade Organization forced China to eliminate the export quotas and tariffs that allowed Beijing to effectively control prices.

Capital believes the removal of the tariffs, in particular, meant that international demand for  Chinese produced REE would probably increase. And that would reinforce the dependence of end-users upon Chinese production. Unlike with the removal of the quota, which had consistently been higher than exports in recent years, and hence was not constraining REE export volumes, the removal of the tariffs will probably boost export volumes.

“Indeed, many (REE consuming) companies were reportedly running down inventories due to the high expense of buying REE and the uncertain demand outlook in recent years,” writes Debono. She argues that China should benefit from this pent up demand, especially with regard to heavy REE of which China has practically a monopoly. “And, given it produces the majority of REE, it will benefit a lot more than other producers,” she adds.

Dysprosium

The removal of the export tariffs has led to a sharp fall in FOB China prices (which had included the tariff for both oxide and metal forms of REE). These FOB prices have now been able to converge to domestic prices, hence the big falls since May 1. (In other words, the price falls were not so much an indicator of falling demand than they were adjusting to the new non-tariff world.)

Looking ahead, Capital Economics believes that there are three reasons for the recent price falls to now be behind the industry.

One, Capital expects most industrial metal prices to rise in the second half of the year as ongoing stimulus in China boosts industrial activity. REE will benefit from this general improvement in prices on industrial metals.

Two, the change in China’s resource tax, from volume-based to value-based, is expected to lead to a rise in prices.

Third, persistent uncertainty surrounding China’s export regime should be an ongoing factor supporting prices.


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Comments

  • Jeff Thompson

    Thank you, Robin, appreciate your research on behalf of the readership. It seems to me that the crucial parameter at this stage is what the lag time will be for the 27% HREE tax at the concentrate level to propagate downstream and make its way into the final FOB export prices of the oxides and metals. My instincts tell me it should have already been priced into the downstream market by now, yet clearly that’s not the case according to the published data. So it would seem the lage time is more on the order months, not days or weeks.
    Perhaps it is an attempt to drive out the higher cost producers and/or stifle the growth of HREE juniors who are on the verge of transitioning to production, analogous to OPEC’s moves in November 2014 to keep oil production high and the market oversupplied to drive out U.S. shale or other swing/marginal producers.

    July 2, 2015 - 8:00 AM

  • Chris

    Jeff
    Ever considered the idea that depressed HREO prices might have something to do with weak downstream demand?
    Here’s an even worse thought, HREO demand will remain weak for the foreseeable future due to reduced use of Dy in magnets and Y, Tb, Eu in lighting application.

    July 2, 2015 - 10:04 AM

  • Jeff Thompson

    Yes, Chris, that possibility certainly could explain the overall price decline over the last year or so, but I was referring more specifically to the sharp drop in FOB prices that occurred after the May 1st lifting of the export quotas, which doesn’t yet seem to have priced in the new 27% heavy rare earth tax.
    One thing is for certain, the current price environment will act as a filter to separate the wheat from the chaff, and will favor those heavy rare earth companies like TRER who have used more conservative pricing assumptions in their PEA/PFS reports relative to those used by their peers, as the effect of price fluctuations won’t jeopardize their net present value/internal rate of return calculations to the same degree as those companies who have used more aggressive price forecasts in their PEA/PFS reports.

    July 2, 2015 - 10:46 AM

  • ben

    Dear Jeff,

    I have my own guess, who the next big HREE producer is gonna be. I seriously doubt whether it will be Texas Rare Earth Resources. I have placed my bet on a certain Canadian explorer instead…

    July 2, 2015 - 11:33 AM

  • Tracy Weslosky

    Thanks for the email Robin. I do not know this analyst, but the fact that we have a new one on the sector is indeed good news. I plan on contacting Luisa Moreno on the above and getting her feedback.

    This said, since we are the leaders in the industry intelligence, allow me to share with you what I know…

    In the companies covered in the Technology Metals sector, and in particular — the rare earth companies we cover, the stocks were down -12.87% in June and minus LYNAS and MCP in May, they actually averaged UP.

    As for assessing markets in this sector based on prices. Again, we have issues with the pricing structure, and until we have a global metal trading platform that provides REAL market intelligence….it is a bit of a guessing game. Where’s Hongpo when we need him?

    July 2, 2015 - 12:36 PM

  • Jim

    Ben,

    Are you thinking Tasman?

    July 2, 2015 - 1:39 PM

  • Gareth Hatch

    The current pricing situation can be explained by the presence of significant inventories of REEs in China that have accumulated during the years of over-production. Until these inventories are liquidated there is little impetus for increased prices, despite any apparent increase in demand.

    July 3, 2015 - 12:03 AM

  • Steve Mackowski

    Gareth, you are spot on. The export tax removal only affects the FOB price, but the domestic price went down too! Only time will tell how the internal Chinese stockpiles will schedule out. I expect Ce and La to take 5 years, Y maybe 2 years. Others will be <1 year.
    Importantly this will result in near zero China stocks when non-China production is likely to start rolling out. So REO developers – stick to your guns!

    July 3, 2015 - 1:09 AM

  • Billy

    Rest of World end users of rare earths want non-Chinese suppliers of HREE’s but they don’t want to pay a premium – instead they want non-Chinese suppliers of HREE at current Chinese prices – that’s the reality

    Current rare earth pricing is the reality all explorers now need to deal with.

    July 3, 2015 - 1:12 AM

  • Jeff Thompson

    Thanks for your thoughts, Gareth and Steve. It looks like the FOB price is converging to the Chinese domestic price. For example, terbium oxide 99%, recently at $535/kg (FOB China) or $3100 yn/kg (domestic China), is close now to the exchange rate of approximately 6.2 yn/dollar. Does this indicate that the new 27% HREE Chinese tax is going unenforced domestically, or that the international market is able to effectively “ignore” to the new HREE tax by some mechanism, perhaps by the inventory buildup that Gareth and Steve described?

    For those elements that have a one-two year inventory drawdown time I would think the RE developers can hang in there.

    July 3, 2015 - 7:39 AM

  • Robin Bromby

    The 2015 glut and low prices are a long way from the projections and forecasts made back in the feverish days of 2011.

    July 3, 2015 - 5:09 PM

  • fatfretter
    July 4, 2015 - 1:41 AM

  • Billy

    Good point Robin,

    … and when was the last time analysts made a correct call in relation to rare earth forecasts

    a lot has changed since 2010 / 11 when China held rare earth users to “ransom”, …. and China won’t get away with similar tactics again

    low rare earth prices will be with us for a fair while to come

    todays rare earth pricing is the reality all explorers have to deal with

    July 4, 2015 - 2:42 AM

  • irishrover

    My feeling is that it will take the rest of the year to work off concentrate that is inside China. The only differential will be the 17% VAT rebate that exporters do not receive. As to Y it is becoming the new Ce of heavy RE as phosphors decline. Eu will be a similar problem as it comes from both north and south China concentrates and has no other use. This will make it a challenge ton balance SEG and demand

    July 5, 2015 - 4:58 AM

  • Billy

    forget the attempts at analysis – China has a monopoly and controls the market and sets rare earth prices, so prices will be what ever China wants

    presently Lynas and Molycorp are on their knees, and both compete directly with China, so no prizes for guessing what China will do with rare earth prices

    July 5, 2015 - 8:40 AM

  • Positroll

    The funny thing is that the (assumed) Chinese manoeuvres to cripple western juniors could backfire: they forced Alkane to develop a new hafnium stream. If that works out as planned (we will know by September, but things are looking really good), Alk.ax will become the world first primary supplier for hafnium at 200-300 tons/ year, with hafnium bringing in more income (up to 150 mio Au$) than zirconium, which so far had been the limiting factor re: size of Alks operation. If the assured long term supply of hafnium then leads to new uses of hafnium in the metals industry and therefore in turn to even more demand, Alk could – in the mid-term – move to twice the currently planned production rate. and that means a LOT of magnet REEs available for ROW production …
    Now lets wait and see whether a project that stands to make 350 mio profit / year for 70 years can secure 5-600 million in loans …

    July 5, 2015 - 12:20 PM

  • Investor

    Alk needs 1 billion to get going. On top of that you have working capital etc.
    To realise the value from Zirconium one need to be able to sell it. Currently Zirconium is in oversupply.
    Good luck to them in realizing this easy profit.

    July 6, 2015 - 3:16 AM

    • Tracy Weslosky

      Investor. While 1B is a lot to you and me, do you understand the ALKANE story? Have you reviewed the star power on their BOARD? Do you understand the size of Shin Etsu? I am with Positroll, and agree that you need to give it a rest. Ian Chalmers is one of the most respected leaders in the industry — many of us BELIEVE in ALKANE.

      July 6, 2015 - 10:54 AM

  • Positroll

    Your constant bashing of Alk is getting old. I said a 600 mio LOAN.
    Out of the 960 mio capex of the DFS (used by management in a presentation only last week, but you might want to add 50 mio for the new hafnium+FeNi circuits if you are conservative), 160 million is contingency (likely to be funded with convertible [at Alk’s election, hopefully] preferred shares if necessary). Somewhere between 50 and 70 mio capex has already been spent. Over the next 2 yeas, Tomingley brings in another 50 mio FCF. Add 100-150 mio from a strategic investor for 10% of the DZP and we are down to 600 mio. Half of that should come from export agency credits. That leaves 300 mio commercial debt – less than one year profit at full production …
    If necessary, they can shave another 80 mio from the bill by having the acid plant built and operated by a third party (increases opex, of course). They can also delay e.g. 30 mio capex for the FeNi plant by starting out producing just NiO instead (as they had planned before the JV with Treibacher was signed). Etc etc …

    July 6, 2015 - 3:53 AM

  • Positroll

    Oh, and to be precise, we are not selling zirconium, but (higher value) zirconia chemicals – and we have buyers lining up for them, since it looks like we can actually produce those cheaper than the ZOC* based Chinese producers …
    *zirconium oxychloride

    July 6, 2015 - 3:58 AM

  • Billy

    which heavy rare earth explorer appears to be viable at current rare earth prices

    July 6, 2015 - 4:44 AM

  • Chris

    Billy
    Please do tell.

    July 6, 2015 - 7:07 AM

  • Investor

    To Tracy and Positroll I rest my case.
    However Investors and readers need to have opposing views in order to evaluate and decide.
    Molycorp was too big to fail but it failed.
    Scale of production and complexity of operation is important.
    Good luck to ALK and Ian!

    July 6, 2015 - 8:06 PM

  • Jeff Thompson

    And people call the gold and silver markets volatile. Imagine if rare earths investors had a continuously flowing spot price to make reference to, rather than stringing together disparate, anecdotal, apples-to-oranges, and other less-than-ideal sources of information in an attempt to get a broad overview of the sub-sector. Very high peak-to-average ratios. Maybe some day we’ll have that spot price live-stream.

    July 7, 2015 - 12:35 AM

    • Tracy Weslosky

      Thank you Jeff. My company attempted to do this in 2010. We had the only FTSE approved REE indices because we deemed the challenge in maintaining accurate REE prices to be nothing short than an art form, and not quantitative. The Chinese are attempting to do this with their platform, but until we have a Global platform — this is a hit and miss, and I manage my own conclusions through a luxury that few have….and that is in knowing just about everyone in the industry. I continually tell people that I invest in the jockeys in the REE game, and well: I stand by this. Thanks for visiting InvestorIntel, it’s nice to meet you. Tracy

      July 7, 2015 - 9:05 AM

  • Tim Ainsworth

    Jeff,
    This is close, refreshed daily, but certainly not pretty ATM: http://www.ac-rei.org.cn/portal.php?mod=view&aid=3658

    A second daily update at the home page will give you the ranges for individual oxides & metals.

    July 7, 2015 - 8:55 AM

  • Jeff Thompson

    Nice to meet you too, Tracy, I’m sure at some point in the future a growth market will demand greater visibility in pricing and someone will fill the need. Thanks for the link, Tim – looks like I’ll need to brush up my Mandarin.
    Regards,
    Jeff

    July 7, 2015 - 7:20 PM

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