The REE turnaround has arrived and this time it’s here to stay
Shares of Molycorp (NYSE: MCP) and Lynas Corp (ASX: LYC) surged yesterday and today when compared to the lackluster performances seen during most of last June. Lynas reached over AUD$0.45/share in Sydney trading while Molycorp crossed the USD$7 barrier at USD$7.08 share yesterday. Given that there were no significant announcements from either one of the two only existing rare earths producers in the ‘West’, the main explanation is to be found in the Chinese government’s action to cut domestic rare earths production, especially by targeting illegal miners, in conjunction with a perception of higher demand, especially in key markets such as Japan. China, which has repeatedly tried to gain more power over the prices of coveted raw materials, especially rare earths, had actually tested the limits of diplomacy by adopting confrontational international trade policies. It has clearly loosened the rigid policies in the past months and Chinese exports of rare earths have risen thanks to the lower prices.
The encouraging, if rollercoaster like, performance of the Japanese economy has also encouraged demand for the coveted minerals. In addition, European companies have started to buy rare earths again as their reserves have slowly been running out. It is certainly possible to use the term ‘turnaround’ more confidently now. And the time is right as prices for rare earths worldwide are still low, in 2013 they were 80% lower than the same time in 2012, but this buyer’s bonanza may soon turn in favor of the seller. The REE market was burdened by the Chinese export blockade and by the international legal proceedings adopted to challenge them, resulting in an overall climate of tension and mistrust.
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Prices for rare earths from Chinese production did fall in recent weeks by some 10%, but worldwide demand has increased since the start of 2013 by 7% to 107,000 tons. If this sounds familiar, it is because ProEdgeWire suggested as much in an article published exactly two weeks ago, when hints of Molycorp’s current rally, and the relevant explanations, first appeared. Lynas’s share performance, moreover, suggests that Molycorp’s market rise is not a speculative fluke and that demand for rare earths can be expected to increase in the near future, because the prices of the products are low and end users are reaching the bottom of their inventories. Many end users according to Lynas’s CEO, Eric Noyrez, last purchased their stocks of REE’s in 2010. Lynas has already completed the first phase of its Lynas Advanced Materials Plant (LAMP) in Malaysia. The second phase, which will be characterized by a stability of production, has already begun but Noyrez suggested that Lynas has no plans to increase production yet, even if it has the capacity. An increase would only occur after rare earths prices themselves increase.
As for a general REE price indication; in 2011, prices bubbled and grew too high. In the past months, REE prices have fallen too low and perhaps the market has now started to move toward a more reasonable plateau, which will prompt producers to optimize capacity at current levels for the next few months at least. Perhaps, in this still uncertain economy, especially in the OECD zone, this is what best accounts for a ‘turnaround’, whose most optimistic indication is that the REE market has seen the bottom and survived to tell about it.
That bottom may actually have been reached in January, even if the market did not see it, because the steady upward trend in Chinese exports of REE’s started in February and Chinese customs data suggests that REE exports increased such that in the first four months of 2013, the country exported nearly 6,112 tons of these commodities – that’s almost half of the total REE exports recorded in 2012. It turns out that fears of strained trade relations between Japan and China over the diplomatic dispute around sovereignty of the Senkaku/Diayou Islands failed to disrupt what both countries have shown to be of far greater importance to them now: economic growth. Japanese investment in China did drop in relation to Japanese investment in South East Asia, but not by much and there were no bilateral sanctions or direct boycotts.
The situation is ripe for speculators and bargain hunters to rush back to the REE’s, driving prices up. The crucial element here is that this is the second time around. The REE market speculators and the experts have gathered considerable experience and the rise, should it materialize, will be more substantial and less prone to bubbles and bursts. Surely, prices will fluctuate up and down, but the upswings will be more frequent and the downturns less dramatic. The second coming of the REE market rise will be a steadier affair and a long term phenomenon. While China still has the production capacity, giving it monopoly power, the United States with Molycorp and Australia with Lynas and a host of juniors in North America and Australia steadily leading their projects through the phases needed to reach production; Beijing understands that it can no longer use the policies of the past.