Survival of the fittest — what to expect for rare earth miners outside China
While analyst are predicting a rebound in hard-hit rare earth prices later this year, the question that remains unanswered is whether companies outside China, the world’s largest producer, will be able to challenge its dominance.
Melody Bomgardner, a senior editor at Chemical & Engineering News (C&EN), the weekly newsmagazine of the American Chemical Society, is not so sure.
In a piece published this week, he argues that most of the mining companies that once bet on rare earths are now facing a contradictory reality, as they are working to hike output at a time of extremely weak prices, which make it nearly impossible to turn a profit.
Until 2010, China controlled around 97% of the supply of the coveted metals, used in advanced electronics, defense and renewable energy. But when it sought to impose export controls to give an advantage to domestic electronics producers, prices soared by up to 20 or 30 times previous levels. That encouraged investment in the sector in the U.S., Australia and other places outside China. But, at the same time, it fired up smuggling from the Asian nation and a consequent drop in prices.
Rare earths were further battered earlier this year, when China scrapped export tariffs, which had inflated international prices, after a World Trade Organisation ruling.
Now market observers are saying that prices for the 17 coveted elements used in high-tech sectors, should start picking up by year-end. However, they also warn that a glut of supplies, including from illegal mines and smuggling in China, could cause the market to crash back down.
“[The expected rise in prices] is not going to bring us entirely out of the doldrums, but it's going to bring us back to a better place than we're at today,” Amsterdam-based consultant Ryan Castilloux, founding director of Adamas Intelligence, told Reuters earlier this month.
Investment confidence has been badly hit by the poor performances of the two major producers outside China — Molycorp (NYSE:MCP-A) and Lynas Corp (ASX:LYC).
Canadian rare earth companies have also shed nearly all of their value in the last few years. Shares of Avalon Rare Metals (TSE:AVL) are down 96% from their 2011 high, while Quest Rare Minerals’ (TSE:QRM) stocks have dropped about the same, since March 2012.
Meanwhile, China continues to restrict the number of firms allowed to produce and export rare earths. This means there will remain a significant supply bottleneck that is likely to encourage smuggling as well as illegal production in the nation, with the feared consequences in prices.