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WTO ruling: Get ready for rare earth price war

Baotou City: Epicentre of China’s rare earth industry

The World Trade Organization has ruled in favour of the US, Europe and Japan in a dispute with China over its export restrictions on rare earth.

China’s rare earth industry – responsible for almost 90% of global output – imposed strict rare earth export quotas in 2010, ostensibly to curb illegal mining and cut environmental damage.

The Chinese industry is also being consolidated under three giant producers – Inner Mongolia Baotou Iron & Steel (Group) Co, China Minmetals Corporation and the Aluminum Corporation of China.

Worries about the restrictions and China’s monopoly of production sent prices for the 17 rare earth elements – use a variety of industries including green technology, defence systems and consumer electronics – into the stratosphere from 2008 onwards with some REEs going up in price twenty-fold or more.

That reignited interest in the sector with dozens of explorers active around the globe making major discoveries from Canada and Greenland to Madagascar and Malawi.

Canada’s rare earth industry’s stated goal is to corner 20% of the global rare earth market by 2018.

Molycorp’s (NYSE:MCP) Mountain Pass mine in California is targeting production of 20,000 tonnes (with ultimate capacity of double that) and Lynas Corp’s (ASX:LYC) Mount Weld mine in Australia and plant in Malaysia is ramping up production.

Prices have now come back down to earth with most REEs dropping in price by 70% or more after peaking in 2011.

While prices began to stabilize last year, analysts predict further downside ahead thanks to the WTO ruling and the restarting of production outside China. Reuters quotesRyan Castilloux of Canada’s Adamas Intelligence as saying a price war cannot be ruled out:

“If the recent WTO ruling leads to a softening of China’s rare earth industry policy measures, the nation’s only tangible defence becomes competing head-to-head on price with emerging global producers.”

“If we start seeing new mines being constructed outside of China and demand does not grow to absorb this new production, then China may see its REE (rare earth element) industry, at least the upstream end of it, under threat, leading it to undercut competitors on price,” Castilloux said.

Molycorp was last trading down 2.5% in New York. The market value of the $1.2 billion Denver-based company has declined 14% year to date. Lynas shares tanked in Sydney closing down 10% on the day and is now 40% for the worse in 2014.

Image of shrine in Baotou City by Matthew Stinson.