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Published: Thursday September 20, 2012 MYT 8:14:00 AM
Updated: Thursday September 20, 2012 MYT 8:19:13 AM

Analysis: Rare earth prices to erode; what are rare earths


LONDON: Prices of rare earth elements, which tumbled after a speculative bubble burst last year, are likely to erode further as new supplies hit the market and exports edge higher from dominant producer China due to weak demand at home.

Prices of the 17 elements used in technologies such as smartphones and hybrid cars soared last year by hundreds of percent after China clamped down on exports. Hot money flowed into an illiquid sector but later departed, causing a crash.

Lanthanum, used in rechargeable batteries for hybrid autos and in night-vision goggles, rocketed 26-fold from $5.15 a kg in January 2010 to a peak of $140 in June 2011. Although it has slid to $20.50, the price is still well above earlier lows.

The market has steadied in recent months, but new output from U.S. Molycorp and Australia's Lynas Corp is likely to pressure prices, especially those of "light" rare earths which are not as scarce as their "heavy" cousins.

Weaker economic growth in China is also weighing on the market since the world's second largest economy not only produces over 90 percent of global rare earths, but is the biggest consumer of the materials.

"Prices will continue to drop so long as Chinese GDP continues to face downward pressures on the manufacturing side," said Michael Silver, chief executive of American Elements, which buys rare earths from China.

China's slowdown - rather than a trade complaint filed by Western nations - is expected to prompt some relaxation of Beijing's tough export controls, Silver added.

In August, China announced new export quotas on rare earth elements (REE), which increased the yearly figure by 2.7 percent.

"This is the first time in five years that the REE quota has increased and is the highest in three years, which is seen as a slight negative as excess supply would put pressure on prices," analyst Carolyn Dennis of Toronto-based Dundee Capital Markets said in a note to clients.

NEW MINES

The spike in prices prompted a flurry of new mining projects and the two most advanced are due to come on stream this year, boosting global supplies of rare earths.

Molycorp, the biggest rare earth producer outside China, has reopened the Mountain Pass mine in California and is due to boost output to 19,050 tonnes a year in the fourth quarter from 3,516 tonnes last year.

Lynas is also due to fire up an $800 million rare earths plant in Malaysia as early as October after receiving a temporary operating licence. The plant would supply about 11,000 tonnes in its first year, eventually rising to 22,000 tonnes.

"We remain very concerned about what will happen to rare earth prices as ramping supplies from Molycorp and Lynas hit up against a rest of world demand profile that has shown little growth over the past five years," said JP Morgan analyst Michael Gambardella in a recent note.

Light rare earths such as cerium and lanthanum will be hit hardest by the new production because they are not rare at all; they are estimated to be more plentiful than copper and lead.

Rare earths got the name mainly due to the difficulty in extracting, processing and separating the minerals, typically found clustered together in deposits, with higher proportions of light than heavy elements.

When miners target heavy element dysprosium, for example, they often end up producing more cerium than dysprosium, used in nuclear reactors, ships' sonar systems and computer hard discs.

"With rare earths, you can't think of them as one entity," said analyst Kieron Hodgson at Charles Stanley Securities in London. "I'd be relatively bullish on prices for the heavies particularly, certainly more than the lights."

When China clamped down on exports, availability tightened and all rare earth prices soared. Cerium oxide, FOB China, soared more than 35-fold from $4.15 per kg in January 2010 to $150.55 a kg in July 2011.

Since then, prices have fallen back to $21.50 per kg and Morgan Stanley, noting that half of Molycorp's expanded output would be cerium, said it was using a conservative average realised cerium price of $1/kg to reflect oversupply risks.

Analyst Edward Otto at Cormark Securities forecasts the long-term price of cerium oxide to settle eventually at 50 cents a kg and lanthanum oxide at $1.00 per kg, down from $20.50/kg currently.

HEAVIES

The price outlook is stronger for so-called heavy rare earths, which are scarcer and expected to see rising demand in applications such as high performance magnets and energy efficient lighting.

Terbium oxide, mainly used in phosphors for compact fluorescent and LED lighting, has shed slightly over half its value since the peak to $1,750 a kg, FOB China, and Otto expects the long-term price to dip slightly to $1,500/kg.

More volatility is expected as developments could buffet the sector, such as any breakthrough in efforts by industrial consumers such as Toyota Motor Corp <7203.T> to find substitutes for rare earths.

If recent tensions between China and Japan escalate and Beijing retaliates by cutting off rare earth supply to Tokyo, prices could spike again.

Another wild card is the outcome of a World Trade Organization complaint filed in March by the European Union, the United States and Japan, saying China was unfairly choking off exports of rare earth metals.

"It isn't a pretty or happy place at the moment," said a London trader who specialises in exotic metals. "There's no blind panic out there, either to buy or sell, but people are very uncertain about what the future will hold and rightly so." - Reuters

Factbox: What are rare earths?

(Reuters) - The rare earths are a relatively abundant group of 17 chemical elements, but economically viable deposits are rare.

Prices of the elements, which tumbled after a speculative bubble burst last year, are likely to erode further as new supplies hit the market and exports edge higher from dominant producer China due to weak demand at home.

Here are some facts on rare earths and their uses:

WHAT ARE THE RARE EARTHS?

There are 17 rare earth elements, with 15 chemically-related elements divided into light and heavy rare earth elements, while the other two, scandium and yttrium, exhibit similar properties.

Light elements are: lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium.

Heavy elements are: gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, lutetium.

BIGGEST PRODUCERS, RESOURCES

China produces more than 90 percent of global supplies and has about half of global reserves. The biggest producer is Inner Mongolia-based Baotou Rare Earth Co <600111.SS>.

Russia and the United States have about 17 percent and 12 percent of global reserves respectively. Outside China, the biggest producer is U.S.-listed Molycorp , which has reopened the Mountain Pass mine in California. Australia's Lynas is due to launch a plant in Malaysia this year.

BIGGEST CONSUMERS, USES

China, Japan and the United States are the biggest consumers. Below is a summary of rare earth industrial applications and some areas where they are used:

MAGNETS - This is the biggest use, taking up 21 percent of demand, forecast to expand to 26 percent by 2015, for use in wind turbines, hybrid vehicles, earphones and computer hard drives. Neodymium, praseodymium and dysprosium are needed.

CATALYSTS - Petroleum cracking catalysts and auto catalysts use lanthanum and cerium. This use is expected to decline.

PHOSPHORS - These are necessary for the production of television sets and energy-efficient lamps. This is one of the smallest sectors by volume, at about 7 percent, but the largest sector by value, at 30-40 percent, as europium and terbium are among the least common rare earths.

GLASS AND POLISHING - Cerium is used in ultra-violet light filtering. It is also used in glass polishing, a rapidly growing sector that is based on the unique chemical and mechanical properties of cerium.

METAL ALLOYS - Rare earths are used to make super alloys, accounting for about 18 percent of demand, for products such as gas turbines and electric generators. Nickel metal hydride rechargeable batteries are the main driver of demand and could put pressure on lanthanum supply.

Sources: Company websites, USGS, Thomson Reuters (Compiled by Eric Onstad, James Regan, Julie Gordon and Leonora Walet) - Reuters

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