Mining News

Rare Earths Elements – China’s weakening hold

Posted by Cheryl Rutledge on 8/27/2014 4:38:53 PM

by Joshua Allsop and Kenneth P. Green

A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type. The quality of a given commodity may vary but it is essentially uniform across producers.

There are a number of drivers in the demand for a commodity.

1. Price: High mineral prices mean lower demand. Conversely lower prices mean higher demand.

2. Strength of the economy: Demand for many minerals grows as economies grow and as industrial production rises. However, not all minerals are traded on global markets.

3. Substitutes: The logic here is straightforward, when one product gets too expensive it is becomes sensible to switch to another.

4. Technology changes: also has an influence on the demand-side.

5. Government Spending: this is another demand-side force. The influence of governments still makes up a big part of the global economy. For example if nuclear power returns to favor then uranium demand will naturally increase.

Rare Earth Elements (or Rare Earth Metals) are a set of seventeen elements in the periodic table. Despite being called rare earths they are in fact relatively plentiful however they tend to be found in diffuse deposits making them hard to mine. Refining can be difficult and depends greatly on the combination of earths.

Up until recent years the rare earths elements (REEs) were a subject of interest only to industrial chemists or perhaps to the most inquisitive amongst the resource sector investors and professionals. However, this has changed due to the increased requirements from new technology applications such as renewables and electronics.

Demand

REEs and Rare Earth Oxides (REO) are group terms that encompass 17 elements of the periodic table. Their collective strong price appreciation in recent years coupled with only a small number of resource endowed countries has meant that their earths have become far better known amongst the investment community.

Global consumption by end-use segment in 2010 was estimated at 136,000 tonnes of REOs with approximate consumption by segment as follows. REO magnets are the principle end use by volume (26%, 35,000 tonnes) followed by Fluid Catalytic Cracking catalysts (16%, 21,300 tonnes).

Assuming technology does not change significantly, large REE demand growth is expected in the permanent magnet sector. Taking expected growth in the various sectors of demand, give the lower bound for average growth in total REE demand over the next 25 years at five percent per annum; the upper bound is at 8.6 percent per annum. A model assuming historical growth (for a given sector, future growth was close to historic growth rates) resulted in a 5.6% average annual growth rate. Such a growth would yield a demand of approximately 210,000 tonnes total REOs in the year 2025.

As research and technology continues to progress the demand will shift for different REEs. This is because different demand sectors grow at different rates. This means that over time the demand of a specific REE can become a much larger (or smaller) percentage of total demand. For example, by 2035, neodymium demand may be almost 40% of total demand compared to the 20% of total demand that it is today. Furthermore dysprosium fractional demand is forecast to increase. Lanthanum and cerium both make up less of total demand over time.

Supply

Conversely, changes in supply of individual REEs often correspond to changes in the entire supply chain, due to the presence of co-mining. That is, because different rare earth oxides (REOs) do not appear in deposits separately, and thus are mined and processed together, changes in the supply of one particular REE generally reflect the change in the supply of REEs in general. As a result, we can use standard mining models to project future supply.

China strongly dominates supply in REOs, both for its domestic consumption and in exports. Production within China originates from its mining in Inner Mongolia and Jiangxi.  As at 2010 total China production capacity is in the order of 100,000 tonnes total REO. China export policy has the capacity to supply shock the market and has done so in recent years.

Outlook

Understanding and synthesis of an outlook across the rare earths sector is fraught with difficulty as the sector comprises more than a single market. The average Chinese export price of rare earth oxides (REOs), a subset of REEs, surged 537 percent in 2011 from 2010, and was 10 percent higher in the first five months of 2012 than it was only a year earlier, according to data reported by Global Trade Information Services and compiled by Bloomberg Government. However, after a positive start to this year, prices began to fall as data revealed that Chinese REO exports fell 56 percent in the first five months of 2012.

Not all about China

China’s influence is not the only factor that has caused the market to suffer. Investors and analysts have long been forecasting a surge in supply as a result of new projects coming online. Due to Chinese restrictions and heavy dependence by foreign companies in other countries, there is work going on to restart rare earth mines in other countries and pressure high manufacturing economies like Japan to look elsewhere to source their rare earth demands.

As a result of growing production elsewhere, China’s share of the market dropped from 98pc to 86pc last year, according to figures from the US Geological Survey, as new production came online in Australia and the USA, supported by some small but stable production in India. So while China might be restricting supply in the short term, causing prices to rise, in the medium term to long term we were much more likely to see a decline in prices due to an oversupply.

International companies which will benefit from increased demand include Lynas Corporation and Alkane Resources of Australia. The costs associated with new projects are incredibly large, and cash flow will be of the utmost importance for these miners if they want to ensure marketed products. That said, with more projects starting up in an effort to hedge against the possibility of China limiting exports, the rare earth industry should see immense growth.




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