Get Ready, Rare Earth Prices Set to Crash

If the massive crash in rare earth element (REE) prices and the related crash in rare earth miner stock prices blind-sided you last year, be forewarned. It is time to get ready for another drop.

As demand for the 17 elements flags, a lot more production is scheduled to hit the market. The lighter elements, which are less rare and see lower demand than the heavier elements, will see a disproportionate drop as well.

The market has stabilized in recent months, but new output from around the world should start appearing in the next couple months. Molycorp's massive California mine is gearing up, along with Australia's Lynas Corp.'s Mt. Weld ore processing operations.

Molycorp expects to average 40,000 metric tons per year of rare earth oxide ore from its Mountain Pass mine within a year.

Lynas Corp. already has 773,300 tonnes of ore with an high average grade of 15.4%. That is a full two-year stockpile for their processing operations. Another mine in Malaysia could be operational within a couple months. At fill tilt, it will add 22,000 tonnes of ore.

JP Morgan analyst Michael Gambardella stated: "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."

Over the next couple years, even more REEs could be mined. As we discussed in a Wealth Wire article last month, North Korea is sitting on approximately $6 trillion worth of ore from the second largest rare earth supply in the world. While current development is virtually nonexistent, China has committed itself to helping its neighbor build trade and investment infrastructure for large-scale projects.

About 40% of the 138 Chinese companies working in North Korea were already involved with mining operations in 2010, according to the U.S. Korea Institute at Johns Hopkins University.

If demand ramps up in the future and China needs more supply to feed advanced manufacturers, you can bet it would quickly pour money into REE mining projects.

For now, there is no sign that will happen. China is the largest producer and the largest consumer of REEs. With its domestic demand dropping as its economy cools, the country has no need to keep the extremely tight export restrictions that helped cause the run on REE prices in 2010 and 2011.

China already relaxed export quotas on REEs in August. The total export amount was raised 2.7%. Further export increases are widely expected if demand stays low.

Carolyn Dennis, of Toronto-based Dundee Capital Markets, said in a note to clients: "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.”

Combine all of these factors along with the potential for further economic decline in China, and there is little hope of a REE price rebound until the global recession subsides.

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