Rare earths markets challenged by supply-demand imbalance

Published: Wednesday, 29 October 2014

Lack of investment hinders projects; oversupply expected in coming years.

By Rachel Carnac

It has been another challenging year for the rare earths markets and the jury is out as to whether the first glimmers of an improvement are starting to show and the worst of the downturn is over, following the havoc caused by the price spikes in 2011-2012.

The key focus for the rare earths industry remains on supply out of China; whether policies to curb environmental pollution and to consolidate production, as well as to curtail illegal smuggling, are bearing fruit. In the wake of losing the World Trade Organization (WTO) trade case brought by the European Union (EU), the US and Japan, China is also looking at how it will adapt its trade policies and export practices. Outside China, new sources of supply are continuing to come on stream.

More positive news has recently come from both Molycorp in the US and Malaysia-based Lynas Corp. The latter reported a strong lift in both revenue and production during the quarter ending 30 September 2014 with revenues rising to $31.06m for the quarter. Lynas’ production performance improved for the fifth consecutive quarter, delivering 2,043 tonnes in the last three months. The improvement in output is demonstrated by the fact that in fiscal 2014, total production was 3,965 tonnes. Meanwhile, Molycorp has completed debottlenecking, allowing for targeted production increases.

Supply from rare earths scrap is also a new factor to take into consideration in the marketplace. According to Tasman Metals’ Mark Saxon, this perhaps only accounted for 1% of supply. Saxon said, at a recent conference, that he felt supply from scrap will have an increasingly significant impact in the marketplace.

In terms of new production coming to the market, a lack of investment means a number of well-documented projects appear to be in limbo and this will have an impact on the projected supply pipeline over the coming years. “There is a lack of money to develop new projects,” Saxon said.

On the demand side, substitution remains a factor as companies continue to look at alternatives to rare earths in magnets, lighting and other applications following the high prices for rare earth materials a few years ago. Equally, uncertainty over the global economic outlook, particularly across Europe, means demand for products containing rare earth materials could be impacted in 2015. Germany is a case in point, where the past few months have seen announcements of major job losses and cutbacks at companies consuming rare earth products.

Controlling supply

The spotlight regarding the balance in the rare earths market appears to be firmly fixed on fundamentals on the supply-side rather than any expectation that a strong uptick in demand will bolster the market.

“The rare earths industry worldwide is expected to undergo significant changes before the Chinese New Year in February 2015, as new sources of supply are scheduled to come on stream and supply in China consolidates under a limited number of state owned enterprises,” Kerry Satterthwaite, senior analyst at Roskill Information Services, said.

“Measures taken to control production in China have become more effective, resulting in a decline in both official and unofficial production in the years to 2013. In 2014, China still accounts for more than 80% of world production though this is expected to fall to just over 70% by 2018,” she said.

Roskill analysis shows that an increasing proportion of Chinese supply is now required for consumption by domestic industries which account for more than 70% of the total demand for rare earths. “New projects in the rest of the world are forecast to contribute an additional 45,000 tpy rare earth oxides to supply by 2018,” Satterthwaite said.

According to Roskill research, the supply-demand balance for China is expected to show an oversupply of at least 26,000 tpa rare earth oxides between 2013 and 2018 (and at least 10,000 tpa of this will be illegal production). In the rest of the world, supply and demand are not expected to come into balance until late 2016, with supply scheduled to increase in that year in five other countries.

The research also shows that within China, illegal rare earths mining fell from 20,000 tonnes in 2012 to less than 15,000 tonnes last year. Satterthwaite makes the point that: “If illegal rare earths mining in China had already been eradicated, the world’s rare earths industry would not have been in oversupply in 2013.” Perhaps a rather sobering thought for the global rare earths industry as it approaches the end of 2014.

In August 2013, the Chinese Ministry of Industry & Information Technology (MIIT), in addition to several other state organisations, issued a statement requiring provincial and regional governments to unite all relevant departments in the crackdown on illegal mining, processing and trading.

This campaign, and others, extended into 2014, with the MIIT monitoring progress. All aspects of production quotas, environmental protection supervision, operational safety and invoicing were evaluated. The next few months are expected to see continued consolidation as the crackdown continues.

“The continuing focus on reducing illegal mining in China is expected to reduce illegal production by around 15% a year through 2018,” Roskill’s Satterthwaite said, outlining that much of the illegal production by this time will originate in southern China, with illegal production by northern and western rare earth producers dwindling.

Satterthwaite believes that, as illegal mining and processing is reduced, large government-backed enterprises are likely to fill the supply vacuum and gain more control over the Chinese domestic rare earths industry. “Subsequently, government production quotas may be amended to allow for increased production,” she said.

What is clear is that the rare earths value chain remains extraordinarily complex, with multiple players, business drivers, supply models and geopolitical considerations at each of the various stages of production. At the European Rare Earths Competency Network’s final conference in Milan in mid-October, a number of speakers highlighted their requirement that the industry needs an experienced overview of the end-to-end value chain to provide insight into both potential opportunities and avoidable disruptions.

As ever, the dynamics of the rare earths market remain complicated and the focus of the world’s industry will remain particularly focused on China to evaluate whether 2015 will once again start to provide more positive opportunities after the malaise of 2013-2014.

This subject and more will be discussed at Metal Event’s annual Rare Earths Conference in Singapore this November