Rare earths: Year in Review 2015

By IM Staff
Published: Monday, 21 December 2015

A roundup of the year's main events in the global rare earths industry.

2015 was yet another a torrid year for the rare earths industry, characterised by falling prices, a gloomy market outlook and scarce funding opportunities for juniors.

SUPPLY SECURITY

One of the biggest stories of the year was Molycorp Inc. filing for Chapter 11 bankruptcy protection in the US in late July. Previously one of only two major suppliers of rare earth products outside of China, Molycorp was forced to mothball its historic Mountain Pass mine in October. This brought a production stream offline which, according to Molycorp, in Q1 2015 had produced 1,479 tonnes rare earth oxides and 1,328 tonnes in Q4 2014.

A two-stream bankruptcy process was underway by the end of the year. Molycorp and its creditors can now elect to either negotiate a debt haircut on the company and restart operations at Mountain Pass, possibly with restructuring, or, Molycorp could be asset stripped, with its various limbs – many of which are profitable – sold off to customers. Some essential staff have been kept at Mountain Pass.

While Molycorp’s demise was probably the most eye-catching story of the year in Western media, the most important development for the industry in 2015 was the reaction to the 2014 World Trade Organization (WTO) ruling on rare earths policy in China. The international trade body demanded that China remove its export taxes on the elements and some derived products, which resulted in a policy shift from export quotas and export taxes to production quotas and resource taxes. In May, the resource tax rate for light rare earths was pegged at 11.5% in Inner Mongolia, 9.5% in Sichuan province and 7.5% in Shandong province. Middle-heavy rare earth resource taxes were set at 27%.

Rongzhang Ma, the secretary of the Association of China Rare Earth Industry (ACREI), said in August that higher tax rates in the south of China, primarily justified owing to the higher value of heavy rare earths, which are more common in the region, were resulting in an imbalance, with the south often realising no profit at all following the tax changes.

Illegal mining continues to be an industry stumbling block too. Ma also said at the time that market data proved that the practice was still taking place. While estimates vary, up to 40,000 tpa rare earths are still thought to be produced in China in unapproved operations. Local government is often understood to be complicit in illegal production, which is a significant contributor to oversupply and low prices. Consolidation of the industry into the "big six" rare earths producers, aimed at combatting illegal mining and improving environmental standards, looks set to continue into 2016.  

A grant of Chinese renminbi (Rmb) 1bn ($155m*) was awarded to the Baotou region’s rare earths industry in the summer of 2015, with the aim of increasing the value of production through higher product purities and superior end products. A subsidy of Rmb 458m ($71m) was provided to Ganzhou province for the same purpose.

In April, Chinese rare earths producers reported their first ever collective industry loss, for 2014. 2015 is expected to be similarly unprofitable. China is also reported to be setting up a state-owned bad debt fund to aid floundering miners, according to a Bloomberg report in December.

Lynas Corp. Ltd had a more positive 2015 than most, despite continued unprofitability. The company registered two quarters of positive free cash flow as of September 2015. In addition, Molycorp’s suspension of production means that Lynas is now the sole major non-Chinese rare earths supplier, significantly increasing its standing in terms of supply security. Buyers seeking non-Chinese material will only be able to acquire this, directly or indirectly, from Lynas, a substantial advantage for the company. In addition, its performance in 2015 enabled the company to reduce interest payments on its loans.

Finally, 2015 saw many junior explorers drop out of the market. While there remains a gap for heavy rare earth producers, magnet rare earth producers and those with a potentially revolutionary technology, several juniors have gone bankrupt or reached agreements with creditors. Some have delisted from their respective stock exchanges, including Tantalus Rare Earths AG, Great Western Minerals Group Ltd, Avalon Rare Metals Ltd and Frontier Rare Earths Ltd.

MARKET DEMAND

The rare earths market continues to suffer from the demand destruction caused by 2011’s high prices. Neodymium and praseodymium demand is, however, expected to increase in the medium term, driven by positive market sentiments for the magnet industry. Magnets will be required in higher volumes if the electric vehicle (EV) market takes off.

Dysprosium, despite being a rare earth important to the magnet industry, where it is used to prevent denaturing at high temperatures, is likely to see demand fall in the medium term. While previously dysprosium was blended throughout magnets, it is now just being used as a coating by many manufacturers, requiring smaller volumes.

For europium, the future does not appear positive, owing to the replacement of europium phosphor-utilising fluorescent bulbs. With no other major sources of demand, the element is forecast to see severely reduced demand.

PRICE TRENDS 

Despite several rallies during 2015, prices were down on the previous 12 months. ACREI’s pricing index, which stood at around 135 at the start of the year, was recorded at around 120 in mid-December. This was, however, a rise on the September trough of around 110. The index was as high as 200 in October 2013.

Oversupply remained strong, prompting the big six to cut output by around 10%. Positive sentiment regarding magnets led China Northern Rare Earth Hi-Tech Group Co. Ltd to announce a rise in its guidance prices for neodymium-praseodymium (didymium) concentrate material in October by Rmb 10,000/tonne ($1,548/tonne), up 4% on previous price levels. Meanwhile, IM’s prices for lanthanum and europium oxide have fallen back. 

Significant price rises are not expected in the near future. Positive developments in Chinese policy, including consolidation and a crackdown on illegal mining, should start to produce more positive fundamentals in the long term, however.

MARKET OUTLOOK

Consolidation and the removal of illegal mining from the supply chain are likely to improve market fundamentals in the future if they can be achieved, but for now, the outlook remains one of the most challenged in industrial minerals markets, with oversupply, weak demand and depressed prices all putting pressure on the sector.

Lynas is in a considerably stronger position owing to Molycorp’s withdrawal from the sector, while in China, the big six recently cut their output plans.

*Conversions made December 2015