Ryan Castilloux of Adamas Intelligence gives a mid-year update on the rare earths market in 2015.
It’s been an interesting year for the rare earths space so far, with a number of big changes hitting the market.
From rare earths tax and tariff changes being enacted in China to Molycorp’s (OTCMKTS:MCPIQ) declaration of bankruptcy in June, there’s been plenty for rare earths investors to watch and digest over the first half of the year.
To help investors make sense of what all of those events mean for the market, Adamas Intelligence recently put out an updated Rare Earth Market Outlook report, and the Investing News Network (INN) got in touch with Adamas’ founding director, Ryan Castilloux, to get a bit more insight into the firm’s analysis.
In the interview below, Castilloux talks about where he sees prices heading in 2015 and beyond, and about what rare earths investors should be watching out for in light of recent changes in China.
Keep an eye out for part 2 of our interview, where Castilloux discusses Molycorp’s bankruptcy, the future of rare earths production in the US and junior rare earths companies he’s seen making progress in 2015.
INN: Which rare earths are performing the best so far this year (in terms of percentage change/price change)? The worst? Why is that?
RC: The Chinese domestic and Chinese export prices of nearly all rare earth oxides and metals have declined year-to-date. In terms of the Chinese domestic market, we’ve observed prices of lanthanum oxide, neodymium oxide, praseodymium oxide and yttrium oxide decline by 3 to 8 percent year-to-date, while prices of cerium oxide, samarium oxide and europium oxide have declined by 14 to 22 percent. Aside from these declines, however, we’ve observed Chinese domestic prices of terbium oxide increase by approximately 5 percent year-to-date, while prices of gadolinium oxide have essentially remained flat.
In terms of the Chinese export market, the decrease in prices year-to-date has been much more substantial, largely as a result of China’s elimination of export tariffs on May 1, 2015. While the export tariffs formerly applied to rare earths should have amounted to just 15 to 25 percent on top of Chinese domestic prices, the disparity between Chinese domestic and export prices for several rare earth oxides was often observed to be far greater than 15 to 25 percent with little to no rhyme or reason.
For example, through the first four months of 2015, the quoted Chinese export prices of lanthanum oxide, cerium oxide, praseodymium oxide, europium oxide and yttrium oxide were commonly upwards of 60 to 110 percent higher than the Chinese domestic prices of the same materials, indicating that export prices were being manipulated and inflated by traders in China.
While this was an unpleasant reality for importers of Chinese rare earth oxides, it boded very well for producers and emerging producers outside of China since the inflated Chinese export prices were indicative of the price levels at which such producers could compete with China. However, the harsh downside of this inflation has been observed since May 1, 2015 with the elimination of rare earth export tariffs in China, which has resulted in the convergence of Chinese export and Chinese domestic prices at the Chinese domestic level.
This has resulted in declines of Chinese export prices to the tune of 40 to 65 percent for oxides of lanthanum, cerium, praseodymium, samarium, europium and yttrium. Other rare earths oxides, such as neodymium oxide, dysprosium oxide and terbium oxide, for example, have declined by 10 to 20 percent year-to-date, taking a smaller hit because prices of these oxides were not as inflated as the aforementioned oxides prior to the elimination of Chinese export tariffs on May 1, 2015.
That said – export prices of neodymium, dysprosium, terbium and gadolinium oxides have performed best year-to-date, marking the smallest declines of all rare earth oxides, which is attributed largely to the fact that prices of these materials were not as falsely inflated pre May 1, 2015.
INN: Where do you see prices heading for rare earths this year? What about in the medium term?
RC: Through the end of 2014 and the first quarter of 2015 traders and end-users of rare earths globally stocked up their captive supplies in advance of anticipated export tariff and resource tax changes in May 2015 that many were speculating would send prices higher. However, in doing so, this stocking up has since led to a lull in demand from traders and end-users globally, leading to the continuous erosion of Chinese domestic and export prices through the second quarter and into the third quarter of 2015.
That said though – we believe the rare earth prices being quoted at present are a reflection of very small and sparse transaction volumes taking place and are indicative of ‘bait’ prices aimed at drawing buyers back into the market. As end-users draw down the supplies amassed through the last quarter of 2014 and the first quarter of 2015 and begin re-stocking in late-2015 we believe prices will begin to rise accordingly and this upward momentum will carry into the first half of 2016.
Looking forward through 2020 we forecast that prices of all rare earth oxides will increase from present levels, although the increase will be modest for some and more aggressive for others depending on the supply-demand fundamentals anticipated for each respective oxide.
In our recent “Rare Earth Market Outlook Update” we forecast three prospective supply-demand-pricing scenarios for 2015 through 2020 that take into consideration recent tax and tariff changes in China, as well as uncertainty with Molycorp that could see the company cease production from its Mountain Pass mine by as early as next year.
In Scenario 1, which we believe it most likely at present, we forecast prices will increase annually from 4 to 16 percent from 2014 through 2020, whereas in the other two scenarios we forecast annual price increases for certain oxides could reach upwards of 20 percent from 2015 through 2020. In all scenarios, we forecast the sharpest increases to come through end of the decade as global inventories of oxides such as lanthanum, neodymium, praseodymium, dysprosium and terbium are drawn down, pushing markets for some of these oxides into short supply should no new sources of production emerge.
INN: There have been quite a few changes out of China this year, including the scrapping of export quotas and tariffs, and the revamping of the country’s domestic production tax. How is that going to change the market for investors and rare earths companies outside of China? What should they be paying attention to?
RC: In recent years China’s export quota amounts have been more-than-sufficient to satisfy demand from importers globally thus the elimination of these quotas is unlikely to impact global access to rare earths in the near-term. However, the replacement of export quotas with a strict export licensing system in China could have negative impacts on importers over the medium term.
Under China’s new export license system companies that wish to export rare earth products must first apply for one of 75 different ‘flavors’ of export licenses from the Ministry of Commerce, depending on the type of rare earth product the company wishes to export (compounds, metals, alloys, minerals, etc.). Moreover, a company wishing to export rare earth products must also demonstrate that they have pre-established export agreements with a foreign buyer, and if approved, can only export the material in question from one of eight eligible ports.
While China’s replacement of export quotas with a strict and complex export licensing system may superficially satisfy its obligations as a World Trade Organization member, the shift has arguably increased China’s ability to control, limit and micro-manage exports of rare earths while increasing uncertainty and risk for buyers outside of China. Foreign buyers’ purchase agreements with potential Chinese rare earth suppliers will now be subject to review and approval by the Ministry of Commerce prior to a license being granted, creating potential for unforeseen supply disruptions or conflicts of interest between foreign enterprises and their state-backed Chinese competitors.
As mentioned previously, on May 1, 2015, China announced the elimination of rare earth export tariffs, which has to-date caused the convergence of Chinese domestic and export prices at the Chinese domestic level. Concurrent with the elimination of export tariffs, China’s Ministry of Finance announced on May 1, 2015 changes to the rare earth industry’s resource tax regime from a volume-based tax to a value-based tax.
As we examined in a complimentary briefing published in May, titled “Much Ado About Rare Earth Taxes in China”, the new resource tax will lead to an increase in concentrate production costs for most miners of China’s ion-absorption clays, and ultimately an increase in the price of concentrates they produce and sell. This conclusion was later reinforced by a 10 to 20 percent increase in the price HREO-rich concentrates from such regions, as reported by Ganzhou Rare Earth Association.
However, despite the increase in HREO-rich concentrate prices observed since May, the prices of individual rare earth oxides that are separated and refined from these concentrates have continued to decline, thinning the margins of China’s processing and separation companies to the point of weak or non-profitability. As such, we’re confident that as the resource tax increases percolate through China’s value chain the prices of certain rare earth oxides, such as dysprosium oxide, terbium oxide, neodymium oxide, praseodymium oxide and others will increase accordingly.
With regards to resource tax changes affecting producers in China’s north, such as China Northern Rare Earth Group, we noted in our recent “Rare Earth Market Outlook Update” report that the new tax regime would actually lead to a decrease in concentrate production costs. That said however – the price of concentrates from such producers have remained flat since the introduction of the new tax and we suspect will not decrease as a result owing to reports from market participants in China that supplies of such concentrates are growing increasingly tight.
Market followers, participants and investors should keep a keen eye on the price of concentrates in China to get a sense of which direction prices will move in the near-term. Because the lead time to transform ore to concentrate to separated oxides and metals can take several months or more, the prices of concentrates can serve as a great indication of where individual rare earth oxide and rare earths prices will ultimately head.
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
Ryan Castilloux is the founder of Adamas Intelligence, an independent research and advisory firm that provides strategic advice and ongoing intelligence on the critical metals and minerals sectors. He helps investors, financiers, end users, emerging producers and other stakeholders track emerging trends and identify future business opportunities in the critical metals and minerals sectors. Castilloux is a geologist with a background in mining and exploration and has a Master of Business Administration (finance) from the Rotterdam School of Management, Erasmus University. Subscribe for free updates from Adamas Intelligence at www.adamasintel.com.
Disclosure Statement: At the time of interview, Ryan Castilloux did not, nor did his family or any other employee of Adamas Intelligence, own shares in any of the companies mentioned. Moreover, Ryan Castilloux was not paid by any of the companies mentioned in the interview for his coverage nor does he have a financial relationship with any of the companies mentioned.