Rare Earth Supply Too Tight for Comfort

By Michael Montgomery—Exclusive to Rare Earth Investing News

Following last month’s release of the second half of China’s export quotas, some Chinese REE processors have already stated that they are halting production for the year to comply with the restrictions. Despite the quota having doubled year-over-year, the total allocation for the year has decreased, resulting in the price of some rare earths to continue to rise. With Lynas Corp opening its Mt Weld mine in Australia last week, hopefully there is a light at the end of the supply tunnel.

High REE prices

The quota has done nothing to solve the problem of high prices for REEs. Some of the metal prices, such as dysprosium and lanthanum, have surged upwards of 4 fold on the year. Though prices are seen to be stabilizing, high rare earth prices are the new reality until non-Chinese sources of the elements hit the market. Even then, it will take significant tonnage to drive the prices downward.

The only respite for the high prices may be the prices themselves. “Rare Earth prices will remain bullish in the second half of this year, but won’t be higher than the first half’s levels, as companies in downstream activities halt production due to expected high operating costs,” reports Zhang Qi, for China Daily. Only the lack of demand due to companies not willing to pay the high price will hold the prices at bay.

Zhang Zhong, General Manager of the largest rare earth company in the world, Batou Steel Rare-Earth Hi-Tech Co. (SHA:600111) stated, “rare earth prices will remain at a high level in the second half of this year due to tight supply.”

Halt in production on horizon?

The tight quota is also effecting the production of the metals. One of the largest processors of the rare earth’s to call for a halt production to adhere with the guidelines.

China Minmetals Nonferrous Metals Co. (HKG:1208) recently stated “that production should be proactively halted with immediate effect at the beginning of August 2011 in order to guarantee the stable operation of the rare earth market,” reported David Stanway, for Reuters.

The call for a nationwide halt may be a preventative measure by Minmetals to stop smaller firms from selling on the black market. The Chinese government announced that at the beginning of August, six government agencies started cracking down on illegal operations.

It is speculated that the production quota for rare earths, capped by the Chinese government at 93,800 tonnes, has already been reached.

Lynas Corp starts operations

One of the biggest names in the rare earth space, Lynas Corp (ASX:LYC), opened its Mt. Weld rare earth mine on August 4^th.

The ceremony opening the mine was attended by the Japanese ambassador to Australia, Shigekazu Sato who stated “It is becoming increasingly important for Japan to diversify our sources of (rare earths) supply… Japan is really pleased with the fact that we can pursue this project with such a trustworthy (partner).”

The mine is not expected to be at full production until next year, when the company hopes to produce 11,000 tonnes of REOs.

Lynas is still working on itsr processing facility in Malaysia that has come under heavy criticism for environmental groups. The company expects the plant to still be completed on time by the end of the year. The plant recently awarded a construction contract for the phase 2 expansion that will increase capacity to 22,000 tonnes of REO per year.

Hopefully, Lynas and Molycorp’s (NYSE:MCP) Mountain Pass projects will provide Japan and the West with the much needed supplies of REE’s, to challenge Chinese dominance over rare earths and bring down the price for end users.