Rare Earths Market Update: H1 2020 in Review

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Rare earths prices were hit during the first few months of 2020 as the coronavirus pandemic took center stage globally, with governments imposing measures to contain the virus.

The group of critical metals has increasingly become a trade war pawn between China and the US, as the former dominates the market. Rare earth elements (REE) are used in everything from smartphone cameras to defense systems, and are much more prevalent in our day-to-day lives than many may think.

With the second half of the year kicking off, the Investing News Network talked to analysts to find out what’s been happening in the REE space and what to expect in the second half of 2020.

Rare earths market update: Price performance

During the first quarter, when the coronavirus pandemic hit the world’s economies hard, prices for some REEs were affected, including cerium, lanthanum, neodymium (Nd) and praseodymium (Pr), which saw 5 to 8 percent declines in Q2 compared to Q1.

“However, overall prices for most elements showed signs of recovery in June and July,” said Luisa Moreno, managing director at Tahuti Global. “I don’t think prices will fall in Q3 or Q4, but it depends if the virus is kept under control, the global economy stays open and a recession is avoided.”

The rare earths industry also saw supply-side disruptions and delays in transportation of material in the first three months of the year.

But the second quarter was a different story, with China experiencing a fairly robust recovery from COVID-19. That said, demand projections have tapered slightly as a result of weaker economic conditions both in China and globally, according to Roskill.

“Outside of China the impact was more pervasive into Q2, with supply-side disruptions and closures at non-Chinese operations, which have now largely restarted,” said David Merriman, manager at Roskill.

“The supply disruptions in H1 caused an uptick in most REE prices, particularly dysprosium (Dy) and terbium (Tb),” he continued. According to Roskill, these increases are in line with what would be expected during a period of tightening supply for heavy rare earths; there was then a correction as increasing supply returned to the market.

“Prices for Dy and Tb have performed particularly well, though we are expecting to see prices dip back in Q3 before strengthening again in Q4,” Merriman said. “Prices for Nd and Pr, the key magnet rare earth materials, have largely been subdued in H1 2020, with little supply-side disruption in China, though notable demand-side disruptions caused by plant closures downstream.”

Rare earths market update: Supply and demand dynamics

Speaking about the supply and demand dynamics in the first few months of 2020, Moreno said in China, the top-producing country, more than 50 percent of production was disrupted.

“Demand was weak because of downstream manufacturing closures, and overall distribution was disrupted by traveling restrictions,” she added.

However, the expert said most production has returned and supply should stay uninterrupted if the virus stays under control in REE-producing regions.

“It seems that overall there have not been major concerns about supply, even once downstream manufacturing restarted,” she said. “It should be noted that end users (both defense and industrial) usually keep stockpiles of critical materials, which offers some cushion during supply chain delays.”

Rare earths are mined and extracted from ore together to produce a mixed chemical compound. China controls almost all mining and refining of heavy rare earths, which are usually found at lower concentrations and are used in more niche applications and at smaller amounts.

When looking at REE supply, Merriman pointed to Nd and Dy as the two elements that present real supply issues over the coming years, as a result of their use in the high-growth automotive industry.

“Supply for Nd has largely been robust in 2020, meeting demand growth, and whilst there was tight supply for Dy during H1 2020, this is expected to be alleviated in H2 2020,” Merriman said.

He added that to achieve sufficient supplies of heavy rare earths, particularly Dy and Tb, there have been increasing volumes of REE ores and concentrates imported from Myanmar or in the form of monazite mineral concentrates from various countries, which are processed in China. Myanmar is the third largest rare earths-producing country in the world.

Outside of China, which dominates the space, the challenges remain the same for many REE developers.

“The availability of good finance, technical development of flowsheets and securing downstream consumers for their products all remain key barriers to entry which must be overcome,” Merriman said.

Speaking about whether the market will see more supply enter the space, Moreno said she doesn’t think there will be any significant new production in the near term, at least not in the next five years — but that may change after that point.

“If the financing and government support in the critical materials space stays healthy, in the longer term there is a chance that we may see new REE production and processing, for instance out of South American projects, like CBMM in Brazil, or from other by-product processing (like uranium or phosphate) projects,” she explained.

For Merriman, the rise of REE by-product supply (from heavy mineral sands operations or phosphate operations) is likely to fill market space, which new entrants are targeting in the short term.

“This is likely to further fuel Chinese market dominance of refined REE products and maintain a relatively small number of market players at the refined stage in the short term,” he added.

On the demand side, the rise of electric vehicles will be key for the REE space.

“There are expectations that as electric vehicle sales continue to rise at double digits every year, and if permanent magnet motors are widely adopted by automakers, then we will see coupled demand for Nd and Pr (two important light elements), as well as Dy and Tb,” Moreno said.

Rare earths market update: Building out supply chains

Commenting on the challenges of building supply chains outside of China, Merriman said there is significant potential, though these supply chains must be supported at multiple stages if the aim is to make them independent of China.

“This itself presents the main challenge in that even if separated REEs were produced outside of China, there is a limited market for their use outside of China, particularly for magnet materials,” he said.

For these supply chains to be sustainable, downstream consumers must be willing to commit to non-Chinese producers, potentially even incurring higher prices, to support them longer term and ensure security of non-Chinese supply chains.

“This cooperation throughout the supply chain has been hard to come by, particularly where Chinese-sourced material has been comparatively low cost,” Merriman added.

For Moreno, the top challenge of building non-Chinese supply chains for most companies is metallurgy.

“To be able to develop an economic flowsheet at current prices means that most deposits (especially those with large percentages of low-price elements like lanthanum and cerium) need to keep processing costs below US$8 per kilogram. It has not been easy,” she said.

Rare earths market update: What’s ahead?

In the second half of 2020, Roskill expects prices to fall back slightly for Dy and Tb, with further increases then coming towards the end of the year. Prices for other REEs are expected to remain stable or show a marginal upward trend in H2 2020 as demand growth recovers.

“We expect prices for these elements to recover in H2 2020 as demand recovers and facilities work through any built-up inventory,” Merriman added.

In terms of demand, the REE space is recovering well in H2 2020, though Roskill expects annual year-on-year demand for REEs to fall back in 2020 across all market segments.

“Demand for magnet rare earths (Nd, Pr, Dy, +/-Tb) is expected to experience the strongest growth during the early 2020s,” he said.

Looking ahead, investors who are following the REE space should keep an eye on several potential catalysts that could impact the future of the industry.

“The pulse of the global economy should give investors a sense of things to come. (Investors) need to pay attention to GDP growth, unemployment numbers, consumer spending, etc. The stock market seems to be disconnected from mainstream and perhaps betting on a fast economic recovery post-COVID-19.”

Of course, another development to monitor is the relationship between the US and China.

“If China implements any quotas on REE exports or tariffs on imports of unprocessed REEs from the US, we may see REE prices rise,” she said. “Of course, the outcome of the US election this November is also important for the future of US/China relations, I think.”

Moreno also mentioned the measures to contain the pandemic and the potential for a second wave of COVID-19 as factors to watch.

“If the supply chain stays mostly open — I mean refineries, metal and alloy makers, magnet makers, chemical processors, electronic component manufacturers, automotive manufacturers and so forth — we may see prices continue to rise and stabilize at a higher level,” she said.

“The situation may change if COVID-19 returns during the northern hemisphere winter, forcing governments to close businesses and restrict traveling.”

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.