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Demand Ahead – Metal-Pages Rare Earth Conference in Shanghai

Demand Ahead – Metal-Pages Rare Earth Conference in Shanghai

We recently attended the Metal-Pages Rare Earth Conference in Shanghai. The conference focused on the current state of the rare earth market and where it is headed. There were a number of presenters, including the General Manager of Inner Mongolia Baotou Steel-Rare Earth Group, Hi-tech Co. Ltd., Mr. Zhang Zhong. Mr. Zhong shared the Baotou Group’s understanding of the status of selective projects outside of China. As expected, Baotou Group sees Lynas Corp. (ASX:LYC) and Molycorp Inc. (NYSE:MCP) as having the most advanced projects. The group is also following the expansion projects in the neighbouring countries, including India, but expects only modest increases from other Asian producers. The group did not highlight any other projects in North America, but recognized the progress made by a number of Australian juniors.

Baotou believes its operating costs are lower because of the iron ore product but did not share the actual costs, which it claims are about “half” of those of external producers. Baotou expects to continue to be the world’s largest producer of rare earths and believes that China is still the world’s lowest-cost producer.

According to the Association of China Rare Earth Industry, prices may have bottomed in July. Lanthanum and cerium prices may remain at current levels or fall slightly; all other elements are expected to increase going forward, except europium, which is likely to remain weak as fluorescent lights are replaced by LED lights, which require less rare earth elements (REE). The association also stated that China has not been too successful tackling illegal production, particularly in Southern China, where heavy rare earths are produced. The association provided detailed estimates of exports of different REE compounds and products. Japan was consistently the largest consumer of exported REE products from China in the last few years. The U.S. showed strong demand for some magnet products in 2012. According to official estimates, 16,000 tonnes of REE products were exported from China in 2012; Japan consumed 29% and the U.S. 26%. The lower REE exports from China to Japan in 2012 were “blamed” on end users destocking.

There were a number of company presentations, including Baotou, Molycorp, Lynas and Northern Minerals (ASX:NTU). From the group of presenters, Northern Minerals was the only one with an enriched heavy rare earth deposit. REEs are found in xenotime, a mineral previously commercially processed for the recovery of rare earths. The company has been able to upgrade the ore 25 times through beneficiation to produce a mineral concentrate with 20% total rare earth oxide (TREO). Northern Minerals expects the high-grade feed to be processed using conventional hydrometallurgical methods, which should involve low capital costs. The scoping study is expected to be completed in 4Q2013 and the feasibility study in 4Q2014.

POLICIES, STRATEGIES AND FORECAST

CHINA

China is likely to implement tariffs and other restrictions to control exports if the export quotas are removed. China seems to be determined to protect its resources for domestic use by capping domestic production at ~90,000 tpy and limiting REE exports, particularly the export of the least common and critical elements.

China is focused on attracting downstream industries and on the development of downstream applications. It was reported that a number of rare earth downstream industrial parks are being developed.

Industry participants agree that REE prices need to be more transparent and that the rare earth product exchange (expected to be opened this year) could offer more price transparency. The Research Centre for Strategy of Global Mineral Resources in the Chinese Academy of Geological Services estimated that to date China has spent more than 4B Yuan remediating the environmental problems that have been caused by the mining and processing of rare earths.  As part of China’s new environmental policies, REE companies must comply with the Pollutant Discharge Standards that were recently adopted. The new environmental policies also prohibit the tank and heap-leaching methods for processing of ion-absorption clays.  Although China has large monazite deposits, the government has also prohibited the mining of these deposits for the recovery of rare earths, due to the thorium content.  The new environmental policies are expected to increase the operating costs of Chinese rare earth producers.

JAPAN

According to MTC trading house, Japan is still dealing with expensive inventory stockpiles of certain elements, such as dysprosium; however, the stockpile of most elements has been significantly reduced since March. Demand for REE compounds and products in Japan are expected to double by 2020.

KOREA

Korea stockpiles more than 30 metals and materials, including rare earths, which should only be used in the case of no-supply availability. The Korean government is focused on economic programs that spur technology development using unique and advanced materials such as rare earths, which could lead to disruptive technologies. Korean demand for rare earths is expected to increase in the near term. KORES (Korea Resources Corporation) has a major role, as the group is responsible for securing mineral resources essential for the growth of the Korean economy.

Supply and Demand Forecasts

  • REE demand is expected to increase 6–10% year-over-year to 2020.
  • China currently accounts for 85–90% of the world’s REE supply but may fall to ~50% by 2020 if production quotas stay conservative.
  • REE Consumption: China 70%; Japan 20%; 10% ROW (rest of the world).
  • IMCOA estimates 110,000–125,000 tonnes of TREO consumption in 2013 and 250,000 tonnes of REO consumption by 2020.

Key Sector Overviews

  • Lighting industry: Important elements in this sector include europium, terbium and yttrium. The lighting industry has been able to accommodate relatively high REE prices, which could be passed on to buyers; however, high price volatility has had a worse effect on sector economics. In 2011, there were 40 trichromatic phosphor powder companies in China, 60% of these closed their operations in 2012 due to weak demand. Sales of rare earth phosphor powder in China were ~4,000 tonnes in 2012, while capacity was 30,000 tonnes. Demand for europium and terbium fell 60–70% in 2012. Sales of fluorescent lamps fell 20–30% in 2012, aggravated by the increasing adoption of LED lamps. Going forward, the demand for REE phosphor products is expected to increase as incandescent lamps are phased out and replaced with fluorescent and LED lamps, as per government policies in a number of countries (e.g., U.S, Canada, China, European Union, etc.).
  • Catalysts: The General Deputy Manager of Wuxi Weifu Environment Protection Catalyst discussed the potential substitution of precious metals in catalyst applications by light rare earths (LREE). According to Dr. Ji LiWei, platinum catalysts that clean car exhaust fumes could potentially be replaced with cheaper REE catalysts. If REE catalysts are proven economically and technically viable at commercial scale, it could lead to a significant increase in demand for rare earths in the automotive sector.

OUR TAKE

Lanthanum and cerium supply is expected to increase more than 35% in the next three years as Molycorp and Lynas expand their production. The increased production of these common light elements is likely to cause oversupply and downward pressure in prices in the near term but potentially spur the development of new applications in the long term. Currently, the average REE compound prices of Molycorp, Lynas and Baotou is in the range of $21±$5/kg, likely close to their production costs ($18±$5/kg, excluding co-products). Thus, we believe that lanthanum and cerium prices may have bottomed at current levels of $6–$7/kg and below these levels some LREE projects are likely not economic, especially if neodymium and praseodymium prices fall below $70/kg.

Assuming the global economic conditions do not weaken, we expect to see increasing demand  and higher prices for most of the rare earths, with the exception of lanthanum and cerium, as discussed above. Demand for heavy rare earths is expected to remain strong. China is likely to lose the outside-China supply market for most of the light elements, but we expect it to continue to control the supply of heavy rare earths for at least the next four years.

New research centres and groups are being formed in a number of countries with the aim of advancing REE recovery methods and further investigating the benefits of using rare earths in a number of applications. The increasing global production of REE should lead to security of supply, which could spur the development of new applications for these unique elements.

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