Are Rare Earth Metal Prices About To Rise?

Rare earth metal prices have fallen sharply since mid-2011, some declining by as much as 80% as expectations of rising supplies coincided with declining demand. More recently, prices have shown signs of stabilising. Chinese restrictions on mine output and plans to stockpile materials, coupled with the increased likelihood of problems at mines outside China may mean rare earth metal prices are about to rise.

China reduced its export quota for rare earth metal’s by 27% year on year to 10.5kt for first half 2012 in an effort to stabilise prices and preserve stock. Then, in August, under scrutiny from the World Trade Organisation (WTO) China announced a 2.7% increase in the annual export quota, the first rise in 5 years and the highest quota for 3 years. Although the Chinese export quota for the whole of 2012 is just over 30k tonnes, exports are likely to only amount to around half that amount.

In July, the Chinese government announced that it would start to stockpile RMB 6 billion worth of rare earth metal by end October. In addition, there are reports from some Chinese provinces that local governments will look to stockpile rare earth metal in an effort to stabilise prices and support local businesses that got into difficulty following the collapse in prices.

Meanwhile efforts by the Chinese government to restrict illegal mining and the most polluting operators may also help support prices. In August, the government proposed new rules saying that mixed production rare earth metal mines must have a minimum annual output of 20k tonnes with smelters producing no less than 2k tonnes per annum.

Outside of China, new production from US’s Molycorp and Australia’s Lynas Corp was expected to increase the supply of the ‘light’ rare earth metals. Molycorp has reopened the Mountain Pass mine in California with output expected to rise from 3.5k tonnes in 2011 to 19k tonnes by the fourth quarter of 2012. Meanwhile, Lynas was due to start production at its Malaysian mine in October with output forecast at 11k tonnes in the first year eventually rising to 22k tonnes.

However, mines outside China are not without their challenges. There is concern that Molycorp may have based its business plan on rare earth metal prices significantly higher than current prices and taken on too much debt. Molycorp invested $900 million in revamping the Mountain Pass mine (compared with 2011 revenues of $400 million) while also taking on significant debts to acquire a business in Canada. Molycorp is particularly vulnerable to declining revenues if rare earth metal prices do not rebound, potentially affecting the company’s ability to produce rare earth metal from the mine.

Meanwhile Lynas’ mine in Malaysia has been forced to delay production following a court ruling on environmental grounds. The company is facing stiff opposition from residents nearby after an earlier rare earth metal refinery was shutdown in 1992 after the local population complained of health problems and birth defects. Delays or production difficulties at either of these mines will reduce available supplies of ‘light’ rare earth metals, potentially leading to higher prices.

Companies used to order as much as 6–12 months of rare earth metals at a time. Now, they take a wait-and-see attitude ordering on a month-to-month basis to avoid downside price risk. With signs that rare earth metal prices may be stabilising on Chinese output restrictions and concerns over mine output outside China now may be a good time to revise that attitude and secure longer term.

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Cold November to provide short term boost to energy prices

The latest forecast from meteorologists WSI point to warmer than normal temperatures this winter (Nov-Jan) in western/northern Europe. Warmer than normal temperatures are likely to reduce demand for gas and oil for heating.

In the short term the UK may be an exception. The UK is forecast to see colder than normal temperatures in November, particularly early in the month.

UK gas prices (summer-13 contract) rose to their highest level since April following the reports publication. UK heating oil prices are currently around 61p per litre.

Although UK energy prices may see short term increases, both gas and heating oil prices are closely correlated with oil prices which is likely to see further falls during the fourth quarter.

The next seasonal forecast will be published on 19th November.

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Cooking oil prices to rise as Chinese seek ‘crush’ margins

Forecasts of a 25% hike in palm oil prices could support increased imports of soybean into China as farmers take advantage of the ‘crush margin’ to produce soya oil.

According to a report in Reuters, one of the largest palm oil producers Sime Darby Bhd. forecasts that palm oil prices may rise by almost one-quarter over the next eight months. Malaysia, the second biggest producer after Indonesia has announced a plan to cut taxes on exports while also abolishing the duty-free shipment quota from the start of 2013. These measures should help to reduce inventories, supporting higher palm oil prices.

Palm oil and soya oil are substitutes for each other, used in the production of cooking oils, margarine etc. Palm oil prices have slumped by almost a quarter since the start of 2012, close to their lowest level in three years. In contrast soya oil prices have fallen by 4% since the start of 2012, caught between the decline in palm oil prices on the one hand and the surge (up 28%) in soybean prices on the other.

Chinese buyers have been importing soybean in record volumes, despite the high prices turning it into meal for its pigs and chickens. With the Chinese government currently supporting an expansion in pig production to help tame consumer prices, meal prices have increased by 43% since the the start of 2012.

The crushing of soybeans produces soya oil as a by-product. If palm oil prices rise by 25%, soya oil prices are also likely to rise. This will increase costs for consumers of cooking oil and margarine but will also help to support increased demand from China for soybeans with higher ‘crush’ margins.

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