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Tim Worstall Contributor


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Why Lynas Corp Is Struggling; The Great Rare Earth Shortage Is Truly Over

Lynas Corporation, over in Australia, is having a hard time of it as it ramps up its production of rare earth elements from the mine at Mount Weld and the processing plant in Malaysia. The share price has been bouncing around but the underlying cash flow numbers don’t look good. How can this be, given that the company is (along with Molycorp Molycorp) the solution to the Chinese monopolistic stranglehold over rare earth supplies for the globe? There’s two possible explanations that we can put forward here, both of them economic. One is that China is manipulating that monopoly to Lynas’ detriment, the other is that this is just the free market outcome.

We all recall how a few years back the entire world was running around like a headless chicken over supplies of rare earths (17 metals, the lanthanides plus scandium and yttrium and yes, my day job is in dealing with scandium, the one and only of them that traditionally China has not been a major supplier of). The basic background was that they’re not rare (and they’re not earths) but various mines in China were the source of 97% of the world’s supply. Some 30% of proven reserves (ie, that stock that someone has proven they can mine and make a profit on) were also in that country. When China, as it did for several decades, simply sold these metals at prices everyone was happy to pay then no one worried.

Then there was a move by China to restrict exports. There’s a couple of different explanations here: China was saying that it’s environmentally damaging, not so much the mining but the processing (it certainly can be) and thus they wanted to limit that part of the sector. They lost that argument at the WTO. The other explanation was that China wanted to curb exports of the raw materials to places like Japan, so that companies would move the value added manufacturing part into China where they could still get supplies. For the restrictions were upon exports, not upon consumption in China, nor upon exports of things made from rare earths. There’s no proof that this was so of course, it’s only an explanation that some put forward.

Whatever reason you want to believe underlies China’s actions they did cut export quotas, price soared, reports were written to Congress about how this threatened the high tech manufacturing future and people like me ran around saying it would all blow over soon enough. For those of us in the industry knew that two mines were about to come online outside China. Molycorp was to reopen its mine in the California desert and Lynas Corp its one at Mount Weld in Australia. Lynas also built a new processing plant (the expensive part of this process, rare earths are very common, not very rare, it’s the ability to actually separate them which is rare and expensive) in Malaysia. And that of course is where the troubles really started. For global consumption is of the order of 150,000 tonnes a year (rough figures). And those two new mines would add about 50,000 tonnes between them. Which is actually about the consumption of the world outside China (most of the things made with rare earths, camera lenses, permanent magnets and so on, tend to be made inside China). So while China might be restricting supply in the short term, and thus prices soar, in the medium term we were much more likely to see a glut on the marketplace.

And that’s exactly what has happened:

As a result of China’s significant influence on the rare earths market, Lynas has seen its average rare earths ‘basket sales price’ fall from above US$200 per kilogram in 2012 to US$18.25 per kilogram. This is down from US$22.63 per kilogram last quarter.

I might argue about “China’s influence” there. For China is doing all sorts of things (including having closed down the largest mine for a time a year back) to try to raise those rare earth prices. I would even argue that it is Lynas’ influence, being the new entrant into the market, which has brought those prices back down. But our essential point is that the market has moved from a position of supply shortage to a position of oversupply. And the problem for Lynas is that it’s not actually covering operating costs, let alone the capital costs that it has incurred:

The company’s total cost base is nearly double, on a per unit basis. In this case, operational production and administration costs were double the cash receipts from rare earths.

And as long as production continues to climb, it will likely only get worse. In this case, Lynas will struggle to meet its $440 million debt commitment due in two years’ time.

And all of this brings us to our economic point. We’re usually told to be very wary of allowing anyone to have a monopolistic position in the supply of anything at all. And plenty of people have worried about China’s operational monopoly in the rare earths. However, what we’ve actually got to worry about is whether someone has a contestable monopoly or not, not whether they have a monopoly. For China certainly had an operational monopoly and then they tried to take advantage of that monopoly. Standard and classic monopoly behaviour, reduce supply to drive up prices and thus increase profits above what a free market would produce. The creation of economic profits or rents if you prefer. But what actually happened when they did so?

The joy here is that it was precisely that upward drive of prices that allowed both Molycorp and Lynas to actually finance their expansion plans. It’s seriously unlikely that they would have gained the capital that they needed without China having attempted to manipulate the market. And now that they have been able to finance production China’s monopoly has been broken and those monopoly profits, those economic profits, have gone again. This isn’t so great for those who invested in either company of course but for the rest of us it’s just fine.

Which is, as I say, a lesson in what sort of monopoly we need to worry about. Where’s there’s a natural monopoly, one that people cannot conceivably compete with, or where there’s one imposed by legislation or regulation, then we do need to look askance at the prices and volumes of production. For that’s exactly what people will manipulate in order to try and make monopoly profits. But where a monopoly is contestable this is much less of a worry. For if people do try to so manipulate then this will call forth the competition to contest that monopoly. As here: precisely that China tried to gain monopoly profits is what has led to the arrival of competition to that monopoly.

And the Great Rare Earth Shortage is now over, as China’s attempt to exploit that production monopoly they held has called forth the new supply to challenge said monopoly. Which is just as I an others were saying those years ago. We don’t need to worry about China’s monopoly precisely because it is contestable.

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  • jim jim 4 months ago

    Tim you are a wealth of erroneous information. Molycorp and Lynas are both failed businesses. One of the key reasons is that they do not produce heavy rare earths. You are partially correct, in that they ramp up production in light REs, thus compounding losses. This is a consequence of U.S. NRC / IAEA regulations as it relates to Thorium and Source Material. If you, or your readers are the least bit curious please see this presentation at the United Nations / IAEA conference earlier this year: https://www.youtube.com/watch?v=fLR39sT_bTs

  • Tim Worstall Tim Worstall, Contributor 4 months ago

    Well, not really, no. Lynas has 5% heavies in its ore and Molycorp has historically been a big producer of europium, usually classed as one of the heavies.

  • jim jim 4 months ago

    Tim you are like the winning Lotto ticket of bad information. Lynas has less than 1% heavies and Europium is NOT a heavy. These companies have very low value rare earth distributions so they just reclassify light rare earths as heavy rare earths. Repeating misinformation like this does not change the geo-chemistry in the ground, but it does misdirect investors and policy makers.

  • Bob Lewsen Bob Lewsen 4 months ago

    Agree with Mr. Worstall.

  • Nick Dentrinos Nick Dentrinos 4 months ago

    You say “the Great Rare Earth Shortage is Over” why then is the government of Alaska throwing $145M at the sector to assist Ucore into production. Also why has the US Government classified 5 rare earths as ‘critical”. You say “China’s monopoly has been broken”, tell me then who is supplying the heavy rare earths to the ROW. Also why have some ROW manufacturers had to relocate their plants to China just to source a reliable supply of heavy rare earths.

  • Tim Worstall Tim Worstall, Contributor 4 months ago

    You’ve noticed that prices have collapsed? Terbium is back down to $800 from $5,000? That’s usually a good sign that a shortage has passed, falling prices, no?

  • Nick Dentrinos Nick Dentrinos 4 months ago

    Hi Tim, I will tell you what I have noticed and that is you have avoided answering my questions. I will however address the issue you raised. The rare earth market is dominated by the Chinese, and the Chinese set the prices – now with ROW predominantly “light rare earth” producers Molycorp and Lynas coming online why would the Chinese keep the prices up and in the process make the ROW competition viable. Better strategy is to kill the competition by pushing the prices down – and that is what I believe is occurring.

    I am trying to see things from your point of view but what is actually occurring in the world tells me you have arrived at incorrect conclusions, so could you now please answer the questions I raised and assist me understand your point of view.

  • Tim Worstall Tim Worstall, Contributor 4 months ago

    Sure, the RE market is dominated by the Chinese. Everyone knows that. But it’s no longer a monopoly of theirs. No, prices are not determined by China. They’re determined by supply and demand. Lynas and Molycorp are predominantly light RE producers but Lynas at least claims to have 5% heavies in its ore.

    The Chinese monopoly has been broken is what I’ve said, not that China doesn’t produce REs any more, nor that they’re not a power in the market.

  • Bob Lewsen Bob Lewsen 4 months ago

    Thank you, Mr. Worstall, appreciate your comments. Now, the bottom line question for me is should I remain a long term investor with Lynas, Molycorps, and/or REE (trade symbol (US) for Rare Element). Appreciate the comments in your replies below also. I guess the bottom line for me is can Lynas survive, and by the obvious extention the other “wannabes”, Molycorps, REE et alia. Right now there seems to be a crisis coming for Lynas in the near future (less than 2 years) concerning their debt payment. I dearly want them to succeed so we have reliable producers outside of China. It looks like Molycorp is at their crisis point, and REE shows it is going and going on research and exploration, but no “hard” point of production. Again sincere thanks.

  • Tim Worstall Tim Worstall, Contributor 4 months ago

    Asking me about stock prices is probably not a good idea. I was actually a stock broker for a time, many years ago, and I wasn’t a good one. Which is why I do something very different now.

    I have no doubt that My Weld and the processing plant in Malaysia will survive as a unit. They’re just too valuable if they’re debt free for that not to be the case. But what’s going to happen to Lynas stock, sorry, I really don’t know. I share concerns about that debt load but as I say, I’m really not a good stock picker so please don’t take anything I say as a reason to trade one way or another.

  • Bob Lewsen Bob Lewsen 4 months ago

    Appreciate your candor. If the processing plant survives (I agree on that one also), then despite the crushing debt, the company will survive, that is why I am an investor and NOT a trader. Again thank you.

  • Chris Clemen Chris Clemen 4 months ago

    Once the Chinese drive out competition, they will get prices back up to monopoly levels make no mistake about it. At that point nobody will stand in their way because they have seen what will happen. I dont understand how the world governments can stand by and allow a communist country like China to have 97% market control. If that is not a monopoly then what is? This is also how wars have been started in past history.

  • Ali Nassimi Ali Nassimi 5 days ago

    Hi Tim,
    Your analysis show that there are more Light REE than is needed (the heavies seem to be in high demand still). So the question is whether demand is elastic enough to increase or some producers will go out of the market? In the later case would it be Lynas? Moly corp or some of the Chinese producers?