Lynas Rare Earths (ASX: LYC) (OTCPK: LYSCF) shares reflect the company’s dominant position in non-China rare earths production. That’s fine, but LYC shares are also subject to the effects of what everyone else does in rare earths. This is an industry expanding at a rate of knots after all. So, in the longer term, like any commodity company, Lynas is going to be subject to the market prices for their production. Our suggestion is that there’s a real risk of that rare earths market being oversupplied soon enough. Yes, yes, we know, electrification of the world, all those magnets and so on. And yet the expansion of the rare earths supply chain is perhaps larger than the increase in demand. Only this morning we’ve had yet another ionic clay prospect being touted at Viridis after all - that’s at least the tenth we’ve seen on the ASX in the past 6 months alone.
We’ve been around long enough to know that this isn’t a silly concern. It might not be the correct one, of course, but it’s not silly. After all, a decade back Lynas did need to be recapitalised. Back in 2010 China restricted rare earth exports. Lynas and Molycorop both expanded into the higher prices that resulted, Molycorp then went bust and Lynas had to be recapitalised. Because just those two fed the world’s non-China demand and so prices slumped.
Now, history doesn’t repeat but it sure does echo. It is possible that the wild expansion of the rare earths industry will get ahead of demand and therefore prices will slump. They’re already well off highs: “The average Chinese domestic price of NdPr slid from $US86.60 ($129.70) a kilogram in the March quarter to $US60.30 a kilogram in the June quarter, and down from $US120.40 a kilogram in the same period last year.” A 50% reduction in price, well, is that quite the time to be expanding production?
Lynas Rare Earths share price from Google Finance
Yes, demand is increasing for rare earths. But so also is Lynas - massively - increasing production. There’s the work being done in Australia to augment and partially replace the Malaysia plant. Then there’s also the much more recent deal to build a separation plant in Texas. Sure, the US is paying $120 million for that. But that’s exactly the problem we’re wondering about. Rare earth prices are falling on the surge in production driven by hte recent high prices. The stock exchanges of the world are packed with companies declaring their rare earth ambitions. And yet here we’ve got the world leader expanding production into those falling prices.
It is possible for the 2013 thing to happen all over again. That rare earth prices slump to the point where mining is hardly viable. We don’t say that this definitely will happen but we do insist that it’s possible. Lynas simply isn’t a one way bet.Trubunr
