China has dominated the rare earth markets since the 90s and accounts for approximately 65% of the mining side, 85 percent of rare earth processing and 92% of rare earth magnet production as of Dec 22. Why am I highlighting this fact, well it is the main reason why China wants to suppress rare earth prices at the front end. It has taken Lynas multiple decades to even turn a profit due to China’s dominance in this space, even with the incredible Mt Weld deposit (one of the worlds highest TREO deposits). The reason being is they were selling raw material at low prices to China (playing right into their hand as China were the ones controlling the price they paid to other companies). They had no where else to send the supply so they had to cop the market prices available to them. Simple economics.
They effectively manipulate and control markets and market pricing by increasing or decreasing the level of supply year on year (balancing the equilibrium where supply meets demand). They are able to do this due to their stranglehold on the market by controlling the entire supply chain and the level of reserves they have on hand from a country perspective, they have a competitive advantage in this space and also have very low cost operators (some massive ionic clay deposits in southern China). The world has allowed them to do this so I have no qualms with them capitalising as a nation. It makes financial sense to do so but now nations are paying for it from a national security perspective. The sad part here is that it took the war in Ukraine for the powers at be to form the general conclusion that they are susceptible and at risk in the event of war and have finally started to act. Hate Trump or love him at least he realised what China were up to and called them out on their predatory pricing practices.
It is not going to be easy as supply chains need to be rebuilt and a lot of capital investment from western nations to reduce their stranglehold on the market. That is the problem with outsourcing, yes you may make more short term profit initially but when you give up control, you are asking for trouble and this is where the western nation finds themselves. Price Auctions and exchanges for critical commodities need to be built to ensure fair and transparent prices are able to be provided to the market. Believing the prices coming out of China is fraught with danger.
China can keep prices low because they control the entire value chain and have significant level of rare earth reserves, if they keep prices low from a raw material perspective then it enables them to separate/process/refine and then turn into magnets to ultimately sell to end users (they are the one stop shop and therefore are price makers, charge what they like). They have essentially paid next to nothing for the supply/raw material but then charge a fortune at the back end. Hence why a lot of rare earth projects from a mining perspective seem marginally profitable at best. As no other country has completed these downstream steps, they have a competitive advantage and therefore can charge what they like and make massive profits on the back end. That is why I keep harping on about we need to go downstream otherwise we won’t make any money, Tim knows this and is trying to convince the western markets to build the necessary supply chains to compete. It will be interesting to see how much China controls of the rare earth market in the next 10-20 years. Only then will you know how effective the investments made today will be. If they still have the same percentage, the world has failed. It ain’t going to be easy let me tell you as China is an economic powerhouse but I have done my bit by investing here. Cheers, CP.
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