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Global supply and demand for rare earths were estimated to be approximately in balance in 2014, based on official
statistics, with continued increases in non-Chinese production from Mt. Weld (Australia) and Mountain Pass
(California) offsetting slightly reduced exports from China. However, recent estimates that annual illegal mine
production of rare earths in China, where environmental concerns continue to grow, might be as much as 30,000-
40,000 metric tonnes (25%-30% of global supply) suggest that the REE market was in oversupply, with that
condition likely to continue into 2015. Certainly, the continued gradual decline of rare earth prices in 2014 indicates
that REE consumers continue to find the needed rare earths readily available.
Chinese official domestic REE production is expected to increase at a rate of more than 8.5% per year from 2014 to
2017, while illegal mining is forecast to decrease by about half of the tonnage increase implied by that growth rate,
as the government’s measures to consolidate the rare earth industry and curtail illegal mining progress. These two
factors together imply a future overall growth rate of around 4% for domestic Chinese production. Rare earths
production in the rest of the world, though only 15% of estimated production, is expected to grow at a faster rate as
Lynas Corporation’s (“Lynas”) and Molycorp’s operations continue to ramp up toward their design capacity. In the
quarter ended December 31, 2014, Lynas reached approximately 80% of its design production capacity of 11,000
tonnes per annum. Based on Molycorp’s fourth quarter 2014 production report, although production improved
significantly, the company continues to struggle with ongoing operating problems, leaving its REE production far
below its annual design capacity of 19,050 tonnes. Given their collective design capacity relative to the global
market, whether Lynas and Molycorp can resolve their operating and financial difficulties could have a significant
impact on future rare earths supply and pricing dynamics.
Industry forecasts indicate that the overall REE market might be oversupplied for the next few years (largely based
on illegal mining in China). It is expected that certain REE elements (particularly Ce and La) will represent the
largest portion of this oversupply, while other elements may be more in balance or even in deficit, particularly
magnet materials and HREEs. Market observers cite magnet materials especially as being at risk of short supplies in
the near- to medium-term future.
As a result of increased investment in the REE industry outside of China since 2009, there are several new and
refurbished REE projects that are being developed that could add to the non-Chinese supply of rare earths over the
next two to five years. New production began to ramp up beginning in 2013 and is expected to continue through
2015. Some market observers believe that this new production may have a negative impact on the pricing of some
REE products, especially the LREEs of La and Ce. We believe that current rare earth prices and the present lack of
capital available for new rare earth projects are likely to temper this anticipated production growth. According to an
IMCOA report dated December 2014 (the “IMCOA Report”), REE total supply is forecasted to increase from
171,000 tonnes in 2014 to 242,500 tonnes in 2017.
Trends affecting demand of REE products
The global economy plays a key role in the continuation and pace of increased demand for REEs. If the global
economy experiences a prolonged period of slow growth, then the projected increase in REE product demand may
not occur at the pace expected. In addition, the spike in REE prices in 2010 and 2011 to extremely high levels seems
to have accelerated consumers’ efforts to economize on rare earth consumption or to use substitute materials and
therefore slowed the expected pace of demand growth. Based on the IMCOA Report, REE total demand is
forecasted to increase from 136,000 tonnes in 2013 to 168,000 tonnes in 2017, or 23.5%, driven mainly by demand
for magnet materials, metal alloys, glass polishing materials and catalysts. Based on forecasted production levels,
these figures would imply a significant oversupply of total rare earths by 2017. A more detailed analysis of the
supply/demand balance by element suggests that the oversupply is largely driven by significant imbalances in Ce, La
and Y markets. In the IMCOA Report, the excess Ce and La production seems to be a result of demand destruction
caused by very high REE prices in 2011, while the Y imbalance may be driven by the transition from fluorescent
lighting to LED technology. The projected imbalances in other more highly-valued rare earth elements are much
smaller, and Nd is expected to remain in relatively short supply for the next few years.
