What happened to the rare earths boom?
In early 2011 two questions occupied the minds of investors: what are rare earths and how do I get some? The boom was already well underway with the groups of 17 previously unheard of substances clocking enormous price gains in a short amount of time.
China, which controls 95% of the supply of rare earth elements, was threatening to limit exports and use its market power as a political weapon. With rare earths essential for use in telecoms, autos, batteries and renewables, it was thought prices would stay – you guessed it – stronger for longer. A new paradigm of high priced rare earths was upon us, said the bulls.
As a result of this conviction, any business with a plan to mine the elements was given a rocket under its valuation. Largest of all was US listed Molycorp, the biggest non-Chinese producer and operator of the sole American rare earth mine. Its share price, swept up in the euphoria, at one point valued the nascent miner at US$6bn.
Last month, Molycorp filed for bankruptcy. Predictions of sustained high prices proved well off the mark because high prices are the best solution for high prices.
As prices for neodymium, scandium and yttrium soared, users did not simply wear the higher cost, they innovated. Users became efficient and substitutes were found; Toyota released a battery that used no rare earth elements at all. There was a supply reaction too as high prices encouraged new production.
Speculators didn’t realise that rare earths were given that name because it was once hard to separate elements into their constituent parts. The ore itself is relatively abundant. With new technology and processing techniques, rare earths no longer deserved their name and businesses once dedicated to gold and base metals turned their attention to the new market.
We warned of the dangers of the rare earth bubble (you can read that prophetic piece here) and prophesised in 2010 that ‘in a few years’ time, this tiny market will be flooded with new supply that will force a spectacular price crash. And like all booms, it will seem obvious after the bust that this was all folly’. It’s worth thinking about the next time you hear the words ‘stronger for longer’.
To get more insights, stock research and BUY recommendations, take a 15 day free trial of Intelligent Investor now.
Frequently Asked Questions about this Article…
Rare earth elements are a group of 17 substances essential for use in telecoms, autos, batteries, and renewables. They gained popularity among investors due to their critical role in technology and the perception that their prices would remain high due to limited supply, primarily controlled by China.
The rare earths boom was driven by China's control over 95% of the supply and threats to limit exports, which led to fears of scarcity. This, combined with their essential use in various technologies, led to a surge in prices and investor interest.
The decline was due to high prices prompting innovation and efficiency among users, who found substitutes or reduced usage. Additionally, high prices encouraged new production, increasing supply and ultimately leading to a price crash.
Molycorp, once valued at US$6 billion during the boom, eventually filed for bankruptcy as the market corrected and prices fell. This highlights the volatility and risks associated with investing in rare earths during that period.
Investors can learn the importance of skepticism towards market hype and the risks of assuming prices will remain high indefinitely. The rare earths market showed that high prices can lead to increased supply and innovation, ultimately correcting the market.
Despite their name, rare earth elements are relatively abundant. The term 'rare' originally referred to the difficulty in separating them into their constituent parts, a challenge that has been mitigated with new technology and processing techniques.
Technological advancements allowed for more efficient use and substitution of rare earth elements, reducing demand. Additionally, improved processing techniques made it easier to extract these elements, increasing supply and contributing to the market's decline.
Investors should consider the potential for market volatility, the impact of technological advancements on demand, and the geopolitical factors that can influence supply. It's crucial to conduct thorough research and remain cautious of market hype.
Call 1300 880 160
Start a chat
Schedule a call
