The Lynas Rare Earths Ltd (ASX: LYC) share price has been in free fall this week. But
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Among them, Northern Rare Earth will be doubling production within three years. This accounts for some 60% of China’s total rare earth production.
This news sent the Lynas share price into free fall, shedding 13% in value in the last two trading sessions.
China has a near-global monopoly in rare earths production. This accounts for more than 55% of total global output. Between 2011 and 2017, fierce domestic competition and ignoring environmental protocols sent rare earth prices plummeting. Furthermore, placing Lynas on the brink of collapse.
While China’s planned increase in production is met with a different set of circumstances today, it might be worth taking a trip down memory lane.
The boom and bust for rare earth prices
Rare earth oxides (REO) were fetching for as much as US$200/kg at their peak in 2011. However, as soon as China began to purge the market with supply, much of which was produced illegally, prices began to crash lower and lower.
Lynas’ most recent quarterly update observes a steady improvement in REO prices. But the complete opposite was happening just a few years back. In its FY16 quarterly, REO prices went from A$17.2/kg in 1Q16 to as low as A$14.7/kg in 4Q16. The company was burning through cash and on the verge of collapse.
Between the boom and bust of rare earth prices, the Lynas share price went from as high as $26.70 in April 2011. Prior to falling as low as 30 cents in October 2015.
This could be why the Lynas share price is facing heavy selling pressure. Due to a significant amount of rare earths production is expected to hit the market in the medium term.
However, it is also important to acknowledge that the supply increase is met under a different set of circumstances given the global multi-decade commitment to decarbonisation and electrification of vehicles.
Lynas share price slumps for a third straight session
The Lynas share price dipped as much as 5.50% on open to $5.25. Its shares quickly bounced off lows and are currently trading 2.53% lower to $5.40.
Its shares are caught in a tug-of-war. Caught between the potential impact that China might have on rare earth prices and the clear long-term demand for rare earths and renewable technology.
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Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.