A short while ago I had Jon Hykawy, Clean Technologies and Materials Analyst at Byron Capital Markets on our air to talk about rare earth proxy Molycorp. Today, Jon sent me the following note in response to the recent runup in MCP. Jon, you will see, is a bear on the stock.
While the math is a bit convoluted, Jon's main point is that China will soon have significant competition from Molycorp and Australia's Lynas , that global supply of rare earth elements will be increasing notably in the next couple years, and that prices are likely to be coming down.
(Please also see my earlier blog, "Is Molycorp Worth $4.7 billion?" for a link to a similar discussion by stock blog Seeking Alpha.)
Jon Hykawy's note:
"Hopefully some simple math.
Production of lanthanum and cerium out of China is about 88,000 tonnes a year.
60% of rare earth demand is within China. Assuming this holds for lanthanum and cerium individually, ex-China demand is 35,000 tonnes per year.
Lynas and Molycorp will obviously be producing outside China. Lynas's deposit is about 72% lanthanum and cerium (mostly cerium, 47%) and Molycorp's deposit is 84% lanthanum and cerium (again, mostly cerium at 50%). Between the two of them, the total is 48,048 tonnes per year of lanthanum and cerium, but we can round to 48,000.
This is an increase of 55% to global supply of these two rare earths, or amounts to about 136% of the annual consumption of these two rare earths outside China. China production of lanthanum and cerium satisfied all of global demand for these two rare earths until the quota system created an artificial shortage of these two. China is not going to stop producing lanthanum and cerium, and they will want to sell it inside and outside China.
We believe this means lanthanum and cerium prices are going down, and hard, once Lynas and then Molycorp are in production. And that means profitability of Molycorp would be heavily impacted. Not all rare earth prices are going to rise from now until the end of time."
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