The Molycorp Bankruptcy – Doom or Dawn for Rare Earth Elements?

The recent bankruptcy (chapter 11) filing by Molycorp, the U.S.’ only producer of rare earth elements, prompted many comments about the future of this market sector. Once an icon for independence from China for these crucial materials the company now appears to have fallen victim to a sustained period of low prices.

Rare earth elements are key components in almost all technology products these days, ranging from smartphones and flat screen TVs to all sorts of electric motors, high performance metal alloys and even automotive catalysts.

Image courtsey of Molycorp

Analyst comments that Molycorp’s demise was in part due to substitution of rare earth elements are lacking substance, though. Despite statements by Tesla published a while agosaying the electric motors used for propulsion of their Model S are free from REEs, there are plenty of REEs in many other places of the car (power windows, power tailgate, electric seat adjustment, power mirrors, speakers, cameras, sensors,… ect.).

Even comments talking about “the end of the line” for Molycorp seem inaccurate. Only the company’s North American operation is affected by the chapter 11 filing; plants in other parts of the world remain untouched, at least for the time being. The company also reports on its website that short-term financing has been obtained, making a debt restructuring plan and return to normal operation a possibility.

“If anything, Molycorp’s troubles are a good thing for prices”, commented Matthias Rueth, president of Tradium GmbH, a large REE trader. In fact, because there is so little substitution, the market for REEs is not elastic at all in terms of demand. After the price explosion in 2010, more new operations were encouraged to add capacity than was healthy for the market. As a result, prices plummeted in subsequent years to all-time lows.

Recent months did, however, see a much improved conscience in China with respect to environmental and safety issues leading to higher production costs that are now more in line with international levels. On top, China restructured its taxes and tariffs to comply with WTO rulings. The country also shut down some illegal mines, leading to increased legal export volumes. All signs indicate that China is regaining control over this market, which – if successful – would have a positive impact on prices.

Markets will continue to be cyclical but growing. The premise remains: in the absence of non-physical markets for REEs, investing in this exciting group of metals will remain a matter of long term strateiges.

Bodo Albrecht
President – BASIQ Corp.