The Impact Of The Japanese Earthquake And Tsunami On Short-Term Rare-Earth Demand

by Jack Lifton on March 14, 2011 · 12 comments

in Japan, News Analysis, Rare Earths

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It goes without saying that in the short term, the biggest challenge for Japan and its economy is to provide immediate humanitarian relief to the victims of the earthquake and tsunami. Cost will, of course, not be a factor in rescue and relief efforts.

However, in the long term the largest problem for the Japanese industrial economy will be the sudden onset of the need to redistribute (at best) and allocate and prioritize (at worst) the supply of electricity between civilian and industrial demand. I don't know how much of Japan's national electricity production capacity has been destroyed, but even if there is spare capacity, it remains to be seen when the grid in the affected area can be restored.

It also remains to be seen how much of Japan's industrial capacity has been impaired and which particular industries may have been affected. As long as the emergency lasts, there will be no need and perhaps no easy way, logistically, to continue either just-in-time or long-term deliveries of non-fuel or non-food raw materials. Theoretically Japan will want to bring its export industries back up to speed as soon as possible, so as to resume full economic life. Practically, however, some industries will need to slow down, so as to allow others to get logistical priorities for humanitarian reasons.

Japan is China's largest customer for rare-earth metals and alloys, but processing such materials is energy-intensive, such that this processing may be reduced or even eliminated this year, until the essential economy is restored. I am going to guess that deliveries of rare-earth metals and alloys to Japan will slow dramatically in the next quarter at least, if not longer. Although Japanese trading companies will continue to buy and now stockpile them, they will not simply accumulate them for an indefinite period.

This means a short-term increase in the supply of these materials, since the production of them is mostly in an unaffected China. If the law of supply and demand is still operating in the real world, this should mean a short-term decrease in the price of the critical rare-earth metals.

I note, finally, that last year China exported only 10% of its production of the critical rare-earth metal, dysprosium, as a metal for others to alloy and fabricate products. If I were a Japanese end user or trading company, or one of the same in Korea, I would try now to buy as much dysprosium as I could, and take delivery outside of China for future demand. The rare-earth production industry's customers are overwhelmingly in China and Japan. Any impairment of industrial production in either country will have a major impact on global rare-earth prices.

Investors should focus on those rare-earth ventures that can produce outside of China, the most critical rare-earth metals such as dysprosium, terbium and europium. There are ample deposits of the lighter rare earths in development, and thus no further need to worry about the supply of the light rare earths.

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1 Gary King March 14, 2011 at 8:32 pm

Good informative article as always!! It will be interesting to see if any of the usual buyes take advantage of current price declines and make strategic inventory purchases

with regards to this, have any other participants on this site ever looked at CVE:DSM http://www.dachacapital.com this company is a very niche REE player focusing on trading and storage of REE, with storage in Asian facilities. Any comments appreciated
atb
gary

2 Igor March 15, 2011 at 12:30 am

I agree with the arguments presented above. But it seems to me very early to talk about the consequences of what happened. One thing is certain they will, but I think Japan will be forced as soon as possible to the energy industry, as it is necessary not only to rebuild their shattered, but did not give an export-oriented industries to collapse.

3 Max12345 March 15, 2011 at 1:02 am

….and by the way, fairly predictably uranium shares have dropped very considerably all around the world. Is this a temporary fall, or is this drop in share prices likely to be sustained over a period of years rather than months? With the benefit of hindsight one also has to wonder at the wisdom of building lots of nuclear reactors in a country that sits on the intersection of three MAJOR fault lines (and moreover right by the seaside which of course is prone to be hit by tsunamis). But apart from that, it would seem that it is quite safe to build (modern) nuclear reactors everywhere else. Will publics and local communities around the world understand this, or will they throw out the baby with the bath water and dig in their heels at ANY new nuclear reactors anywhere? Given that assorted publics typically understand very little about scientific matters this certainly seems more likely -at least in the short term- And it comes at the worst possible time since: a) we are soon reaching -or have already reached- “peak oil” and moreover global warming and climate change are continuing apace. And there is no immediate term alternative on a large scale to fossil fuels other than nuclear power. (unless one wants to burn ever more of the more plentiful coal which is even worse for climate change) So it is also interesting to consider what’s going to happen going forward to the nuclear power sector’s supply and utilization and disposal “chain” (all the way from upstream green fields exploration for uranium to manufacturing of nuclear plants by people like GE and to the downstream safe disposal of nuclear waste)….What’s at stake may not be only how much money various people could end up making or losing but the very future of the planet.

4 markus pekeler March 15, 2011 at 4:20 am

I agree that short term demand for REE is hard to predict under the given circumstances. In a longer perspective, the demand for the heavy elements, especially the ones used in permanent magnets must rise considerably. Just look at the soaring prices of green tech energy stocks since yesterday. It is a safe bet that the political pressure to invest in renewable energy will boost a whole industry that uses tons and tons of REE.
Too sad that all of this is based on the horrific events happening in Japan right now…
It would be an opportunity to set up a joint fund of REE companies to help those who suffer the most from this catastrophy.

5 Dan Collins March 15, 2011 at 4:54 am

It’s logical that the price for REE’s would drop. But I expect due to storage and stockpiling there will be shocking news that the price stays flat or continues up. Alot of processors here in China are running out of acumulated stocks purchased in 2010. Long term, alternative energy should get renewed focus as an alternative to Nuc. power. Of course, it can’t replace the Kw from Nuc but that won’t stop governments from trying.

6 Tom March 15, 2011 at 7:39 am

Very prudent analysis although I would tend to go along with what Dan Collins is saying. At least, current spot prices seem not to loose ground, rather the opposite (see i.e. Asianmetal.com).

Even if there would be a short term surplus of REEs due to fallout from Japanese hampered production, I don’t think it would be in the interest of China to let REE spot prices deterioate. China’s own demand for their renewable applications remains increasingly high and they would not allow to let others (e.g. global competition in the renewable sector) easily take advantage of buidling large stockpiles from (temporarily) low REE prices. After all, they control the REE market, no one else … and if necessary, they will further reduce export quotas.

7 unown March 15, 2011 at 10:36 am

unown

8 Lou Pearson March 15, 2011 at 11:51 am

If the price of rare earths soften due to diminished demand from Japanese alloy processors and fabricators, would that not logically lead to robust margins for alloy processors and fabricators who are not in Japan like, for instance, Great Western’s LCM subsidiary? Feedstock material prices would be low, and finished product manufacturers outside of Japan would be trying to source alloys outside of Japan.

9 fran March 15, 2011 at 1:55 pm

GARY KING–

DSM.V if you can understand their business model and how cash ls
generated with which to grow the business, the answer to your querry is plain. you also must understand the reasons for withdrawal of their recent stock offering, CAVEAT EMPTOR

10 Robert Gill March 15, 2011 at 6:45 pm

Hi Jack,

I reviewed the TMR Advanced Rare Earth Projects Index after reading the comments about Dy2O2. I listed the companies with the highest wt % of Dy and then looked at the line underneath for In-Situ Reo:TREO wt%. However, I could not determine the applicable meaning of the two wt% to each other. Could you explain how the two go together? For instance, I noted the following 4 companies have the highest wt% of Dy, but they vary in their In-situ REO:
Dy2O2 wt% In-situ TREO wt%
LYSCF 0.05 0.58
TSM 0.03 4.79
GWG 0.08 0.67
QRM 0.04 4.10

Which of these 4 companies has the greater quantity of Dy?
Thanks
Robert

11 Gareth Hatch March 15, 2011 at 10:35 pm

@Robert Gill: there are two ways to do what you’re trying to do. Using the example of Mount Weld:

1) Multiply the Total MR (mineral resource) value of 17,494,000 t, by the material grade of Dy2O3 of 0.05 wt% OR

2) Multiply the Total TREO (total rare-earth oxides) value of 1,413,644 t, by the in-situ Dy2O3:TREO value of 0.58 wt%.

Because of rounding, the second number will be a little more precise than the second (and is the one that I would use), but theoretically you would end up with the same value, if there were enough decimal places in the wt% values.

So in the case of Mount Weld, according to their figures, there is around 8,200 t of DyO2 present in the deposit.

12 Brooke Zenon March 22, 2011 at 5:33 pm

this was an very good report!:)

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