Highfliers Find Lower Orbit

By LIAM PLEVEN (WSJ) October 7, 2011

Rare earths, an obscure group of commodities, are facing a fate similar to their more common brethren: Once-soaring prices are nose-diving, catching investors and producers off-guard.

Prices have declined as much as 20% to 50% since midsummer for some of the 17 rare-earth elements, according to analysts and market participants. Rare-earth elements are used in consumer electronics, automobiles, lighting and some military weapons.

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The comedown is particularly sharp because rare earths had been among the highest-flying assets recently, seeing gains of as much as 30-fold over five years. Shares of Molycorp Inc., which is ramping up production at a California mine, have shed half their value since May, though they rose $4.19, or 13%, to $36.45, on Thursday.

Rare earths shot up as worries rose that China, home to about 90% of the world's supply, could restrict exports.

Now, miners elsewhere are racing to increase production, investors who had hoarded the elements are dumping them and firms that use the materials face sliding demand.

"It's too early to say that the downward pressure is over," said Anthony Young, an analyst at Dahlman Rose, a natural resources-focused investment bank, who said some prices could fall a further 50% or more. "I don't think that they'll go back to their peak levels anytime soon."

Unlike most commodities, rare earths aren't traded on exchanges, and pricing often is based on a limited number of transactions.

"There's no transparent market for this stuff," said Jack Lifton, founding principal at consultant Technology Metals Research LLC.

Overall, rare-earth prices have fallen about 15% to 20% from their highs this year, Michael Silver, CEO of American Elements, which makes materials that include rare earths, said in an email. The drops haven't been across the board, and europium and ytterbium prices remain high, he said.

Lanthanum and cerium, the most heavily produced rare earths, plunged from $150 to $80 a kilogram in recent months, Mr. Young said, a 47% decline. He said neodymium fell 22%, to $265 from $340 per kilogram. By comparison, neodymium cost $10 in 2006.

The declines could be good news for some companies and U.S. military strategists, which have been feeling a pinch from price increases and possible shortages.

Magnets made with neodymium power cellphones and wind turbines, cerium is used to polish flat-screen monitors, and europium puts the red in cockpit displays and televisions.

Toyota Motor Corp.'s Prius and other hybrid vehicles have lanthanum in their batteries. Smartphones and cellphones contain neodymium-based magnets that enable their vibrate function.

For manufacturers, the bite of more expensive rare earths has been substantial. Harman International Industries Inc., which makes audio equipment for cars, recently told investors that pricier neodymium, used in speakers, will increase the firm's costs by $85 million a year.

Harman is seeking substitute materials and asking partners to share the pain. "That's a work in progress," said Jean Lepine, a Harman spokesman.

But neodymium's recent decline in price "pales in comparison to the 500% increase in the last 18" months, Mr. Lepine said.

Price cuts and expanding supplies also could influence military planning. The Pentagon has been concerned about securing materials it considers strategically important. Rare earths are used in military gear, including missiles and night-vision goggles, according to Mr. Silver of American Elements.

The Defense Department soon will report to Congress how it plans to manage any potential supply-chain problems regarding rare earths if they arise.

Wednesday, October 12, 2011