INDUSTRY BULLETIN: Avalon Comments on the Heavy Rare Earth Market

March 20, 2014

According to the metals markets information service, Asian Metal™ (http://www.asianmetal.com) prices for rare earth oxides FOB China have remained unchanged since mid-January, 2014.  However, current prices are significantly higher than prices in October 2009, prior to the start of the increases that lead to the 2011 spike. Prices are roughly twice as high for europium, terbium, samarium and yttrium, and several times higher for the magnet metals praseodymium, neodymium, dysprosium and gadolinium. These prices are still considerably lower than the peak prices reached in Q3 2011.

There are also reports that profits for Chinese rare earth firms have been falling over the last two years. As reported by China Daily, the profits of Baotou Steel Rare Earth (Group) Hi-Tech fell 56% in 2012 versus 2011 and China Minmetals’ profit fell 74% during the same period¹.  Profits for the rare earth industry in China as a whole have apparently fallen 28% in 2013 compared with 2012.  It is also reported that the Chinese government is continuing to consolidate production of rare earths to six companies on a geographical basis and pledges to reduce smuggling and illegal mining to continue to regulate the domestic rare earth industry.²

While some market commentators see reduced prices and the apparent availability of rare earths in the market as a sign the crisis has passed, many industry players still want to see new rare earth supply chains established outside China. Lynas and Molycorp are bringing new supplies of light rare earths to the market; however, no significant new supplies of heavy rare earths have come into the marketplace outside China.

Pierre Neatby, Avalon’s Vice-President Marketing and Sales notes, “While many industry players remain oblivious to the threat of future heavy rare earth supply shortages, several very large consumers of rare earths have indicated that they remain concerned about the continuing dominant position held by China on heavy rare earth supplies. One consumer went as far as stating that they expect to see a heavy rare earth supply crisis emerge again before long, as demand continues to pick up.”

Rare earth demand in permanent magnets is expected to grow by 40% from 2012 to 2017³, despite efforts to reduce consumption of rare earths (especially the key heavy rare earth dysprosium) through recycling and substitution. The proven high performance characteristics of dysprosium-bearing rare earth permanent magnets make them the magnet of choice for many applications today, and for the products of tomorrow.

Without a significant change on the supply side, future rare earth supply shocks marked by high price volatility are a virtual certainty. The example of cobalt, another strategic metal with a single dominant supply source (Democratic Republic of Congo) is instructive. As illustrated below, cobalt has seen several price spikes over the past 40 years caused by similar market circumstances. Notice how similar the shape of the 2008-14 dysprosium price chart below is to the 1976-82 cobalt price chart.

Are we in for another price spike in dysprosium and other heavy rare earths?

The cobalt example provides a reminder that for small market commodities like the rare earths, short term price stability should not be interpreted as evidence of a long-term balanced market.

Heavy rare earth demand is growing rapidly and there are reports that some companies in Japan are close to concluding their de-stocking and will be back in the market to buy in 2014.

¹ ChinaDaily.com, April 1, 2013
² ChinaDaily, Feb. 23, 2014
³ Roskill and Arnold Magnets estimate

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Avalon Rare Metals Inc. (TSX and NYSE MKT: AVL) is a mineral development company focused on rare metal deposits in Canada. Its 100%-owned Nechalacho Deposit, Thor Lake, NWT is exceptional in its large size and enrichment in the scarce 'heavy' rare earth elements, key to enabling advances in clean technology and other growing high-tech applications. With a positive feasibility study and environmental assessment completed, the Nechalacho Project remains the most advanced potential large new source of heavy rare earths in the world outside of China, currently the source of most of the world's supply. Avalon is adequately funded, has no debt and its work programs are progressing. Social responsibility and environmental stewardship are company cornerstones.