LONDON Prices of rare earth elements, which tumbled after a speculative bubble burst last year, are likely to erode further as new supplies hit the market and exports edge higher from dominant producer China due to weak demand at home.
Prices of the 17 elements used in technologies such as smartphones and hybrid cars soared last year by hundreds of percent after China clamped down on exports. Hot money flowed into an illiquid sector but later departed, causing a crash.
Lanthanum, used in rechargeable batteries for hybrid autos and in night-vision goggles, rocketed 26-fold from $5.15 a kg in January 2010 to a peak of $140 in June 2011. Although it has slid to $20.50, the price is still well above earlier lows.
The market has steadied in recent months, but new output from U.S. Molycorp MCP.N and Australia's Lynas Corp (LYC.AX) is likely to pressure prices, especially those of "light" rare earths which are not as scarce as their "heavy" cousins.
Weaker economic growth in China is also weighing on the market since the world's second largest economy not only produces over 90 percent of global rare earths, but is the biggest consumer of the materials.
"Prices will continue to drop so long as Chinese GDP continues to face downward pressures on the manufacturing side," said Michael Silver, chief executive of American Elements, which buys rare earths from China.
China's slowdown - rather than a trade complaint filed by Western nations - is expected to prompt some relaxation of Beijing's tough export controls, Silver added.
In August, China announced new export quotas on rare earth elements (REE), which increased the yearly figure by 2.7 percent.
"This is the first time in five years that the REE quota has increased and is the highest in three years, which is seen as a slight negative as excess supply would put pressure on prices," analyst Carolyn Dennis of Toronto-based Dundee Capital Markets said in a note to clients.
The spike in prices prompted a flurry of new mining projects and the two most advanced are due to come on stream this year, boosting global supplies of rare earths.
Molycorp, the biggest rare earth producer outside China, has reopened the Mountain Pass mine in California and is due to boost output to 19,050 metric tons (20,999 tons) a year in the fourth quarter from 3,516 tonnes last year.
Lynas is also due to fire up an $800 million rare earths plant in Malaysia as early as October after receiving a temporary operating license. The plant would supply about 11,000 tonnes in its first year, eventually rising to 22,000 tonnes.
"We remain very concerned about what will happen to rare earth prices as ramping supplies from Molycorp and Lynas hit up against a rest of world demand profile that has shown little growth over the past five years," said JP Morgan analyst Michael Gambardella in a recent note.
Light rare earths such as cerium and lanthanum will be hit hardest by the new production because they are not rare at all; they are estimated to be more plentiful than copper and lead.
Rare earths got the name mainly due to the difficulty in extracting, processing and separating the minerals, typically found clustered together in deposits, with higher proportions of light than heavy elements.
When miners target heavy element dysprosium, for example, they often end up producing more cerium than dysprosium, used in nuclear reactors, ships' sonar systems and computer hard discs.
"With rare earths, you can't think of them as one entity," said analyst Kieron Hodgson at Charles Stanley Securities in London. "I'd be relatively bullish on prices for the heavies particularly, certainly more than the lights."
When China clamped down on exports, availability tightened and all rare earth prices soared. Cerium oxide, FOB China, soared more than 35-fold from $4.15 per kg in January 2010 to $150.55 a kg in July 2011.
Since then, prices have fallen back to $21.50 per kg and Morgan Stanley, noting that half of Molycorp's expanded output would be cerium, said it was using a conservative average realized cerium price of $1/kg to reflect oversupply risks.
Analyst Edward Otto at Cormark Securities forecasts the long-term price of cerium oxide to settle eventually at 50 cents a kg and lanthanum oxide at $1.00 per kg, down from $20.50/kg currently.
The price outlook is stronger for so-called heavy rare earths, which are scarcer and expected to see rising demand in applications such as high performance magnets and energy efficient lighting.
Terbium oxide, mainly used in phosphors for compact fluorescent and LED lighting, has shed slightly over half its value since the peak to $1,750 a kg, FOB China, and Otto expects the long-term price to dip slightly to $1,500/kg.
More volatility is expected as developments could buffet the sector, such as any breakthrough in efforts by industrial consumers such as Toyota Motor Corp (7203.T) to find substitutes for rare earths.
If recent tensions between China and Japan escalate and Beijing retaliates by cutting off rare earth supply to Tokyo, prices could spike again.
Another wild card is the outcome of a World Trade Organization complaint filed in March by the European Union, the United States and Japan, saying China was unfairly choking off exports of rare earth metals.
"It isn't a pretty or happy place at the moment," said a London trader who specializes in exotic metals. "There's no blind panic out there, either to buy or sell, but people are very uncertain about what the future will hold and rightly so."
(Additional reporting by David Stanway in Beijing; Editing by Veronica Brown and David Stamp)