China sets first tranche of 2012 REE export quotas

China has determined that its first tranche of export quotas for rare earth elements in 2012 will be 10,546 tonnes, down 27% from its first tranche of export quotas in 2011, but the China Daily reported that officials at the Ministry of Commerce maintain that export quotas for the full year will remain virtually unchanged from 2011 levels.

The first tranche of export quotas typically represents the first half of the year, while a second tranche is usually announced in July, China watchers say. Of the 10,546 tonne export quota, 9,095 tonnes are in the light rare earth element (REE) category and 1,451 tonnes are heavy REEs.

Based on the first-round quota figures, Bloomberg News estimates that the full-year quota for 2012 could be in the range of 31,130 tonnes. In 2011 the export quota reached 30,184 tonnes, down from 30,258 tonnes in 2010 and 50,145 tonnes in 2009.

Shares of some rare earth element companies have fallen in the wake of the news, most notably New York-listed Molycorp (MCP-N), which shed US$1.04 or 3.7% to close at US$28 per share on Dec. 27 and was down a further US$3.52 or 12.43% to US$24.48 per share in mid-day trading on Dec. 28.

JP Morgan analyst Michael Gambardella, who has a neutral rating on Molycorp, cut his target price on the stock from US$57 per share to US$39 per share after the export quotas were announced.

Other companies that have seen their share prices trimmed at presstime include Lynas Corp. (LYC-A), which fell 3.43% to close at $1.125 per share; Quest Rare Minerals (QRM-V), down 36¢ or 13.69% to $2.27; Rare Element Resources (RES-V), down 59¢ or 15.01% to $3.34 per share; Avalon Rare Metals (AVL-T), down 20¢ or 7.58% to $2.44 per share; Great Western Resources (GWG-V), down 2.5¢ or 5.95% at 39.5¢; and Rare Earth Metals (RA-V), down 1.5¢ or 13.64% to 9.5¢ per share.

“China’s 2012 rare earth export quotas appear to be largely unchanged from 2011 levels, but differ from the 5-10% decline we had anticipated,” Anthony Young, Anthony Rizzuto and Joseph Giordano of New York investment bank Dahlman Rose & Co. wrote in a flash note to clients. “We believe the full-year data release could result in pricing pressures for rare earths oxide in the first portion of 2012, as companies will look to sell material prior to Lynas and Molycorp, commencing production in 2012.”

The analysts noted that prices for cerium and lanthanum “may fall below our expectations” while the remaining basket of rare earths “may exceed our expectations.”  Nonetheless they are optimistic about the industry’s long-term outlook.

“While the export quota will likely lead to continued near-term pricing pressures in rare earths, we believe that the significant margin capabilities at Lynas and Molycorp will remain intact, even at much lower rare earth prices,” they wrote. “While it may be necessary to incorporate the current information into our analysis, we continue to remain extremely optimistic on the long-term outlook for the overall industry.”