2024 marks the third consecutive year of adjustments in the rare earth industry. Policy-wise, 2024 is expected to be a "big year" for the rare earth sector. As a strategic minor metal, rare earth prices have experienced increased volatility this year due to geopolitical factors and the supply-demand relationship. Against this backdrop, the performance of rare earth enterprises has further declined. Meanwhile, the growth rate of rare earth quotas is slowing, but the pace of industry consolidation continues to accelerate.
In January this year, the controlling shareholder of Guangdong Rising Nonferrous Metals was changed from the Guangdong State-owned Assets Supervision and Administration Commission to China Rare Earth Group, accelerating the evolution of the "South-North" pattern in the domestic rare earth industry. In October, the first phase of China Northern Rare Earth's green smelting upgrade project was completed and put into operation, marking the official launch of the world's largest rare earth raw material production site. These significant developments are destined to leave a profound mark on the history of China's rare earth industry.
What is the outlook for the rare earth industry amid this "volatility"?
According to data released by the China Rare Earth Industry Association, as of December 27, the rare earth price index stood at 163.5 points, down 17.42% from the year's peak of 198 points on January 2. In the spot market, the average market price of Pr-Nd oxide on December 27 was 398,000 yuan/mt, a 10.16% decrease from 443,000 yuan/mt at the beginning of the year (January 2). Meanwhile, dysprosium prices hit a new low for the year at 1.6 million yuan/mt.
(Chart source: China Rare Earth Industry Association, released on December 27)
Regarding the rare earth market, China Rare Earth noted at its Q3 2024 earnings briefing that in 2024, due to factors such as market conditions and the industry's supply-demand cycle, the prices of major rare earth products showed a rapid downward trend in Q1, fluctuated at relatively low levels in Q2 and Q3, and partially rebounded in Q4.
Additionally, according to a post on the "SMM Rare Earth" official account on December 26, with Myanmar fruits already shipped to China, Myanmar ore imports are expected to enter the domestic market by month-end or early next month, thereby increasing supply.
Accelerated Industry Consolidation Amid Losses
From a performance perspective, in the first three quarters of 2024, among the major rare earth giants, only Xiamen Tungsten (600549.SH) achieved positive net profit growth, although the company's revenue experienced a double-digit decline.
In its rare earth business segment, Xiamen Tungsten's revenue from rare earth operations in the first three quarters was 3.203 billion yuan, down 18.25% YoY, primarily due to a decline in raw material prices and the exclusion of its rare earth smelting and separation business from the consolidated financial statements during the period. Total profit was 180 million yuan, up 61.92% YoY.
During the same period, both China Northern Rare Earth and Shenghe Resources saw declines in revenue and profit, with the former's net profit dropping by 70% and the latter's by 40%, mainly due to lower gross margins caused by YoY declines in rare earth product selling prices. China Rare Earth, Guangdong Rising Nonferrous Metals, and Baotou Steel each reported net losses of 203 million yuan, 276 million yuan, and 516 million yuan, respectively, with revenue declines of 45.03%, 43.85%, and 6.94%. Evidently, 50% of the major rare earth giants incurred losses in the first three quarters.
It is worth noting that China Northern Rare Earth's primary operational targets for 2024 are to achieve revenue of over 43 billion yuan and total profit of over 4.3 billion yuan. According to its financial report, the company's revenue and total profit in the first three quarters were 21.56 billion yuan and 1.004 billion yuan, respectively. This means the company has only achieved 50.24% and 23.35% of its annual revenue and profit targets, respectively, in the first three quarters.
On the other hand, China Northern Rare Earth's production and sales of rare earth products reached new highs this year. According to its announcement, the company's production of rare earth smelting and separation products, rare earth metal products, and rare earth functional materials in the first three quarters increased by 12.95%, 39.46%, and 21.35% YoY, respectively.
Among the three loss-making companies, Baotou Steel holds exclusive rights to the Bayan Obo mine's rare earth concentrate resources, which it sells to its sole customer, China Northern Rare Earth. In the first three quarters of this year, Baotou Steel reported a net loss of 516 million yuan, including a net loss of 625 million yuan in Q3 alone. Notably, the company had posted a net profit of 108 million yuan in H1.
Baotou Steel explained that the steel industry has faced a clear trend of strong supply, weak demand, low prices, and high costs this year. In Q3, steel market prices declined, with steel price drops outpacing those of raw materials, leading to reduced profitability.
In addition to weak performance in its steel business, the decline in rare earth prices also significantly impacted Baotou Steel's results. In 2023, the company had forecast rare earth concentrate sales of 13.28 billion yuan but ultimately achieved only 9.109 billion yuan. For 2024, Baotou Steel forecasts rare earth concentrate sales of 10.61 billion yuan, but its revenue from rare earth concentrate sales in the first three quarters was only 5.402 billion yuan.
Similarly, due to the decline in rare earth product prices, the two listed companies under China Rare Earth Group—China Rare Earth and Guangdong Rising Nonferrous Metals—also incurred losses in the first three quarters, as they increased impairment provisions. In January 2024, Guangdong Rising Nonferrous Metals announced that China Rare Earth Group would acquire 38.45% of the company's shares held by Guangdong Rare Earth Industry Group at no cost. Upon completion of the transfer, the company's controlling shareholder will change from the Guangdong State-owned Assets Supervision and Administration Commission to China Rare Earth Group.
This marks the basic formation of the domestic "South-North, heavy South and light North" rare earth industry pattern. Additionally, cooperation between China Rare Earth Group and Fujian Rare Earth Group is also underway. Industry insiders generally believe that Xiamen Tungsten's inclusion in China Rare Earth Group may already be on the agenda.
Initial Results of Supply-Side Constraints
It is well known that domestic rare earth production and separation are regulated by quota controls. Therefore, the annual total control quotas for rare earth mining and smelting separation issued by the Ministry of Industry and Information Technology (MIIT) and the Ministry of Natural Resources are closely watched by the market. Compared to 2023, the 2024 rare earth quotas have returned to normal batches, but the absence of a third batch of quotas has narrowed the annual growth rate of rare earth quotas.
Overall, the total control quotas for rare earth mining and smelting separation in the first two batches of 2024 were 270,000 mt and 254,000 mt, respectively, representing YoY increases of 4.16% and 5.88%. In comparison, the annual growth rates for rare earth mining and smelting separation quotas in 2023 were 21.4% and 20.7%, respectively.
In terms of the breakdown of total rare earth mining quotas, the 2024 ionic rare earth mining quota was 19,150 mt, unchanged from previous years, while the rock-type rare earth mining quota was 250,850 mt, up 6.36% YoY. From 2020 to 2023, the YoY growth rates of light rare earth mining quotas were 7.09%, 23.17%, 28.22%, and 23.6%, respectively. It is evident that this is the first time since 2020 that the growth rate of light rare earth mining quotas has fallen below 7%.
On August 25, Galaxy Securities stated in a research report that assuming no third batch of rare earth quotas is issued this year, the domestic rare earth mine supply growth rate for the year would be 6%. It forecast that global rare earth supply growth in 2024 would be 5%, while global Pr-Nd oxide demand growth would be 9%, outpacing rare earth supply growth. Therefore, the supply-demand pattern for rare earths is expected to improve, and rare earth prices are likely to rebound from the bottom.
In addition to the slowdown in rare earth quota growth, the concentration of supply in the rare earth industry is also increasing. On June 29, the State Council officially released the "Rare Earth Management Regulations," which came into effect on October 1, 2024. This marks the introduction of the first dedicated legislative framework for China's rare earth industry.
The regulations consist of 32 articles covering various aspects, including rare earth resource protection, management systems, industry development, and entire industry chain supervision. The regulations explicitly state that rare earth resources are owned by the state, and no organization or individual may encroach upon or damage them. The state will implement protective mining of rare earth resources. Additionally, the regulations require total control over rare earth mining and smelting separation and the optimization of dynamic management.
According to an investor survey memo released by China Rare Earth on November 12, with the implementation of the "Rare Earth Management Regulations" and the improvement in the supply-demand pattern, the prices of major rare earth products are expected to return to relatively reasonable levels.
Yu Jiayi, Chief Analyst for the Nonferrous Metals Sector at Guotai Junan Securities, believes that as domestic rare earth quotas shift from a strong supply release cycle to a supply-constrained pattern, coupled with overseas plans for incremental supply being slow to materialize, the initial results of supply-side constraints are becoming evident. "The continued growth in demand for new energy vehicles and wind power, along with the effective boost in demand for industrial motor equipment upgrades, is expected to elevate the demand curve for 2025-2026. This may succeed new energy as a major source of rare earth demand growth. Additionally, the expansion of application scenarios for robotics may usher in another growth year for rare earth magnetic materials in 2025."
