[institutional Review] rare Earth inflation: the mysterious cycle of New Energy and its Macro signals

It is important to note that the current price of rare earths has risen to its highest level in nearly nine years:

In history, there have been three rounds of price increases in rare earths: 2009-2011, 2016-2017 and 2020-present.

After a period of climbing, the current price of rare earths is at its highest level in nearly nine years.

Independent logic can explain the price of some rare earths, which in most cases is demand-driven:

After 2010, the prices of praseodymium and neodymium oxide, an important variety of rare earths, are generally related to the production growth of new energy vehicles; in 2010-2011, under the influence of centralized integration, separate taxes on rare earth resources, export quotas and a series of anti-mafia policies, output growth has been negative for two consecutive years; in addition, the exuberant export of rare earths can also explain the rise in rare earth prices in 2010, 2012-2014 and the current.

The price of rare earths is related to the global inflation situation:

1) the three increases in rare earth prices in history correspond to the rise in global inflation, which cannot be explained by industry logic alone.

2) in fact, it is not just rare earths, but the trends in the new energy industry are generally related.

As the upstream material of new energy vehicles, the price of rare earths is also rising and falling with the price of polysilicon (upstream photovoltaic). In addition, with the recent increase in sales of new energy vehicles, the installed capacity of wind power is also rising.

The cyclical nature of the new energy industry may come from the relative costs provided by traditional cyclical industries:

1) it is necessary to be the first to deny that inflation in the new energy sector is not solely driven by money. At a time of inflation in the new energy industry, we can really observe the changes in downstream demand.

2) A more likely answer is that the cycle of the new energy industry is driven by the periodicity of traditional industries. The recent surge in sales of new energy vehicles is at least largely due to the rise in the price of crude oil.

From this point of view, the price of new energy should be a beacon of inflation:

1) the price of new energy actually contains a sufficient "expected premium". Industrial adjustment is not an easy task, and only after the market thinks that the price rise has become a trend and has a certain degree of sustainability, the demand and pricing of the new energy industry will clearly benefit.

2) from this point of view, the current inflationary pressure should not be small. On the one hand, oil prices are still within the volatility range of 2019, but rare earth prices have reached their highest level since 2012, which means that market expectations for future oil prices are still high; on the other hand, market expectations for industry are extremely high. this has led to a significant increase in downstream demand for wind power and photovoltaics. What needs to be clear is that a considerable part of inflation is actually driven solely by expectations, and when expectations are too strong, the possibility of subsequent inflation exceeding expectations is still on the high side.

Risk hint: economic and monetary policies exceed expectations