After rising up to 650% in the first seven months of 2011, rare earth prices have continued to slide to return to pre-crisis levels (see Figure 1). Global economic uncertainty has curtailed demand and stockpiles are being worked down. A Chinese production response occurred in late 2012, with Baotou (600111.CH, not covered) temporarily ceasing production activities at the world's largest REE mine, Bayan Obo.

Rare earth elements provide productivity efficiencies in many applications than cannot be reproduced by lower quality alternatives, but price increases in 2011 forced endusers to investigate ways to decrease rare earth intensity in a number of products. In more price-elastic applications, structural changes in rare earth use occurred, including:

La oxide content in fluid catalytic cracking units (3% w/w to 2% w/w in 2011).
Increased recycling in polishing powders and automotive catalysts (La, Ce, Pr).
Improvements in LED technology threatening rare earth phosphors (Y, Eu, Tb).
R&D to decrease dysprosium consumption in rare earth magnets.

By 2018, rare earths with exposure to magnets and glass (neodymium, praseodymium and yttrium) will be in undersupply and have strong price support, in our view:

Eoin Treacy's view Rare earth elements exemplify the old commodity market adage “the cure for high prices is high prices”. The surge in rare earth element prices was driven primarily by a supply deficit and encouraged consumers to explore alternatives. The success of consumers in developing new technologies to displace rare earth elements is a testament to the power of human ingenuity in a high price environment. The majority of rare earth element shares declined sharply over the last few years but a number are now worthy of mention.

As the largest rare earth element company outside China, Lynas has trended lower since April 2011, falling from A$2.50 to less than 50¢. While somewhat oversold relative to the 200-day MA, a sustained move back above the 200-day MA would be required to question the consistency of the medium-term decline.

US listed Molycorp lost downward momentum from November and has entered a process of base formation development. However, a sustained move above $8 will be required to break the progression of lower rally highs and signal a return to demand dominance beyond the short-term. Ucore Rare Earths, 5N Plus, Rare Element Resources, Quest Rare Minerals, Tasman Metals, Hudson Resources and Rare Earth Metals share similar base formation characteristics.