(Kitco News) - After exploding onto the metals scene in 2010 and garnering widespread media and investor attention, rare earths element prices have dropped and have been unstable mainly due to demand tapering off in 2011, leading to uncertainty in 2012.

Low demand during 2011 was caused by high rare earths prices from both heavy and light rare earths metals, which despite their fluttering prices, remain historically high.

Despite unstable prices throughout 2011, there is some expectation that rare earths prices might become more stable in 2012.

“I think that rare earth metals, they tend to be more strategic in nature and supply versus demand remains quite balanced in favor of prices being stronger in 2012,” said Mike Frawley, global head of metals at Newedge Group. “The pace of consumption in mainland China is a critical component of demand, prices.”

The Chinese continue to control most of the rare earths supply but reports show that Chinese exports are extremely low. Information provided by Metal Pages, a news site that focuses on non-ferrous metals, ferro alloys and rare earths, indicated that rare earth elements exports have dropped 65% in 2011 and that China has only exported 11,000 metric tons of rare earths through the first three quarters of the year.

Reports suggested that the Chinese government may change regulations that would get around Chinese producers who have cut their supply while keeping prices high.

Rare earths prices alone are also an issue not only with volatility, but with their general cost.

According to a report focused on rare earth elements performance for the upcoming year from A.L. Waters Capital, the firm highlighted some specific rare earths and their current prices compared to their peak prices.

A heavy rare earth such as dysprosium, which is commonly used in televisions and lasers, reached a market high of $2,800 per kilogram while its current price is $2,000.

Another heavy rare earths type, europrium, which is used in television screens, peaked at $5,900/kg while its current price is $3,900.

Some light rare earths come at a substantially cheaper price, such as neodymium, which is used in magnets, peaked at $410/kg on the market and currently sits at $270. (A complete list of all 17 rare earth metals and their uses can be found at the end of the article.)

While rare earths are expensive to use in producing several products used daily, the drop in demand does not come from an alternate substance that can be as effective for a fraction of the cost.

“Demand has gone down (in 2011) but I also think that they haven’t really been able to replace rare earth metals,” said Arnett Waters, chairman of A.L. Waters Capital. “I think that part of what’s going on is that businesses are spending less money on more expensive stuff. If I have a use for europrium and I can use a quarter of a pound of it and it does ok in the product that I’m making, I’m not going to adopt a new product in this economy. It would cost too much money.”

Also, with current economic crises around the globe, it is expected that demand will not be strong in 2012 given the historical high prices of rare earths.

Waters used strategic military defense equipment as an example.

“In the case of strategic military equipment, defense budgets are declining,” Waters said. “I realize the U.S. may not be cutting stealth bomber production, but I am saying that in many countries that would like to use these rare earth metals for strategic purposes are cutting their defense budgets and they cannot afford it.”

Rare earths metals play a large role in current modern technology, cruise missiles and other weapons systems.

PRODUCING RARE EARTHS METALS OUTSIDE OF CHINA

China holds most of the processing capacity for rare earths metals.

“A lot of the processing capacity is in China and you can’t use Chinese capacity unless you’re actually getting your rare earths from them,” said Waters. “That’s why Lynas Corporation Ltd. (ASX: LYC) and others have been building their plants in Malaysia.”

Lynas currently has a concentration plant under construction at Mount Weld in Western Australia as well as an advanced materials plant in Kuantan, Malaysia. Neither plant has begun production yet.

Molycorp Inc. (NYSE:MCP) has three facilities, two located in the U.S., California and Arizona respectively, as well as one located in Estonia. The company stated earlier in 2011 that production from the three facilities would produce between 4,941 and 5,881 metric tons by the end of 2011. The company expects to raise production to 19,050 metric tons by the end of 2012.

The sentiment to mine and produce rare earths outside of China does not fall squarely on the shoulders of these two companies but it is still believed that bigger companies will gain more control of mines and production compared to smaller mining companies.

“At the end of the day it just means that there’ll be fewer smaller mines and there’s a natural evolutionary process that takes place in all developing parts of the world,” said Frawley. “You’ll have the small miners who will be succeeded by stronger companies. A more efficient process will begin to emerge.”

“That takes a long time and I don’t see it changing the balance of that supply any time soon.”

RARE EARTHS AS AN INVESTMENT OPTION FOR THE GENERAL PUBLIC

The biggest obstacle rare earths metals face as an investment is that although classified under the umbrella of rare earths metals, there are 17 different types and they are separated into two categories.

“Rare earth prices are not listed like precious and base metals prices so it is difficult for the average person to invest in,” said Waters. “It’s a barrier to the growth of the industry.

“As the market is maturing, there is going to be a need for a centralized source of information.”

Although newer in the metals world than precious and base metals, information can always be found.

“They’re small markets in comparison to gold, copper and aluminum in terms of tonnage and consumption tonnages,” Frawley said. “In terms of price transparency of these markets you’ll have to dig a little deeper.”

-List of heavy and light rare earths metals and their uses-

Heavy

Yttrium TV, glass and alloys

Promethium Nuclear batteries

Europium TV screens

Gadolinium Superconductors, magnets

Terbium Lasers, fuel cells and alloys

Dysprosium TVs, lasers

Holmium Lasers

Erbium Lasers, vanadium steel

Thulium X-ray source, ceramics

Yterrbium Infrared lasers, high reactive glass

Lutetium Catalyst, PET scanners

Light

Samarium Magnets, lasers, lighting

Neodymium Magnets

Lanthanum Re-chargeable batteries

Cerium Batteries, catalysts, glass polishing

Praseodymium Magnets, glass colorant

Scandium Aluminum alloy: aerospace

By Alex Létourneau of Kitco News
Source: http://www.forbes.com/sites/kitconews/2011/12/30/2012-outlook-uncertainty-continues-for-rare-earths-prices-china-still-major-player/3/