The Chinese rare earth sector seemed prepared for COVID19. In fact, some market participants assert that the fact that the Chinese rare earth market was relatively unaffected by the virus is evidence that the authorities not only knew about the virus and covered it up, but took active measures to protect their markets by increasing production ahead of having to suspend capacity.
Unusual Production Pattern
The first mention of COVID19 by the Chinese Association of Rare Earths was only on the 6th of February which was a general call for all company employees to come together and comply with the requirements of their superiors in an effort to control this virus outbreak. Prior to this announcement, it would seem that there was almost no hint of the virus and business as usual. In fact, export prices, particularly of neodymium and magnet-related metals rose over 2% during this period, led by fewer exporters and a stronger Yuan.
Following the end of the Christmas/ New Year period, buyers returned to the market, though Chinese consumers and exporters remained inactive. The lack of deals during this time was explained by the depreciation of the dollar and the impending Spring Festival so no one suspected anything was amiss.
Moreover, Chinese producers seemed to be well prepared for a shutdown. Inventory levels rose conveniently in January and continued until the beginning of February. This is highly unusual as the norm would be for Chinese production to slow over the International New Year and the Chinese New Year in February and for there to be a subsequent decline in stocks. However, excess stocks meant that the impact of Chinese suppliers’ ability to meet demand was minimal. This is despite the fact that during the first two months of the year, more than 70% of the rare earth processing capacity of 80,000-100,000 tonnes of mainly heavy rare earths was suspended. This means, that China over-produced in November/December and began stockpiling. This pattern of production is quite unusual for the rare earth industry and suggests that China had been preparing for this eventuality.
Impact on Prices
The impact on prices during this shutdown seems like prices declined, but was actually minimal and in line with normal rare earth market volatility.
Heavy rare earths, however actually gained on the back of the suspensions on processing capacity. In particular, terbium increased in March to $602/kg, from $526/kg in March and subsequently lifted the heavy rare earth basket price to $299/kg.
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