Goldman’s Position on REEs in Debate

May 6, 2011 — In a research note released yesterday, Goldman Sachs analysts posited that the global supply deficit of rare earth elements that has driven up prices more than tenfold since 2009 is likely to peak this year and swing into a surplus by 2013, as Western companies start up new mines to compete with the Chinese firms that currently dominate the market.

We’re all aware of the extraordinary upward trajectory of prices for both rare earths themselves, and the companies that produce them. The question is whether Goldman’s analysts, led by Malcolm Southwood, are correct in assuming that the current boom is already nearing its peak.

Goldman doesn’t have the greatest track record when it comes to REEs, as in March of last year they sold their entire position in Molycorp, just 4 months before Molycorp went public, in what turned out be the single most successful IPO of 2010. The stock price quintupled in less than a year, from between 12 and $14 to its current perch, hovering around the $70usd mark.

There has been a healthy level of doubt around the blogosphere, particularly from those most active in the rare earths industry. The most pressing single criticism is simply the oversimplification of even the most basic tenets of the ‘analysis’ by the majority of the press, who seem to be viewing the paper in the most stringent black and white terms. Even by Southwood et al’s estimation, demand and prices will continue to rise at least through 2013, but headlines have run the risk of making the REE market seem potentially unstable to potential investors. 

Their primary assumption seems to be that non-Chinese companies will be fully integrated in terms of supply by late 2013, but current information doesn’t really bear this up. Furthermore, there is strong concern (especially by my favourite group of REE experts, the commentors here on RMB itself) that Goldman’s analysis is making the mistake of viewing the REEs collectively, rather than as individual commodities, with their own individual supply and demand trajectories.

China will almost surely further reduce export quotas, and is almost certain to begin to import critical rare earths, and their domestic consumption rates skyrocket. It seems very unlikely that market demand can level off in that relatively short time period, especially factoring in the concept of China as buy-side consumer rather than sell-side supplier.

Probably the biggest single issue with this analysis is that we simply don’t have a realistic picture of what demand will even be. Green technologies, in general, virtually all require rare earths, and invention and production of new enviro technology products is ongoing, and rapidly growing.

There has been discussion of shifting away from rare earths in certain settings, such as Toyota pioneering research into EV and hybrid motors that don’t required the kilogram of neodymium that the current Prius motor requires (per car). But even these programs seem to be more fanciful than realistic. In the comment section of RMB, under the article ‘Great Western Links with Toyota’, gobucks referred to the Toyota non-rare-earth motor as a canard, which could very well be as accurate as it is funny.

Speaking of this purported no-neodymium-required Toyota engine, there has been very little information released at all, save for the fact that it is being developed by a Toyota supplier, Aisin Seiki Co., Japan’s biggest maker of transmissions, who currently do not produce motors of any type, but want to add a new product line in case the auto industry shifts to EVs that do not required transmissions. Doesn’t exactly inspire confidence, that last sentence, does it?

Thoughts on Goldman’s analysis in general? Specific bones to pick, claims to contest, et cetera?