Learn from rare earths bubble
Molycorp goes under after being the next hot thing
In late 2010, two questions were on the minds of many commodities investors: What are rare earths? And where could they buy some?
The group of 17 obscure, difficult-to-pronounce minerals, used in hot-ticket items like smart phones, electric cars and wind turbines, were beginning to post the kind of price gains not seen even in the traditionally volatile energy and metals markets.
For many investors, the only way to get in on the action was to buy shares of U.S. producer Molycorp Inc. Its market capitalization had shot up to US$4 billion after an initial public offering earlier that year.
On Thursday, Molycorp filed for bankruptcy protection, having run out of cash after a precipitous and sustained slide in rare-earth prices. The company has become a cautionary tale for investors looking for the next hot thing, a lesson in how excessively high commodity prices can quickly reverse.
“In hindsight it was an absolute commodity bubble,” said Jon Hykawy, an analyst at Stormcrow Capital Ltd. in Toronto who tracks the rare earths industry.
The trigger for the rally was the decision by China in 2010 to suddenly restrict exports, sending users scrambling for supplies of lanthanum, neodymium, cerium and other rare earths. Yet grave predictions of a shortage of these critically important materials proved to be flawed. Rare earth consumers such as Toyota Motor Corp. simply switched to cheaper alternatives.
The rare earth boom ended almost as quickly as it began, with prices posting steep declines in late 2011. More supply was coming on the market, not just from California but also from Australia and Malaysia, according to Kevin Starke, an analyst at CRT Capital Group.
“The industry shot itself in the foot with so much new supply,” he said. Prices also came under pressure as corporate buyers did workarounds. The glass polishers started recycling cerium, according to Stormcrow’s Hykawy. Toyota went one step further, developing motors for hybrid and electric vehicles that don’t need rare earths. Oil refiners substituted rare earths from the catalysts used in refining.
“There’s a maximum price that you pay,” Hykawy said. “I’m sick to the stomach of the argument that rare earths are irreplaceable.”
In court documents, Molycorp listed assets of US$2.49 billion and liabilities of US$1.79 billion. A group of creditors has agreed to provide US$225 million in financing. The company continues to operate and says it plans to exit bankruptcy by the end of the year.