The Lynas Corporation Ltd (ASX: LYC) share price could head further north on rising demand and the dependency for Australia to supply rare earths.
China and rare earths
China has been the most dominant player in the production and export of rare earths. The country controls between 80–90% of rare-earth related activities. In recent times, Beijing has used its market dominance as a tool to leverage its trade and technology conflict with the US. When the US banned Huawei's exports back in May, China warned that the US could not expect China to continue exporting its rare earth products. Furthermore, China has also subsidised its rare earth producers and cut prices, making it uneconomical for other players to enter the market.
Rare earth metals are vital for the production of ever day products such as computer memory, DVDs, rechargeable batteries and cell phones. It also plays a crucial role in national defence. The military uses it in night-vision goggles, precision-guided weapons, communication equipment and other defence electronics.
What about Australia's rare earth prospects?
Australia has multiple listed rare-earth companies with good prospects that have been unable to line up binding offtake agreements and project finance. A rare-earths business, given current prices and financing, is just very difficult in the Australian landscape.
However, Lynas has survived through thick and thin to exist as the only significant rare earths producer outside of China. The company is in a unique position to leverage the growing demand of rare earths and the desire to move away from China as a sole rare earth supplier.
Lynas quarterly market update
In the Lynas quarterly report, the company cited that continuing US–China trade tensions was leading to a greater interest in rare earthers. However, the tensions also have a negative short-term effect on market confidence.
The Malaysian government is an important stakeholder for Lynas. Lynas Malaysia posses one of the largest and most modern rare earths separation plants in the world. The Malaysian government renewed its operating license for a 6 month period. Subject to meeting specified conditions over the six month period, this renewal provides a clear pathway for continued operations in Malaysia.
Lynas highlighted strong demand from customers in Japan as well as increasing interest from magnet buyers in Europe and the USA, seeking long-term material contracts to secure their supply chain. Furthermore Lynas also announced its intention to build a Heavy Rare Earth separation facility, which would be the only facility of its type outside China. Heavy rare earths are critical elements to secure automotive electrification.
Foolish takeaway
Lynas is in a strong position to capitalise on the increasing demand for rare earths. There may be some short–medium term volatility caused by the rare earth spot price, Malaysian regulatory policies and geopolitical tensions. However, I believe this is a growing space and Lynas is positioned front and centre.
