Why did Macquarie just downgrade Lynas shares?

The Lynas Rare Earths Ltd (ASX: LYC) share price is in the red today.

Lynas shares are down nearly 7% and are currently trading at $8.53. For perspective, the
S&P/ASX 200 Index (ASX: XJO) is falling 0.37% today.

Let's take a look at what is going on with the Lynas share price.

Broker downgrade

Analysts at Macquarie have downgraded the Lynas share price to a neutral with a $9.10 price target.

Lynas is a rare earths producer exploring the Mt Weld mine in Western Australia. The company also has a processing plant in Malaysia.

Macquarie analysts highlighted that the company's earnings forecast will depend on the commodity price outlook. In comments cited by The Australian, Macquarie said:

While we believe Lynas enjoys a valuation premium given it is world's only significant producer of separated rare earth materials outside of China, its earnings outlook depends on commodity prices outlook.

Analysts highlighted there are "signs of NdPr price support" from rising pressures on rare earth concentrate costs, the publication noted. But on the flip side, smartphone sales have declined in the last two quarters.

In its latest quarterly report, Lynas said rare earth prices were "quite volatile during this quarter". Lynas said:

NdPr oxide pricing started to decrease in July and this continued until mid-September prior to rebounding and stabilising at around 700 RMB/kg at the end of the quarter.

This corresponds to USD88/kg CIF1 China. This pricing trend was triggered by
concerns that the 25% production quota increase in China would lead to oversupply.

However, once these concerns were found to be excessive, prices started to recover.

Lynas was awarded a contract from the United States to establish a commercial heavy rare earths separation facility in June.

The S&P/ASX 200 Materials Index (ASX: XMJ) is 1.62% in the red today.

Lynas share price snapshot

Lynas shares have gained 6% in the past year, while they have descended 16% in the year to date. Lynas shares have climbed nearly 14% in a month.

For perspective, the ASX 200 has fallen 4.69% in the past year.

Lynas has a market capitalisation of about $7.7 billion based on the current share price.