May was another choppy month for the Lynas Rare Earths Ltd (ASX: LYC) share price.
Its shares started the month strong, rising almost 10% from $5.50 to $6.01 by 11 May. But by the end of the month, its shares had gone full circle, closing at $5.51.
Why May was a rollercoaster ride for Lynas shares
Rare earth prices cool down
According to the Shanghai Metals Market, neodymium-praseodymium (NdPr) oxide prices have cooled down from ~US$83,000/tonne to ~US$75,300/tonne in May.
Similarly, Trading Economics observes that neodymium prices topped out from March highs of more than ~US$133,300/tonne to under ~US$94,000/tonne. This brings neodymium prices to roughly breakeven year-to-date, but much higher than the subdued levels it was trading at last year.
NdPr is a core material produced by Lynas, with its quarterly result highlighting 1,358 tonnes of NdPr production.
Commodity producing companies are always to some degree anchored to spot prices. Classic ASX200 miners such as BHP Group Ltd (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) are perhaps more extreme examples of where its shares rise and fall by the iron ore spot price.
Despite Lynas’ recent investor presentation highlighting the company as one which “supplies essential materials to exciting growth industries” with “exposure to global megatrends and future-facing technologies” including electric vehicles, green technologies and robotics, a pullback in rare earth prices in the near-term could be a reason why its shares struggled to make headway in May.
Lingering Chinese production concerns?
A major catalyst behind the recent underperformance of the Lynas share price appears to be its quarterly results. The results read well at face value, with an improvement in production, rare earth prices and scoring a number of operational milestones.
However, it only took a few sentences to wipe out a chunk of Lynas’ valuation, driving the almost 20% decline in the Lynas share price between 20 to 22 April. The quarterly observed that several Chinese rare earth producers had planned to increase production. China is responsible for more than half the world’s rare earth production, and among its plans to increase production was the behemoth Northern Rare Earth.
This Chinese company accounts for some 60% of China’s total rare earth production, with plans to double production in the next three years.
An optimist could say that the increase in production is in response to the rising demand for electric vehicles and green technologies. But an influx of Chinese production could also weigh on prices in the medium to long term.