Recent fall in rare earth prices offers 'a good buying opportunity': UBS

UBS says rare earths and neodymium praseodymium (NdPr) in particular, is well positioned to benefit from growing EV demand and the electrification megatrend.

"Despite the opaque nature of the rare earths market, we like the demand prospects for the commodity," the analysts said in a note on Wednesday.

"The increased focus on supply chain security is an additional tailwind, while the retracement in prices offers a potential entry point."

EVs and turbines

The investment bank estimates that the NdPr market will grow by a compound average growth rate of 8% through the decade to approximately 150,000 tonnes.

Key drivers for NdPr growth include:

1. "EV's - with NdPr a crucial ingredient into the induction motor."

2. "Wind turbines - and in particular direct drive wind turbines which are preferred for offshore wind farms."

"The electrification thematic is crucial to the demand thesis for NdPr with EV's / wind turbine demand growing at 22% / 13% CAGR through to 2030 to account for 42% / 11% of overall NdPr demand," the analyst said.

Positive outlook despite risks

The 'rare' opportunity is not without its risks including a supply side that's dominated by China and potential substitution risks, according to UBS.

Encouragingly, the investment bank estimates that China's supply side is forecast to grow "in-line with its own domestic demand only, conserving its own strategic resource and not push prices dramatically lower."

A 'modest deficit' of approximately 20,000 tonnes is forecast for 2030 as the supply effort fails to match demand. In the long-run, prices are forecast to sit around US$95/kg compared to current spot levels of US$80. UBS sees further upside to spot prices and its long-term outlook if geopolitics worsen.

Of note, Lynas (ASX: LYC) reported average rare earth selling prices of A$49.3/kg in its September quarter update, down from A$79.2/kg in the December quarter.

Lynas said the weakening price trend was "triggered by concerns that the 25% production quota increase in China would lead to oversupply." Although the company noted that "once these concerns were found to be excessive, prices started to recover."

"Indeed, the 50% retracement in the NdPr price from 2022 highs offers a good buying opportunity in our view," noted UBS.

ASX-listed players

"Lynas is our preferred name in the space, with the established Australian producer looking to build market share in a growing market," the analysts said.

"We also like Iluka as it builds out its story, although production is a few years off and we are cautious on any potential weakness with respect to its mineral sands business."

Lynas (blue) versus Iluka (orange)