‘Pricing at the margin’ is a phrase heard in the marketplace to indicate that a recorded price is not representative of the totality of transactions for that commodity, but instead was the result of perhaps as little as one transaction occurring at the margin (the edge) of the range of transactions. Pricing at the margin is not representative of market pricing.
Recent actions by Chinese governmental regulators, have caused some confusion in the rare earths market with regard to pricing, production, and inventory levels.
First, the Chinese government reduced the allocation of Chinese rare earth production in the form of individual rare earth raw materials for the export market for the rest of the year. There was no differentiation among the individual rare earths covered by this allocation reduction, so immediately the 28 officially licensed Chinese trading companies with ‘allocations’ moved to export only the highest priced of the rare earths, such as terbium, dysprosium, and europium that they had in stock, so as to maximize their transactional revenue.
These actions, of course, reduced the normal outflow of the more common rare earths such as cerium, lanthanum, neodymium and praseodymium.
After just a few transactions occurred at the margin of the market and a whispering campaign was started about China ‘cutting off exports’, the prices for all rare earths rose. Those familiar with Economics 101 concepts such as supply and demand, knew that a price increase of 500% for the most common of the rare earth metals, cerium, which is in oversupply now as it has been for decades, was an aberration caused by some glass polisher caught short of inventory at a critical moment.
In the same way the sharp increase noted in a few transactions for the most important of the rare earth metals, neodymium, was also an aberration probably caused by a panicked Japanese magnet producer or his trading company procurement department.
Chinese businessmen in Beijing during this period of price rises, said to me that non-Chinese buyers had not seemed to notice that there were no export reductions on rare earths contained in finished goods or components. Of course, when I relayed this to some junior mining executives, they responded that this also was a part of a larger ‘conspiracy’ to drive manufacturing jobs to China. In the West at least, when I was a corporate executive we called this a business model, not a conspiracy, as we demanded tariffs (import restrictions) against our foreign competitors along with anti-dumping legislation and lawsuits.
I was also told that non-Chinese alarmists also did not seem to have noticed that the previous quotas had not even been used up, so that there was in fact material available. I think the alarmists knew this all along.
In any case, I think that investors should be very wary of junior miners that immediately repriced their business models using the ‘new higher rare earth prices.’ First of all, those prices were not at all meant to pertain to the low valued, undifferentiated concentrates that junior miners’ pricing models seem to think have the same value as 99.9% individual metals. Second of all, the prices will come down as soon as pricing at the margin is subsumed into realistic multi-transactional market pricing.