Didymium oxide, a combination of neodymium and praseodymium, two rare earth elements is shown at at Molycorp Mineral's Mountain Pass Mine in Mountain Pass, California. In early March, Molycorp Inc. (NYSE: MCP) demonstrated a focus on integration within rare-earth (RE) mining initiatives with their $1.3 billion acquisition of Toronto-based Neo Materials. Neo Materials is a substantial player in the refining stage, allowing for a merging of operations and the potential to streamline towards higher value chain efficiencies throughout the RE production stage. MCP has seen a substantial increase in rare-earth (RE) mineral reserves as well in recent months, due to the recently opened Mountain Pass, California mine, which could positively affect this partnership. Though investors were initially enthusiastic about the deal, evidenced by a sharp MCP stock price increase, falling prices of RE materials in the market forced those same shares into consistent decline throughout April and May. Understanding the economics behind the fluctuating RE prices sheds light into MCP's logic behind improving internal logistics and expanding their supply chain from the mine all the way to the finished product, which offers more control in a fluctuating external environment.

The most difficult threat to miss within the RE industry is the dipping prices for many of these materials, highlighting a serious risk for invested incumbents as their margins shrink along with their buyer's price points. What's most interesting here is that the primary reason these rare earth (RE) prices may be trending downward so significantly is the successful growth of the incumbents, that is to say that as the big players like MCP and Lynas increase the potential quantity of materials mined scarcity dictates that prices will lower. As MCP successfully taps into the large reserves in the reopened Mountain Pass mines, so do they increase the global supply of RE materials and therefore cut into the previously established higher prices from a previously less competitive RE market.

A brief background of how these prices got so high in the first place is useful going forward, and segues well into the next intrinsic threat for MCP: China. Chinese companies command an enormous competitive advantage through sheer domination of the current RE supply, some figures estimate their control of the production of these materials to be as high as 95% (alongside figures of the country itself holding only 36% of the world's identified reserves). Such a limited competitive environment allows for companies to pursue profit generation through maximizing margins, limiting buyer power and allowing suppliers more control of RE prices. There is no shortage of blaming and finger pointing, with WTO meetings and tariffs geared at battling potential monopolies in the industry, but whether such accusations are founded or not doesn't really matter. The truth is, the only ones really accomplishing anything here are companies like MCP, who are fighting to compete and increase RE supplies despite the risks involved if they succeed: which is an increase in buyer power and likely lower margins. Molycrop President and Chief Executive Officer Mark Smith poses for a picture during the Reuters Mining Summit in Toronto, March 21, 2011.

With RE prices trending from an inflated price due to a lack of competition (lower supply) into one of increased competition (high supply), one can only expect the price points to continue downward under the conditional success of other RE mining players. More simply put, as rare earth becomes less rare with more companies mining and producing it, so will the price be lower to reflect this. This makes for something of an upward battle, pushing companies to consider ways to minimize their costs to continue capturing value. This brings us more or less full-circle, back to MCP's integration strategy, which in light of falling prices and increased competition, only further underlines why it was a good move. As Mark Smith, CEO of MCP, told analysts: “(We are)putting those two together and forming the best full supply chain capability known in the industry.”

Bottom Line – Not So Rare?

The narrower conclusion is that the acquisition appears to be beneficial for MCP, anticipating a more competitive environment and necessitating more internal value through improved supply chain management. However the broader bottom line of this analysis encompasses more than the just the players in mining RE, but also the constantly growing technology industries who are dependent upon a variety of RE in creating their products. If anyone, these are the real winners. MCP is fighting to compete in a heavily consolidated industry, and as Adam Smith once said: “In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so.” A more diverse group of strong players in the RE industry would theoretically create a much more attractive environment for the buyers in various tech industries, lowering prices and leveling the playing field as supply of rare-earth increases.