According to Securities Times, Sinolink Securities issued a research report stating that, according to SMM, the import checkpoint for Myanmar rare earth mines is currently closed. Industry insiders expect this situation to continue until the end of the year. Currently, domestic smelting and separation plants have two months' worth of raw material inventory, and if the raw material inventory is depleted, the prices of medium and heavy rare earths may experience a significant increase; the supply of light rare earths will also improve. The disruption in Myanmar's supply may exceed expectations. The implementation of regulations is expected to bring about a "quasi-supply reform" effect in the industry. Rare earths, as a globally advantageous industry in China, have the potential to further increase in strategic value against the backdrop of global geopolitical fluctuations. The industry fundamentals are also in the stage of bottoming out, and state-owned rare earth groups such as China Northern Rare Earth Group and China RareEarth Group, representing national assets and high-quality magnetic materials companies, are expected to benefit.

Event:

According to Mining.com, the Kachin Independence Army (KIA) of Myanmar recently announced that it has taken control of the country's rare earth mining area. Adamas Intelligence, a Canadian rare earth and battery metal research company, stated that the control of the region by rebel forces may affect the export of rare earth concentrates. Myanmar mines constitute the main supply of medium and heavy rare earths globally, with an estimated import volume of rare earth oxide (REO) of nearly 0.05 million tons in 2023. The domestic quota for medium and heavy rare earths REO is only 0.019 million tons; it is estimated that Myanmar mines will account for approximately 10% of global light rare earth praseodymium-neodymium in 2023.

Sinolink Securities' main points are as follows:

Outlook for future supply of Myanmar mines: Some supply rendered ineffective, resumption highly challenging compared to the past.

The implementation of regulations will impose a higher level of constraints on imported ore and secondary utilization. Due to environmental protection and cost differences, Myanmar mines have been an important supplement to the domestic quota for medium and heavy rare earths in the past; the regulations may impose stricter constraints on imported ore and waste recycling industries. Under stringent supervision and traceability, some low-cost sources may become ineffective supplies, thereby making it difficult for the future supply of Myanmar mines to return to the high base of the past. The industry cost curve is gradually shifting upwards. Myanmar mines typically represent the lower end of the industry cost curve; under the implementation of the regulations, some low-cost sources that are non-compliant or abandoned may lead to an upward shift in the industry cost curve.

The terminal demand continues to show good signs, with clear improvements in supply and demand.

Demand for new energy vehicles, motorcycles, household appliances, and industrial robots is strong, estimating a 9% global terminal demand growth rate in 2024; the annualized growth rate of demand from 2024 to 2026 is also expected to maintain 11%. Quota growth rate has significantly decreased, considering the weakening of imported ore and waste supply, estimating a global praseodymium-neodymium supply growth rate of only 3% in 2024.

Inventory, prices, and mainstream enterprise profitability have been clarified this year with a triple bottom.

This year, prices have dropped twice to 0.35 million yuan per ton, even though the pressure from the introduction of the 'Regulations' on some non-compliant raw materials has not yet broken through; prices have been falling continuously for nearly three years, with traders selling off, magnetic material factories reducing inventory cycles, and industry-wide inventory dropping to a 5-year low. With prices entering the lower range, H1 2024 rare earth listed companies are generally in a loss situation; as prices started to recover in 3Q24, the profit improvement compared to the previous period has improved significantly.

There is still ample room for rare earth demand.

As the optimal solution for balanced performance in humanoid robot hollow cup motors and frameless motors, rare earth permanent magnets are expected to directly benefit from the high growth of humanoid robots. With the gradual implementation of large-scale equipment renewal supporting measures, considering the good energy-saving effect and low penetration rate of rare earth industrial motors, it is estimated that the CAGR in the industrial motor sector under neutral conditions from 2023 to 2026 will exceed 60%, possibly representing the largest increase in rare earth demand from 2023 to 2026.

Focus on the layout opportunities brought by the 'supply-side reform' + integration.

The rare earth industry can be described as a model industry in the state-owned enterprise reform, after years of integration, it has formed a state-owned asset system with 'Northeast Light, Southwest Heavy' and Shenghe Resources leading the way. China Northern Rare Earth, as a leader in light rare earths, has a stable position; China Rare Earth Group controls medium and heavy rare earths, and there is still a lot of competition within the group with many assets and the listed company China Rareearth. The group has made commitments to address intra-industry competition issues. With the implementation of the 'Regulations', the bank believes that it may directly benefit rare earth groups with leading qualifications, technology, and industry positions.

Investment advice:

Suggest focusing on China Northern Rare Earth (600111.SH), JL Mag Rare-Earth (300748.SZ), and Beijing Zhong Ke San Huan High-Tech (000970.SZ).

Risk reminder: The price of rare earth may fluctuate due to lower than expected demand, higher than expected supply.