The Zhitong Finance App learned that Guojin Securities released a research report saying that as supply growth declines, the supply and demand pattern improves, rare earth prices are expected to bottom out and the fundamentals of magnetic materials are expected to follow the improvement. Magnetic materials related to the robot boom are expected to fully benefit. It is recommended to focus on Jinli Permanent Magnet (300748.SZ), Zhongke Sanhuan (000970.SZ), etc.; in the case of rare earth prices, resource leaders and growth targets are fully expected to benefit. The resource side suggests focusing on targets such as Northern Rare Earth (600111.SH).

▍ Guojin Securities's main views are as follows:

Resource integration: accelerated optimization of the pattern, a model for central state-owned enterprise reform.

Since the establishment plan for the six major rare earth groups was approved in 2011, the China Rare Earth Group was integrated into the four major groups; by September 2023, Xiamen Tungsten Industry signed a relevant rare earth cooperation framework agreement with China Rare Earth Group, and 100% of Guangdong Rare Earth Group's shares were transferred free of charge to China Rare Earth Group in January 2024. As a result, China's rare earth industry has formed a pattern of rare earths from the north and rare earths from China in the south: the China Rare Earth Group received all ionic quota and few rock ore type quotas, and the northern rare earth received the vast majority of rock ore type quotas.

Compared with the fragmentation of other resource industries, China's rare earth raw ore supply has fully achieved state-owned asset control and concentration of leadership, which is of profound significance for China to control global pricing of rare earths. Furthermore, China Rare Earth Group, the controlling shareholder of China's rare earths, also promised to steadily advance related business adjustments or integration within five years (starting January 2022) to resolve competition issues in the industry.

Demand: Humanoid robots are waiting to explode, and industrial manufacturing motors have plenty of space.

As Tesla's humanoid robots continue to exceed expectations, demand for rare earth permanent magnets in the field of humanoid robots is expected to accelerate; as intelligent manufacturing continues to advance, global demand for NdFeB in the industrial robot sector is expected to reach 25,000 tons in 2026, with a 3-year CAGR of 10%. The Ministry of Industry and Information Technology has issued several documents on energy-efficient motors. Recent policy-side measures such as “large-scale equipment updates” and industrial energy saving monitoring work will further open up the market space for rare earth permanent magnets in the field of industrial motors. Conservative estimates suggest that the global demand for NdFeB in the industrial motor sector in 2026 will be 16,000 tons, and the 3-year CAGR will reach 44%.

Supply: Quota growth is slowing down, and imported mines may face bottlenecks.

Since the boom in new energy vehicles and other fields, China's quota growth has entered a period of rapid growth. The CAGR for rock and mining quotas reached 19% in 2018-2023. The indicators for the first batch of mineral products in 2024 increased by 12.5% compared to the first batch in 2023, which is significantly lower than previous years. Myanmar mining experienced high growth in 2023, but supply may face bottlenecks due to problems such as scattered mining, declining quality, and environmental protection. Considering the flat supply of US mines and Myanmar mines and a slight increase in Australian ore and monazite, the global overseas production of praseodymium oxide is expected to be 9% CAGR from 2022 to 2026.

Balance between supply and demand: What is the tipping point of quota growth?

Assuming a rapid increase in the penetration rate of new energy vehicles, demand in fields such as inverter air conditioners, energy-saving elevators, and consumer electronics will grow steadily; demand for mid-range and low-end NdFeB is expected to slowly pick up after consumption bottoms out. Global demand for praseodymium oxide is expected to reach a CAGR of 11% in 2023-2026; with a quota increase of less than 12% in 2024, the global rare earth supply and demand situation is expected to reverse. If we consider that the second batch of indicators in 2024 is the same as the first batch, and the third batch of indicators is not released, then the 2024 quota increase is only 6% year on year. The rare earth supply and demand pattern is expected to improve significantly, and prices are expected to enter the bottom range.

Price elasticity analysis: The resource side is significantly better than the magnetic material sector.

Due to low cost tailings depots and high steel business costs, Baogang Co., Ltd. showed large performance fluctuations in 2021-2022; due to the price adjustment mechanism, procurement costs for rare earth concentrates in the north will also fluctuate with rare earth prices, so the fluctuation in rare earth performance in the north is relatively similar to rare earth prices in 2022 and beyond. Since it is a processing process, the profit fluctuation of magnetic materials is relatively less than on the resource side.

Risk warning

The increase in quotas exceeded expectations; NdFeB replacement exceeded expectations; overseas rare earth supply exceeded expectations; and waste supply exceeded expectations.