Guotai Junan: "Two New" policies increase terminal economic cycle, sector performance expected to improve steadily along with rare earth prices.

Guotai Junan released a research report stating that in recent years, the production of rare earths in Myanmar has grown rapidly, making it the largest importer of rare earths for China. However, it is constrained by political turmoil and the risk of resource over-exploitation, which may impose strong constraints on the supply. On the demand side, the domestic "two new" policies are strengthening the terminal business cycle, and rare earth prices are expected to steadily rise, with the second phase of the rare earth sector reversal gradually opening up. Reviewing the performance of the rare earth sector in 2020-2021, Guotai Junan believes that the first phase of the price increase in rare earth stocks leading the rebound in rare earth commodity prices has basically been completed since the second half of 2024, and the sector's performance is expected to gradually improve along with the steady recovery of rare earth prices. Preferred are rare earth/magnet material leading stocks that have clear logic for volume growth and can contribute excess profits. Guotai Junan maintains a "hold" rating for the rare earth industry. In recent years, the production of rare earths in Myanmar has grown rapidly, but the risk of resource over-exploitation has increased dramatically, and the development prospects are not optimistic. Myanmar has great potential for rare earth resources and its production has been growing rapidly. In 2023, Myanmar has become the world's third largest rare earth producer (accounting for 11% of production) and China's largest importer (accounting for 45% of China's total rare earth ore imports). By 2024, the volume of medium and heavy rare earth ore imported from Myanmar to China has reached 32,000 tons, which is 1.6 times the domestic quota for heavy rare earth ores, indicating the importance of Myanmar's rare earth supply to China's medium and heavy rare earth ores. However, constrained by political turmoil, tight rare earth mining policies, and poor infrastructure, the outlook for rare earth resource development is not optimistic. After experiencing rapid growth in production from 2018 to 2023, disturbances such as overexploitation and warfare have become more pronounced in Myanmar's rare earth mines. Guotai Junan believes that it will be difficult for Myanmar to significantly increase production in the future. The current border closure in Myanmar is not over yet, and rare earth supply in 2025 may be lower than expected. Due to the internal conflict in Myanmar, the volume of rare earths imported from Myanmar to China in December 2024 sharply dropped to around 300 tons. Although customs clearance has been resumed since December, the negotiation difficulties between miners and local governments have increased, and to date, the import volume from Myanmar has not yet recovered. If the disturbance lasts longer, the supplement of rare earth ore supply from Myanmar to China in 2025 may be lower than expected. According to Guotai Junan's calculations, under neutral expectations, China's import of rare earth ore from Myanmar in 2025 will be around 24,000 tons, a decrease of 42%/30% compared to 2023/2024, which is expected to impose strong supply constraints. Rare earth "strong players" are struggling to increase production, plus the strengthening of the "two new" policies enhancing the terminal business cycle, will help the second phase of the rare earth magnet material sector reversal to begin. Guotai Junan believes that the rare earth reversal cycle has gradually started, and rare earth prices are expected to steadily rise with the improvement in supply and demand. On the demand side, since 2024, the domestic "two new" policies have intensified the terminal business cycle, with Guotai Junan estimating that the demand for rare earth magnet materials in the new energy vehicles and air conditioning sectors will maintain a growth rate of 33%/7% in 2025, while praseodymium and neodymium oxide will remain in tight balance. On the supply side, if the rare earth supply from Myanmar in 2025 is lower than expected, it will significantly increase the price elasticity. Risk warning: Overseas supply releases exceed expectations, downstream demand growth is slower than expected.