Rare earth metal prices have been falling steadily for the last couple of years, in spite of China reducing export volumes. Usually a reduction of supply results in a rise in prices, but the falls are indicative of the size of the REE bubble that had formed around the turn of the decade.

Chuin-Weip noted in the WSJ last week that Chinese exports had plummeted 71% in 2012 from 2011; however, this year has seen a remarkable change – exports have been picking up, with April’s figure of 2,196 metric tons almost six times larger by tonnage from a year earlier and a 28% rise from March, according to China customs data quoted in the article.

China exported 6,112 tons of rare earth metals in the first four months of this year, as the authorities approved higher export quotas and demand from China’s principal REE export market picked up. The U.S., you may think? Nope – Japan.

The country’s industrial base has responded strongly to stimulus measures, including massive money printing and a substantial reduction in the value of the Japanese Yen to post impressive economic growth in the first quarter.

Japan consumes some two-thirds of China’s RE exports and as GDP rose at an annualized rate of 3.5% in the first quarter compared to 1% in the previous six months, the industrial base has taken the opportunity of cheaper REE prices to re-stock. Nevertheless, global rare earth prices remain weak.

The value of China’s rare earth exports for the first four months of this year came in 63% lower than a year earlier, at $136 million, according to customs figures quoted in the WSJ. But the pace of the price slump is slowing from the 70%-to-80% declines posted earlier in the year; although if they had continued at that rate, some REEs would have been given away. As this graph shows, in spite of greater exports, the domestic rare earths prices in China continue to fall. Source: MetalMiner IndX

Although this graph only tracks one heavy rare earth and one light rare earth, the trend is similar across the board. After appearing to stabilize for a while in February and March, prices have recently fallen again.

Some analysts are suggesting prices have troughed. Morgan Stanley is reported in Resource Investing News as saying prices could start to come back up following another 12% across-the-board price decline in May. The bank does add a caveat, however; that more supply from Molycorp and Lynas Corporation in the second half of this year could put more downward pressure on prices.

And there lies the great unknown: when China had a near-monopoly on rare earth metals, they could indeed control the price, although not very intricately. As much material was illegally exported as it was legally, making control difficult and, in part, leading to the severe clampdown on illegal mines. But now China’s control over the supply chain is threatened not from within, but from without.

New suppliers like Molycorp and Lynas are already significant-enough producers to influence the price (Molycorp is running at about 7,000 tons per year, compared to China’s current run rate of some 20,000+ tons per year), and with ongoing investment likely to raise this figure, China’s days of having a stranglehold on the market are, if not over, then at least severely limited.

Greater demand from Japan and a recovering U.S. market should, in theory, lift rare earth prices as Morgan Stanley predicts, but there is no evidence of that so far.

A period of better availability and stable prices would certainly benefit consumers, and after the volatility of recent years, would go some way to slowing the demand destruction that resulted from high prices and supply uncertainty in the wake of China’s attempts to control its supply market.