China’s tightly controlled rare earth supply may be reshaping commodity price cycles, creating abrupt surges that fade too quickly to stimulate major investment in alternative production.
Paper: When Supply Cannot Respond: Commodity Price Cycles and Rare Earths. Image credit: AI-generated image created using ChatGPT/OpenAI
In a recent working paper posted on the Social Science Research Network, researchers at the University of Western Australia investigated whether state-controlled supply inelasticity, exemplified by China's dominance in refined rare earth element production, shifts traditional commodity price cycles toward a distinctive spike-and-revert price process.
State-Controlled Supply Context
Commodity markets typically exhibit boom-and-bust price cycles driven by lagged supply responses to price signals. However, this dynamic assumes supply elasticity, which may not hold in markets where supply is tightly controlled by dominant producers.
Rare earth elements (REEs), critical inputs for advanced technologies such as clean energy and defense, provide a compelling example due to China's near-monopoly, which accounts for around 90% of refined production through two state-owned producer groups operating under regulated production quotas.
Structural constraints, such as technological barriers, complex separation processes, high capital intensity, and geological variability, hinder supply responsiveness outside China. Additionally, REEs have limited recycling and substitution options, further contributing to supply inelasticity.
Empirical Frameworks for REE Prices
The paper uses a quantitative approach, analyzing monthly real price data from 2010 to 2025 for 28 benchmark commodity price series and 15 individual REE oxide series, together with equal-weight commodity and REE indices. Neodymium-praseodymium (NdPr), dysprosium (Dy), and terbium (Tb) oxides are examined as three headline products. REE price data are sourced from Asian Metal using domestic Chinese market prices, converted into a monthly series using the price recorded on the last trading day of each month.
Price series are deflated using the US Consumer Price Index to ensure comparability. The core analytical framework involves applying the turning-point algorithm developed by Cashin, McDermott, and Scott (2002), as well as partial moments and distributional analyses, to identify price cycles and asymmetries.
This algorithm detects boom and slump phases by enforcing alternating local maxima and minima with minimum phase duration, full-cycle duration, and amplitude thresholds. The study tests the hypothesis that REE prices follow a "spike-and-revert" pattern distinct from the boom-slump cycles of typical commodities due to pronounced supply inelasticity under state control.
Spike-and-Revert Price Dynamics
The analysis reveals that REE price series deviate markedly from the canonical commodity price cycle pattern. Turning point cycle dating identified fewer completed phases for REEs than for benchmark commodities, although the authors caution that the algorithm can generate artifacts by forcing alternating boom and slump phases onto spike-and-revert series.
The major 2010 to 2011 REE price spike was excluded from the cycle statistics because the sample lacked a preceding trough, while declines from extreme price peaks can produce artificially large measured slumps even when prices merely return toward their long-run range. The relatively short 2010 to 2025 sample also limited the number of complete cycles available for comparison.
Instead, the price evolution for REEs is characterized by episodic sharp upward spikes followed by protracted, gradual reversion towards a long-run median price level. Partial moment analysis of median-centered log prices shows a marked asymmetry in price levels: above-median deviations exceed below-median deviations, consistent with upward price spikes not balanced by commensurate slumps. The REE index had an upper-to-lower partial-moment ratio of 3.12, compared with 1.12 for the commodity index.
Distributional properties of monthly log returns exhibit positive skewness and heightened excess kurtosis, reflecting infrequent but extreme positive price jumps and less pronounced downward corrections. The REE index showed greater positive skewness than the commodity index, at 2.173 versus 0.476, and greater excess kurtosis, at 11.252 versus 0.945. These comparisons support the proposed price signature but do not independently establish state control as its sole cause.
The authors interpret this price behavior as consistent with the structural inelasticity of REE supply, primarily due to China’s centralized control through production quotas, as well as export quotas that remained in place until 2015. The lack of a traditional investment-driven supply expansion mechanism means that price increases are not met with timely capacity additions.
Under the authors’ proposed mechanism, prices bear most of the adjustment when demand rises, and supply cannot expand. Prices increase until demand destruction occurs, after which inventory drawdown and reduced consumption support a gradual reversion. The complex coproduction nature of REEs further complicates market dynamics, as mines produce multiple elements together, with byproduct elements experiencing persistent oversupply and depressed prices, decoupled from their own demand profiles.
From a materials perspective, market concentration and supply rigidity have significant implications for technologies reliant on REEs. The critical role of elements such as Nd and Dy in high-performance permanent magnets means that supply constraints can influence the cost and availability of key advanced materials used in electric vehicles, wind turbines, and defense systems.
The low recycling rates (below 2%) exacerbate supply challenges, as end-of-life recovery processes are technologically demanding and dispersed across vast numbers of small consumer devices, providing minimal secondary supply buffer, unlike more common base metals. Substitution is limited and often compromises performance, further anchoring demand for specific REEs.
These same market characteristics may also weaken the investment signals available to prospective non-Chinese producers. The authors argue that these pricing patterns may help explain the underwhelming development of non-Chinese supply despite recurrent price spikes. They suggest that the short duration of price peaks may discourage the substantial long-lead-time investments required, given technological, environmental, and geopolitical uncertainties.
Efforts to secure supply through policy initiatives and strategic partnerships, such as long-term price floor agreements involving the US Department of Defense and Japanese partners with ex-China producers, highlight attempts to overcome investment disincentives.
Implications for Commodity Cycles
This research illuminates the distinct price dynamics of rare-earth element markets, shaped by inelastic state-controlled supply. More broadly, it suggests that standard commodity-cycle models may not apply cleanly when output cannot readily respond to price signals. Unlike typical commodities that exhibit investment-driven boom-and-bust cycles, REE prices followed a spike-and-revert trajectory marked by sharp price surges and gradual retrenchments, which the authors attribute to China's dominant role and capacity constraints.
From a materials standpoint, this inelastic supply, coupled with limited recycling and substitution, may heighten the criticality of REEs for advanced technologies and increase exposure to price shocks across advanced-technology supply chains.
Policy interventions aimed at providing price certainty and encouraging alternative supply may help mitigate strategic vulnerabilities and support sustainable material availability, although the analysis did not directly test their effectiveness. Overall, the paper highlights the need to reconsider standard commodity-market models when applied to materials critical to the modern economy that exhibit unique structural constraints.