Rare earth platform will not solve China’s rare earth problems

By Albert Li IM analyst, Shanghai, Laura Syrett
Published: Wednesday, 15 August 2012

Industry experts critical of new exchange citing operational concerns

 Plan of rare earths mine in Baoutou,
Inner Mongolia
China’s new rare earths trading platformwill not provide an immediate solution to the industry’s regulatory challenges, market participants warned at an industry conference in Inner Mongolia last week.


The trading platform, also referred to as an exchange, was launched on 7 August at the Fourth China Baotou Rare Earth Industry Forum under the name of Baotou Rare Earth Product Exchange Co. Ltd.


The platform is being led by BaotouSteel Rare Earth Hi-Tech, China’s largest rare earths company, in association with nine of the country’s most significant producers including Xiamen Tungsten, which each hold around a 14.5% stake in the exchange.


But market sources told IM that it will be some time before the electronic platform comes into official operation due to the scale and complexity of the project.


Despite three years of preparation, the trading platform’s rules and a definitive list of the products it will deal in have yet to be ironed out.


Mixed reception


According to Chineseofficials, the aims of the new trading platform is to bring price stability and transparency to China’s rare earthsmarket, goals which have been welcomed by many in the industry.


Speaking at the conference in Baotou, Tong Maofu, a representative of Dali Langda Fluorescent Materials Co., said that the exchange would help to eradicate market distortion.


“When China first entered the international rare earths market, Chinese companies used highly competitive prices to enlarge their market share, pushing prices very low,” Tong said.


“This exchange platform will help improve this situation,” Tong said, but cautioned that the new trading mechanism by itself would not be enough to rebalance the industry.


“Disordered and illegal mining must be controlled and regulated by the government if rare earth prices are to be fairly determined by the market,” Tong said.


Others in the industry doubted that the trading platform would deliver increased transparency and manage volatility.


Ren Jiangyuan, project manager of the China-Japan joint venture Baotou Santoku Battery Materials Co., questioned whether the dominance of the exchange by China’s largest rare earths producer would lead to a price monopoly.


“I wonder whether buyers of rare earths will still be able to purchase raw materials at a reasonable price, and whether these prices will be determined fairly,” Ren said.


Ma Rongzhang, secretary of the Association of China Rare Earth Industry (ACREI), however insisted that having ten companies with equal stock rights in the platform would mean no single company could manipulate prices.


Fears of a price monopoly were similarly dismissed by Wang Jinlong, vice secretary of Anyang Rare Earth Application Association, who said that one company’s influence could not outweigh market forces.


More important, Wang said, were the questions of which and how many rare earth products could be exchanged using this platform.


Wang Zhongshan, vice chairman of Nanjing Rare Earth Application Research Association, criticised the platforms private enterprise foundations.


“This exchange will be meaningful only if it is established, managed and run by the state,” Wang said, adding that the exchange was irrelevant in an industry that was already actively trading rare earths.


Wang also said that small rare earths companies in particular were not interested in doing business through the platform and would resist any handling charges levied on deals transacted via the exchange.


In an attempt to allay these concerns, Zhang Zhong, Baotou Steel general manager, said that the company would work to improve the platform’s business model.


He also said that Baotou would cooperate with futures brokers and financial companies to establish the global and authoritative rare earth price index. 


Operational problems


Critics of the trading platform also used the conference to voice concerns related to the exchange’s operation.


One issue raised was that the exchange is only designed for spot business, with no provision for the negotiation of mid- or long- term business contracts.


There are also no obvious mechanisms for managing the market or providing warehouse receipts for business conducted via the exchange.


It is unclear what the exchange’s total transaction capacity will be, and questions remain over how many companies will decide to do business through the exchange.


According to some industry observers, China’s southern regions, such as Guangdong, Sichuan, Jiangxi, Fujian provinces, will find it difficult to conduct business via the platform which is based in the northern Inner Mongolia region.


GanzhouRare Earths, the biggest rare earth company in Jiangxi province – which is the second largest rare earths-producing region in China – did not attend the conference in Mongolia.


Ganzhou also intends to continue operating independently of the platform, market sources told IM.

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