Rare Earth Special: China’s rare earth revolution

Stonewalling: China continues to evade questions from international community over its rare earths export policies. Credit: stealthtractor

According to the USGS, China’s reserve and resource system divides the country’s minerals into reserves and resources. Reserves are then divided into proved extractable reserves, probable extractable reserves and basic reserves.

Resources are divided into measured, indicated, and inferred categories.

As the USGS acknowledges, China’s method of classification makes comparisons with different reserve systems difficult, and estimates are always approximate. It has concluded, however, that China hosted around 55m tonnes rare earth oxides in 2011.

By claiming that it has fewer rare earths than international estimates suggest, China has argued that its resources are fast depleting and that its industry needs to drastically reduce output and reform its mining practices if it is to be sustainable.

“After more than 50 years of excessive mining, China’s rare earths reserves have kept declining and the years of guaranteed rare earths supply have been reducing,” the Information Office of the State Council, China’s cabinet, said in its white paper on the rare earths industry published this June.

The government blamed excessive exploitation and illegal mining for the decline in its national resources, and said that the devastation caused by pollution from rare earths mining activity had to be addressed urgently.

China is therefore rigorously reining back both its rare earths production and exports, and has urged other countries with reserves to boost output in order to meet the rapidly expanding number of applications requiring the minerals.

Tight export controls pushed up prices to a peak in 2011, persuading miners in countries such as the US, Canada and India to resume production after shutting mines decades ago.

Capacity contraction

Among the most prominent features of China’s rare earths policy has been the government’s continuing efforts to reduce the pool of domestic rare earths producers.

China’s Ministry of Industry and Information Technology (MIIT) imposed minimum production thresholds for domestic companies in early August, effectively removing the bottom tier of producers along with 20% of China’s rare earths capacity.

Dan McGroarty, American Resource Policy Network principal, told IM shortly after the announcement that such unexpected policy announcements by China were far more disruptive to the rare earths market than trade restrictions.

“Nobody saw [it] coming,” McGroarty said. “Variables like taking 20% of capacity out of the market will have far more of an effect on the industry than any [change in] trading activity.”

Then, in mid-September, China’s Ministry of Land and Resources (MLR) announced it was cutting the number of mining permits for rare earths companies by more than 40%, from 113 to 67.

The allocated permits were placed primarily in the hands of companies which were large enough not to have an incentive to cheat export quotas by smuggling the minerals out of China, Jon Hykawy, Byron Capital Markets analyst, noted.

Cracking down on smuggling has been a priority with China’s industry regulators, who are seeking to tally international import receipts with China’s officially sanctioned rare earths output.

In September, IM reported that talks were being held between five Chinese government departments - the General Administration of Customs, State Administration of Taxation, Ministry of Commerce, MIIT, and the MLR - over how to tackle the problem of smuggling.

Six weeks later in mid-October reports from local Chinese media exposed the scale of China’s rare earths black market.

Companies and factories in Inner Mongolia that had been closed down over the summer had shifted their operations to China’s western provinces, including Ningxia and Gansu, where industry supervision is less strict, it emerged.

Sources told Economic Information Daily that rare earths companies were using false descriptions and smuggling to continue manufacturing and selling rare earths products outside the government’s strict quota system.

Following the reports, China’s MIIT posted a statement on its website saying that it would move to close down the illegal operations and prosecute those involved.

Exports decline

Economies such as the US, the European Union (EU) and Japan which are reliant on imports of Chinese rare earths to support technology applications from weapons to wind turbines have watched anxiously as shipments of the minerals continue to dwindle.

China exported just 18,600 tonnes of rare earths in 2011, down 58% from 2010, despite the official export quota for the year standing in excess of 30,000 tonnes, China Customs data shows.

A second tranche of export quotas for 2012 was announced in late August by the Chinese Ministry of Commerce (MOFCOM), raising the overall yearly quota for the first time since 2005 by 6% to 31,965 tonnes.

But any hopes that this move would increase global availability of the minerals were short-lived when it became clear that China would almost certainly fail to meet its export quota for a second consecutive year.

IM reported in September that Chinese rare earths exports plunged 32% year-on-year (y-o-y) for the first eight months of 2012. The export value of the minerals fell by 21% to $2.7bn y-o-y during that period as lower volumes were compounded by falling prices.

As Mark Smith, CEO of US rare earths producer Molycorp Inc. said after the increase was announced, “the export quotas are not all that meaningful anymore”.

The US, EU and Japan are still waiting for a ruling from the World Trade Organization (WTO) on whether China’s export restrictions violate international trade regulations.

China’s MOFCOM confirmed via a statement on its website in August that it intended to “properly deal with the request [for dispute resolution] in accordance with the WTO’s settlement procedures”, and insisted that its export policies were in-line with trading guidelines.

However, industry experts widely expect China to circumvent any ruling that their policies breach WTO rules by arguing that the restrictions are aimed at resource conservation and environmental management.

Stockpiling

China consumed about 83,000 tonnes of rare earths in 2011, against a global consumption total of 110,000 tonnes, according to Liu Yinan, vice-chairman of the China Chamber of Commerce of Metals, Minerals and Chemicals Importers and Exporters.

As the largest consumer of the minerals by a huge margin, China is relying on foreign companies developing rare earth deposits in other parts of the world to feed the country’s internal demand as it slashes domestic output.

Stockpiling has been mooted as one option to ensure supply security until this happens.

According to local press reports, China is considering creating a strategic supply reserve of rare earths to be used in high-tech manufacturing once that technology is in place.

As the government pointed out when it released its policy paper in June, shipping low-end ore abroad has meant paying all the environmental costs associated with the highly polluting business of rare earths mining, but gaining none of the rewards from manufacturing the high-value products the minerals are used for.

A recent article by the state Xinhua news service said that the government plans to spend Chinese renminbi (Rmb) 10bn ($1.6bn) on stockpiling light rare earths (LREEs).

No official announcement has been made to confirm this, although the local government of Jiangxi province announced on 8 October that it plans to purchase and store strategic minerals - including rare earths - produced by state-owned enterprises.

Baotou rare earths exchange yet to begin trading

China launched a rare earths trading platform in Baotou, northern China, on 7 August led by Inner Mongolia Baotou Steel Rare Earth Hi-Tech in association with nine of China’s largest rare earths producers.

Despite three years of preparation, the platform was inaugurated without definitive trading rules and procedures in place, and it is expected to be some time before the exchange starts to operate.

The aim of the platform was to bring price stability and transparency to China’s rare earths market, according to Chinese officials.

At a conference accompanying the launch, industry commentators warned that the platform alone would not be enough to solve China’s rare earths problems and questioned whether the trading mechanism would succeed in regulating prices.

“Disordered and illegal mining must be controlled and regulated by the government if rare earths prices are to be fairly determined by the market,” Tong Maofu a representative of Dali Langda Fluorescent Materials Co., told the conference.

Other criticisms hinted at the potential monopolisation of the industry within China.

Wang Zhongshan, vice chairman of the Nanjing Rare Earth Application Research Association, was critical of the platform’s basis on private enterprises.

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

Ganzhou trading platform stalled

Despite being hailed at China’s first exchange for trading rare earths, the Baotou platform has been quietly preceded by a separate trading mechanism - the Jiangxi Ganzhou Rare Metals Exchange - established in Ganzhou, southern China, in November 2011.

The first deal was made via the Ganzhou platform on 31 December 2011 between Dayu County Jincheng Tungsten Industry Co. Ltd and Mazzoni Chapter Tungsten Co. Ltd for a rare earths contract worth Rmb 42m ($6.7m).

However, no trading activity has been subsequently executed via the Ganzhou exchange, according to the Chinese news service, Money163.com.

The exchange regulators are waiting for transaction fees to be determined before further trading can take place, the news service said, with one source reported as saying that the deal in December was “forced” by the Ganzhou local government, in order to make the platform technically operational.

A spokesman from Ganzhou Rare Earth Mining Co. Ltd suggested that the Baotou trading platform had been launched hastily and before final details had been set in order to seize the initiative while the Ganzhou exchange lay dormant.

Neither platform is currently operational and companies cannot join the exchange until trading commences.

However, some rare earths producers are still positive about the prospect of having a trading mechanism that will help unify the industry and contribute towards more stable pricing, despite the protracted teething problems.

“A formal trading mechanism will establish a reasonable pricing system for rare earths, and avoid the fluctuations of previous years,” Ling Dong Yu, secretary general of the Chinese Society of Rare Earths, told Money163.

“We are looking forward to the day when it is operational,” he added.

Chinese producers struggle

IM reported in August that Chinese rare earths producers were suffering from weakening demand and falling prices, both domestically and internationally.

The impact of the global economic slowdown on manufacturing, coupled with a concerted effort by some rare earths consumers to engineer out of their dependency on the minerals in favour of cheaper, more widely available materials, have taken their toll on the Chinese industry.

Baotou Steel Rare Earth, China’s largest rare earths company, saw its profits fall by 20% for the second quarter of 2012, while Xiamen Tungsten Company reported a decline of 29% y-o-y for the first six months of the year.

Guangdong Rising Nonferrous Metals Group said its profits had fallen by more than 90% during H1, and the situation is believed to be even worse for small producers, many of whom have been forced to close their production lines.

Both high and low-value rare earth products have suffered from falling demand. At the high end, the neodymium magnet (NdFeB) market, the largest domestic consumer of rare earths, saw many manufacturers and products drop out of circulation as a result of the price spike in 2011.

At the low end, the polishing powders market, a major consumer of cerium, has been faced with low prices, soft demand and excess production. Chinese sources reported that around 50% of production lines for rare earth polishing powders in Baotou have closed since 2011.

Tensions with Japan over island territories

China became embroiled in a historic dispute with Japan in August over seabed mineral rights annexed to a small group of islands in the East China Sea.

Located off the coast of Taiwan, the five islands -named Senkaku in Japan, Diaoyu in China and Tiaoyutai in Taiwan, each of which have claimed ownership of the territory - are uninhabited and cover a total land area of just 7km².

However, under the Law of the Sea Treaty’s Exclusive Economic Zone (EEZ) rules, possession of the islands gives the owner rights to 40,000km² of the East China Sea, including the seabed beneath, which is believed to contain extensive reserves of valuable minerals.

In 2010, the Japanese Coastguard arrested the crew of a Chinese trawler which was sailing in the islands’ territorial waters. This prompted China to retaliate by placing a temporary ban on rare earths exports to Japan.

Tensions flared up again in mid-August this year when Japan arrested 14 Chinese activists for planting a Chinese flag on the disputed islands. The Japanese government has subsequently announced plans to buy the islands, which had previously been held by private Japanese interests.

Neither country currently possesses the technology to extract rare earths from the seabed. However, in the same month as the East China Sea quarrel heated up again, both Japan’s JOGMEC - Japan Oil, Gas and Metals National Corporation - and China’s Ocean Mineral Resources Research and Development Association (COMRA) filed applications with the International Seabed Authority for licences to conduct seabed exploration for rare earths, among other minerals.

A major Japanese trading house confirmed at the end of September that imports have not yet been affected by the dispute, according to a report by Japan’s Asahi Shimbun.

Industry observers, including the Hong Kong Economic Journal, have speculated, however, that China could reinstate its ban on rare earths exports to Japan if the situation escalates.

In October, Senior Chinese officials pulled out of annual meetings International Monetary Fund (IMF) and World Bank in Tokyo, a decision which has been taken as a sign that tension over the issue is mounting.

Reducing reliance

While the East China Sea dispute has once again shifted attention to Japanese manufacturing’s reliance on Chinese rare earths, Japan is making concerted efforts to decrease its dependence on the minerals.

Toyota announced earlier this year that it had developed a method to manufacture hybrid and electric vehicles without using the minerals.

Meanwhile, a team of researchers from battery and electronics manufacturer Toda Kogyo Corp. has confirmed that it has succeeded in creating a rare earths-free magnetic material.

Japanese auto manufacturer Honda and electronics giant Panasonic also recently announced that they were developing rare earths-recycling processes for extracting minerals from nickel-metal hydride (NiMH) batteries and televisions.

Outside Japan, US-headquartered Ford Motor Company and computer giant Hewlett Packard are both working to cut the number of rare earths used in their products.

Domestic prices falling

Chinese domestic rare earths prices have been falling since July 2011, apart from some minor increases in September 2011 and between March and April this year, local producers have reported.

At the end of September, the Chinese online news service Business Sohu reported that the minerals were trading at a 12-month low.

IM sources confirmed that prices were continuing to fall, with dysprosium oxide and samarium oxide being among the heaviest fallers in September and October.

The price of dysprosium oxide has fallen 72% since last year’s peak, according to some market participants.

“The market is cold, demand from downstream is soft and trade is less,” one source said.

Another source said that domestic prices for samarium oxide were around $53/kg in October, some $17/kg lower than IM’s lowest range for the month.

Export prices are also widely reported to be falling, although precise data from Chinese exporters is not readily available. Tracking export prices for Chinese rare earths is complex because the export permit fee is different for each supplier, and export pricing information is closely guarded by the Chinese government.

Decline of dominance

Chinese government officials have conceded that China’s dominance as a producer of rare earths will be undermined as a result of changes in the global supply structure.

“There will be a big adjustment in the rare earths market price: changes in the supply pattern present a challenge for businesses and the cost of production will become a major competitive factor,” Zhang Zhong, Baotou Steel Rare Earth president, told China’s Economic Information Daily in August.

The impact of international rare earths developments would result in a “big reshuffle” of China’s domestic market, as falling demand and sliding prices would impact negatively on the profits of Chinese producers, he added.

Several rare earths projects outside China are reputed to have far richer resources than those found in Chinese mines, giving international producers the advantage of being able to work at higher cut-off grades.

Yet, despite China’s acceptance that it may lose its monopoly over rare earths production in the near future, China’s appetite for the minerals is only expected to increase, according to Liu Yinan of the China Chamber of Commerce of Metals.

Li Zhong, vice-president of Baotou Steel Rare Earth has predicted that domestic consumption of rare earths will grow at least 10% per year in the coming few years.

And with Beijing capping production, this growth can only be met by a further export cut or increased imports.