By David Green
Policymakers and officials across Chinas industrial
minerals complex face an uneasy Chinese New Year break as they
assess how best to balance new policy imperatives from Beijing
with their own often competing interests.
Chinas industrial minerals industry
could face an uneasy Chinese New Year break.
The historic third plenary meeting of
Chinas top leaders in Beijing last November concluded
with a resolution pledging to allow the market to
play a more decisive role in the allocation of
The policy statement committed the government to solving
overcapacity issues, both through promoting innovation and
relaxing investment access rules for foreign and domestic
private capital, fostering greater competition.
However, experts warn that in regards to Chinas key
rare earths sector, these reforms will take time to filter
through to Chinese miners, processors and traders.
Minerals are considered a natural monopoly industry in
China, so we can reasonably expect that the government will
retain a certain degree of interest in those industries,
said Simona Gambarini, associate director of research at ETF
So far, the government has pledged to separate the
governments regulatory functions from business management
and operations to be conducted by the state in the mineral
industry. Moreover, a franchise system is planned so that the
natural monopoly sectors will be operated by franchisees
independent of government agencies, but in compliance with
relevant state regulations, she added.
Exactly how this franchise system will operate in practice
has yet to be fleshed out, and for the time being, it is
business as usual in the rare earths sector, save one notable
In mid-December, Chinas ministry of commerce announced
the first round of rare earth export quotas for 2014, in direct
contravention of the World Trade Organisations (WTO)
ruling against Beijings quota policy in late October last
However, there was a nod towards implementing one of the
plenums overarching policy goals to reduce environmental
degradation, in that Inner Mongolia Baotou HEFA Rare Earth Co.
was omitted from the list because of environmental
The market will play a decisive role, but only in so
far as the central government is comfortable with the impact on
a range of contentious issues: the shift from exports to
domestic consumption, reform of the financial sector,
environmental remediation, and other[s], said Jeff Green,
president of JA Green and Company, a governmental strategic
The rare earths sector touches several of these at
once overcapacity, environmental hazards, and a
generally decentralised industry with some very powerful state
owned enterprise reforms are taking place, like the
crackdowns on environmental violations and closing some illegal
mines. However, these changes surely are neither at the pace
nor at the magnitude at which the decisive role in
allocation of resources mantra would seem to
suggest, he told IM.
Earlier this month, the government unveiled a plan to offer
support to six rare earths industry leaders, including Inner
Mongolia Baotou Steel Rare Earth Hi-Tech Co.; China Minmetals;
aluminium producer Chinalco; Ganzhou Rare Earths Co.; Xiamen
Tungsten Co.; and Guangdong Rising Nonferrous Metals Co., to
spearhead industry consolidation in their regional power
Rare earths is a special market in which the Chinese
government will continue the tight grip over the sector by
accelerating domestic consolidation, said Beijing-based
North Square Blue Oak analyst, Frank Tang.
Generally speaking, the mining and separation
businesses will still be controlled by the government through
state-owned enterprises, while downstream applications court
more foreign participation due to their technical
limitations, he added.
China may be willing to accept much more participation
of private capital (foreign and domestic) in research and
development joint ventures or joint ventures with existing
producers for the purposes of expanding and sharing
environmental best practices and more efficient utilisation of
rare earth resources, added Jeff Green. The latter
is particularly important because many Chinese magnet
manufacturers, for example, are much less efficient than their
Japanese and European counterparts.
That inefficiency has not prevented capacity far
outstripping utilisation rates. The Association of China Rare
Earth Industrys secretary general Ma Rongzhang recently
told Chinese media that the combined capacity of Chinas
more than 110 rare earth melting and separating firms is more
than double the average global demand for about 120,000
Indeed, Tang expected central and local government to issue
new capacity targets for specific minerals in the coming
months, following up broader guidelines issued in October on
curbing overcapacity in production.
As for compliance with the WTO rare earths ruling, Green
suggests China might replace export quotas with other controls,
including crackdowns on illegally produced rare earths, sold to
international markets despite the quota system.
This interplay of interests, and whether Xi
Jinpings administration can do a better job of pushing
through central government policy in the provinces than its
predecessors, will be the key factor in determining the success
or failure of the plenary policies, as well as Xis wider
reformist economic goals, said Green.
One market-based mechanism that might be applied to
industrial minerals is being trialled in the aluminum industry;
tiered electricity pricing linked to production efficiency.
This should help reducing the glut in the market that
has plagued prices so far, said ETFs Gambarini,
adding that the real challenge will be bringing local
governments in line with Beijings policy if broadened to
other sectors. Of course, those producers reliant on the state
grid would be hardest hit.
Analysts offer mixed views on what the plenary policies mean
for domestic industrial minerals demand, though most agree that
it is Chinas future urbanisation rate that will prove the
While Gambarini points out that plenums $6.4 trillion
programme to bring 400m people into cities over the coming 10
years will probably spur demand for industrial metals and raw
materials, with an important caveat; Recent government
moves call for slowdown of urbanisation aimed at ensuring
adequate provision of public services for new migrants,
Such slower, more sustainable growth, stoking consumption
while winding down investment, is a primary theme of the