Rough year for global rare earths as illegal mining takes its toll

It might be an understatement to describe the past year as an extremely tough one for the rare earths industry. While these are difficult times for the entire metals and minerals complex, with prices largely dragged lower by the double whammy of global oversupply and the downturn in China’s economic growth, rare earths have been in the doldrums for much longer than the rest of the commodities sector.  

The after-effects of the hype and froth of 2010-2011, when prices for rare earths soared to unsustainable highs, are still being felt. Mid-decade, it still feels like one horrible hangover; prices are low and some of the much-vaunted new production outside China has already closed, while China is struggling to contain illegal mining.

As the industry prepares to gather in Singapore for Metal Events’ 11^th International Rare Earths Conference, surely the questions on everyone’s lips will be: What does the rare earths industry now have to do to turn its fortunes around? When will things improve? 

It’s difficult to call. "I don’t see the rare earths markets changing much over the coming six to nine months, but hopefully we will see some improvement by the end of 2016," said Dudley Kingsnorth, professor at Curtin Graduate School of Business in Australia and director at IMCOA. He sees illegal mining in China as the greatest challenge facing the industry. Changes in China’s taxes and quotas as well as substitution and efforts to increase efficiency of rare earths usage are also factors still impacting the industry’s prospects. The forthcoming conference will enable the participants, from explorers and producers to consumers and researchers to debate these issues. 

China in the spotlight

China remains the focus of attention, not only because its economy appears to be stuttering as it switches emphasis from establishing infrastructure to becoming a consumer society; but also because it remains dominant in the global rare earths sector. So dominant, in fact, that some of the rest of the world’s producers that were promoted as being vital to meet the forecast gap in rare earth oxide (REO) demand, have struggled throughout 2015. US-based Molycorp’s Mountain Pass rare earths facility will be placed on "care and maintenance" in October. However, Malaysia’s Lynas Corp. has survived by cutting costs, generating sales and restructuring its debt, which has allowed it some breathing space to achieve positive cash-flow status.

China’s continued dominance is coming at a hefty price to the whole rare earths industry. Kingsnorth estimates that REO demand in 2015 will be 140-150,000 tonnes, up slightly on 2014’s 130-140,000 tonnes. Of this, China supplies 85-95% and accounts for 60-70% of global demand. Professor Kingsnorth, in his address at the Singapore conference, will outline the reasons why China is unable to control the illegal mining, which has reached pandemic proportions.

"The Chinese rare earths magnet industry’s demand for neodymium and praseodymium is approximately half the amount generated from legal production quotas, which means that China is effectively condoning illegal mining and processing," Kingsnorth said, adding that an increase in production
quotas and other measures could solve the problem. "The current level of illegal production is unsustainable. Unless the
matter is adequately addressed by both China and the rest of the world in the foreseeable future it could threaten the viability of establishing a green global economy – rare earths are used extensively in wind turbines, hybrid vehicles and energy efficient household appliances."

Will the illegal mining and processing be curbed? Given the slowdown in China’s economy, it may be difficult for the government to clamp down at the moment. There are many magnet operations that are like "mom and pop shops", producing cheaply-made magnets from illegally sourced REOs that are used in end products, such as clasps for handbags and in speakers. Stopping the supply of cheap rare earths would likely risk the loss of thousands of jobs.

"China is progressively moving downstream in the rare earths supply chain to create jobs and a high-technology manufacturing industry and it has measures in place to encourage overseas manufacturers to re-locate their production to China, thereby increasing its dominance of high technology global manufacturing," Kingsnorth said.

The aim of the cancellation of export quotas and taxes, the imposition of "revised" resource taxes on rare earths, stricter enforcement of environmental legislation and the effective transfer of rare earth mining quotas to the "big six" government-owned rare earths entities appears to have been to facilitate the consolidation of the industry. However, it seems that the complicated logistics associated with enforcing these changes, coupled with unbridled illegal rare earth activities, are hampering this consolidation and hence the full control of the industry by the Chinese government.

The cancellation of export quotas and the resources tax were also expected by some quarters to create a more even playing field between the prices Chinese companies pay for rare earths and those paid by their overseas competitors. They were also seen as supporting higher prices within China, which has not been the case as illegal production continues unabated. According to the Chinese Rare Earth Industry Association, the legal rare earths industry made a collective loss in 2014. In order to recover and move back into profit, these companies will need to raise their prices — which is not happening at the moment due to the prevalence of illegal materials. 

So where does this leave the development of rare earths projects in the rest of the world? Kingsnorth thinks 2016 won’t be encouraging. "Given the difficulties faced by Lynas and Molycorp in developing projects based on well-known rare earth minerals and access to over 50 years’ production expertise, investors and consumers are reluctant to support new projects. Nevertheless, given the importance of rare earths to the global economy there is a need for two to four rest of the world rare earths projects to be developed over the next decade." 

*Rachel Carnac is the joint managing director of Metal Events Ltd.