China’s rare earths policies struggle to stem supply

By Albert Li
Published: Thursday, 27 October 2016

The cancellation of export quotas and taxes on Chinese rare earths export last year spurred the introduction of a raft of new measures designed to control output and boost value. Albert Li, IM Analyst, discusses the progress of these plans.

The Chinese government is continuing to pursue a range of policies aimed at overhauling its rare earths industry and, officially at least, some of these measures are beginning to show results.

Consolidation of the country’s six biggest rare earths producers – China Northern Rare Earth Hi-Tech Group; China South Rare Earth Group; Guangdong Rare Earth Group; China Rare Earth Group; China Minmetals Rare Earth Group; and Xiamen Tungsten – is now all but complete.

The government wants Chinese rare earths output to be controlled by the "big six" and has used its production quota system to allocate almost all this year’s 105,000 tonne output allocation to these companies. The 2016 production cap is set at the same level as it was in 2015, indicating that the Chinese government at least wants to level off volumes, even if it has refrained from cutting them.

In addition, this year China’s Ministry of Industry and Information Technology (MIIT) announced new regulations for the rare earths industry and published management recommendations to ensure that these rules are followed. The regulations cover production techniques, equipment, energy consumption and resource utilisation.

The fight against illegal mining in China has also continued, with the government announcing several prosecutions of individuals engaged in unauthorised activities this year in Hainan, Fujian and Guangxi provinces. 

As well as production, China’s supply reform policy for rare earths also covers storage of the minerals. In May, the government launched a tender where rare earths-consuming companies can bid for rare earths to store as inventory. This caused a short term bounce of 5-10% in the price of some rare earths, although the market fervour around stockpiling has since died down, despite the incessant circulation of rumours that the Chinese government plans to create a large national rare earths repository. 

New environmental policies have put pressure on China’s rare earths producers to adhere to strict rules on pollution. This year, inspectors from the Ministry of Environmental Protection visited every province in China to assess the impact of local rare earths industries on the environment. The inspections, which began in the spring and lasted until the end of August, forced many rare earths separation and smelting companies to pause operations while they were being inspected, leading to a temporary decline in supply. 

The progress of efforts to establish rare earths technology hubs in China has been harder to track. In 2015, Baotou in Inner Mongolia was named as a pilot city for a rare earths industry upgrade under a two-year plan running from 2015 to 2017. Under the scheme, low-value rare earths processing would be phased out or transitioned to production of high-tech advanced materials and there would be a state sponsored research programme into new applications. Baotou received Chinese renminbi (Rmb) 300m ($44.6m*) from central government and Rmb 200m ($29.7m) from local government to support a total of 36 upgrade projects. 

Going by the numbers, the Baotou scheme has so far been a success. In 2015, the city’s permanent magnet output increased by 15.3% year-on-year (y-o-y) to 11,966 tonnes; polishing powder production was up 45.7% to 8,045 tonnes; rare earth hydrogen storage material volumes rose 23% to 2,286 tonnes; and rare earth catalyst output increased by 22.8% to 7,979 tonnes. 

In addition, a total of 53 patents were registered by Baotou companies for rare earths technologies last year, 121% more than in 2014. And even though rare earth prices dropped by 20% on average in 2015, the value of rare earths produced in Baotou rose by 12% to Rmb 14.4bn ($2.1bn), according to government figures.

China accounts for the vast majority – around 92% - of rare earths
consumed globally and the majority of these rare earths will come
from mines such as this one, in Inner Mongolia, Baotou. 

Companies’ performance

According to the China Association of Nonferrous Industry, revenues from Chinese rare earth materials totalled Rmb 33bn ($4.9bn) in January-May this year, the most recent period for which confirmed figures are available, marking a rise of 4.3% y-o-y. Profits however were down by 4.7% at Rmb 1.54bn ($228.8m).

The rise in sales revenues is attributed principally to the cancellation of export quotas and taxes on rare earths, while the drop in profits is put down to lower rare earths prices and higher labour and environmental costs. 

The brunt of the weaker prices and steeper costs was mainly borne by the big six rare earths companies. China Northern Rare Earth Hi-tech Group, the largest rare earths company in China, recorded a 41% y-o-y decline in revenues from rare earths raw materials in the first half of 2016. Sales of domestic product fell by 33% and international revenues dropped by 28% year-on-year. This led China Northern’s profits to collapse by 88% to Rmb 31.25m ($4.6m). 

The company blamed oversupply for its financials and warned that the performance of Chinese rare earth companies will not improve until this situation is rectified. 

China Minmetals Rare Earth Co. was even threatened with delisting from the Shenzen Stock Exchange earlier this year for posting two consecutive years of losses. 

Xiamen Tungsten reported a 21% y-o-y decline in first half profits to Rmb 3.5bn ($520.1m) but profits doubled to Rmb 68.4m ($10.2m) mainly because of higher prices and sales in its lithium-ion battery materials business. 

Companies with access to capital or government funding hope to halt the downward trend by investing in further manufacturing upgrades, enabling them to sell higher value processed rare earth materials. China Northern has announced plans to invest Rmb 200m ($29.7m) in developing its medical product materials production as well as a new rare earth catalyst project. 

Permanent magnets, such as those used in windturbines, or boron
magnets used in electric vehicle engines are markets for growth in
China. This image depicts just some of the hundreds of windturbines
that form China’s largest wind-power facility, the Dabancheng Wind
Power Station, located in  the valley lying between the Tianshan and
Kunlun Mountains. The power generated actually exceeds transmission
capacity.   Dan Lundberg, via Flickr 

The rare earths market

In the first half of 2016, there was no obvious overall shift in Chinese rare earths supply and demand compared to the year before. But rare earths prices did fluctuate during this period, due more to policy intervention than market fundamentals. 
Domestic rare earths prices declined steadily from January until mid-April, when the government announced its new storage policy, sending prices up slightly. However the rebound had retreated by mid-May and prices have been flat to weak ever since, with the exception of some short-lived upticks around Chinese national holidays.

The China Association of Nonferrous Industry puts the average price of neodymium oxide at Rmb 257,000/tonne ($38,192/tonne) in the first half of 2016, 12% lower than in the same period last year. The price of dysprosium oxide was Rmb 1.27m/tonne ($188,733/tonne), down 24% y-o-y and terbium oxide prices averaged Rmb 2.52m/tonne ($374,493/tonne), 32% less than it was a year ago.

Prices for lanthanum oxide, cerium oxide, europium oxide and yttrium oxide fell by 15%-70% y-o-y in the first six months of this year. Because their prices were already low, lanthanum and cerium saw relatively shallow declines. Europium, a heavy rare earth which had until recently been one of the more valuable elements, saw the steepest fall in price, declining by 70% as demand for fluorescent powders – its main market – have plummeted. 

Optimistic analysts suggest rare earths demand in some industries will increase in the future. The most promising markets are magnets, including rare earth permanent magnets in wind turbines and boron permanent magnets in electric vehicle motors. Other areas where demand could expand, or at least remain stable, are catalysts and polishing powders. 

The cancellation of export quotas and taxes on Chinese rare earths has unquestionably boosted volumes. First half 2016 rare earths exports from China were equal to 70% of the total 2015 export volume, but the weight of oversupply pulled prices down by 23%.

Chinese exports of rare earth permanent magnet materials from January to August increased by 14% y-o-y to 17,542 tonnes, but, even for these higher value processed materials, average export prices were 16% lower than they had been the year before at $49,321/tonne.

China’s government is currently considering other ways of restricting supply, on top of production quotas, but the perennial problem of illegal production is undermining these policies.

*Conversions made October 2016