China's Rare Earth Industry Reforms: Higher Prices Coming
It would seem China is finally getting its house in order regarding rare earth resources, even if it has taken a WTO ruling to help the process along. Contrary to recent press reports, it is fair to say China saw the writing on the wall a year or more back and has been busy trying to take control of the sector.
As a Chinese publication, the Beijing Review, put it just last week the government has carried out major crackdowns on illegal mining, black market dealing and smuggling activities in the rare earth industry in a move to further the industry’s healthy development for the last year. In Ganzhou, east China’s Jiangxi province—an area rich in light rare earth resources, the journal reports more than 40 officials were probed for their involvement in illegal rare earth mining and processing last year.
Rare-Earths ConsumptionRare-Earths Consumption
The industry is notoriously fragmented and riven by illegal mining operations that bear scant regard for environmental considerations and have not only heavily depressed prices by over producing but caused widespread environmental damage in the process. Even among licensed operations, standards are almost nonexistent. In a three-month campaign held from August 2013, 126 rare earth production firms were ordered to suspend operations and another 161 had their production licenses revoked. Inspectors also seized 19,000 tons of illegally mined rare earth materials during the campaign.
Rare earth export volume has been rising but prices have been falling, according to China Customs statistics. In 2013, China’s rare earth export volume rose by 38.3% year-on-year, but its exports value fell by 37% compared with that in 2012 the Beijing Review tells us. Currently, the average price of rare earths has fallen back to the level of 2010, according to Chen Zhanheng, Deputy Secretary General of the Association of China Rare Earth Industry quoted in the article.
In 2010, Beijing applied restrictive measures to the sector, including export quotas and export tariffs of between 15 and 20 percent, a move that triggered a response from the European Union, the US and Japan. In March 2012, the trio lodged a joint complaint to the WTO, accusing China of breaking WTO rules on rare earth exports. Following a report in March and a subsequent appeal, China has now been told it has to find alternative ways to control its errant rare earths market.
As a result, Beijing will accelerate moves started last year to consolidate production into the hands of just six major corporations and set quotas so that the market does not become oversupplied. Illegal activities and corruption have created an industry with massive overcapacity and no incentive to invest in improved refining technology, value-added products or good environmental practices. According to the Wall Street Daily, the Chinese government data shows that utilization rates in the smelting and separation segment stood between 25% and 35% in the first half of this year. Production or output controls should help regulate supply and support prices. In addition, the Chinese government is purchasing, at well above the current market price, over 10,000 metric tons of rare earths to add to the country’s strategic stockpile, to further support prices.
Eventually, six rare earth companies including Baogang Group, China Minmetals, Chinalco via it’s subsidiary Rare Earth Co Ltd, Guangdong Rare Earth Corp., Ganzhou Rare Earth Group and Xiamen Tungsten have been nominated to emerge as the six rare earth champions. Via resource taxes and an environmental tax, Beijing hopes to encourage more responsible exploitation and prioritization of which resources are exploited when and at what rate. For consumers it will likely mean higher export volumes being allowed, but probably no more material, Beijing will seek to control production and particularly exports by other means. It is their intention and, therefore, a probability that prices will rise, if not this year then next as the changes begin to take effect.
by Stuart Burns
