China Shakes Up Rare Earth Industry

By Michael Montgomery—Exclusive to Rare Earth Investing News

It is no secret that China dominates the production of rare earth elements. Over 95 percent of world production comes from China, and over the last few years the nation has tightened its control over the production and export of the 17 elements. Further controls over the industry have come out of the last few weeks. Included in these developments is a major shake up, the establishment of a rare earth exchange in Baotou, Inner Mongolia.

In April, China did increase this year’s production quota of rare earths by 5 percent over 2010. However, the government further clamped down on illegal mining operations that, through the black market, have added significant tonnage to supply. The crackdowns on illegal mining have further exacerbated supply issues, as an estimated 30-40 thousand tonnes of rare earths are smuggled out of the country every year. Chinese officials also suspended new mining licenses until June, 2012, which will not help alleviate supply tightness.

Along with the production quota for 2011, a new tax was imposed on rare earth elements. The tax is small, $9.22 per tonne of light rare earths, differentiated between light and heavy rare earths for the first time. Some analysts have noted that this may also change future export quotas to reflect the different levels of demand for the various elements. Currently only the production quotas for rare earths differentiate between the two common subcategories for the elements.

The most major new development is the creation of the Baotou Rare-Earth Products Exchange. The exchange will be the first and only rare earth product exchange in the world. The exchange will not trade futures, but  rather spot products.

“Wang Caifeng, a former official at the Ministry of Industry and Information Technology (MIIT) who is setting up the country’s Rare Earth Association, said the exchange will help increase the transparency and regularization of the rare-earth trading market,” according to the China Daily.

The exchange will act much like the China Iron and Steel Association which assists companies with exports as well as leading price negotiations with foreign buyers. The exchange will also allow for Chinese producers to have more leverage over the market, following the trend to consolidate the rare earth industry.

It has long been suspected that the Chinese government has wanted to consolidate the rare earth industry, allowing the largest companies to take over smaller producers. Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co Ltd. (SHA:600111), the largest rare earth producer in the world and the main power behind the new exchange, may benefit dramatically from a consolidated market, and has been charged by the Chinese government to build a strategic reserve of rare earths.

On May 19, the State Council stated publicly for the first time that it plans to consolidate the rare earth industry allowing the biggest players to control the industry in the next two years.  The Chinese government wants to eliminate small scale rare earth producers citing environmental concerns.

“The State Council said the country aims to concentrate 80% of southern China’s heavy rare earth mining assets in the hands of the three biggest companies in the next one to two years,” reported the Chinese newspaper, Business China. One of the companies that will most likely take over production in the south is China Minmetals Corp.

The benefits to the producers of rare earth elements from all of the Chinese trade policies are clear, exploding prices helping the balance sheet. In April exports were slashed in half year-over-year, yet the value of the exports raised tenfold averaging $121,933 per tonne. It is unlikely seeing the consolidation and reduction of exports over the last year that China will relinquish their power over this market in the near term.