By Michael Montgomery—Exclusive to Rare Earth Investing News

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The Chinese Ministry of Commerce announced its rare earth export quota for the first half of 2012 on Tuesday. The quota, which is the first increased in six years, is set at 10,546 tonnes. The Ministry also announced its decision to classify the rare earth minerals into two categories: heavy and light rare earths. The change, which has been much anticipated by analysts, may prove to be a positive step for end users as the two groups have vastly different demand levels. 

The Ministry of Commerce stated that the export quota for 2012 would remain flat, in order to boost demand while keeping supplies stable. While the total export quota numbers seem to have been cut, the numbers are slightly misleading.

“[T]he first tranche of rare earths export quotas for next year had been set at 10,546 tonnes, but that figure only included those enterprises that had passed a series of stringent environmental inspections,” reported Aizhu Chen, for Reuters.

In addition, the Ministry is holding 14,358 tonnes in reserve for the rare earth producers still going through inspections. Currently 11 companies in China have passed inspections with another 21 companies scheduled to complete the process by July 2012. If a company fails to pass the inspection, their quota would not be eliminated, just re-allocated to another firm.

The additional tonnage would bring the first half quota up to a total of 24,904 tonnes.

The increased tonnage will more than likely bring prices down even further which may boost demand. Demand levels are a serious concern for Chinese producers because only 49 percent of the quota was used in 2011, severely hurting producers’ bottom line.

Though the full-year quota is still unknown, the Ministry stated that the batch of quota’s accounts for 80 percent of the full-year’s total. If the statement is true, the full-year quota would come to a total of 31,130, an increase of roughly 3 percent.

Heavy and light rare earth classifications

A major change in China’s 2012 quota is the division of the rare earth metals into two groups: light and heavy rare earths. The quota allocates 21,700 tonnes of light rare earth, and 3,204 tonnes of heavy rare earth for export in the coming year. The new classification may be an important, stabilizing factor for the market.

Demand for light rare earths such as neodymium has consumed the bulk of the quota in previous years as many of the heavy rare earths were in short supply. The change may stabilize and increase the supply of heavy rare earths. For end-users the stability and known quantity of heavy rare earth available allows for their business to plan for the future. A feature missing from the rare earth market during the supply squeeze over the past few years.

The change in the quota is also an effort to discourage producers from exporting the elements with the highest price alone in order to increase profits.

“That strategy had led to the price of cheaper rare earths, such as cerium and lanthanum, rising much faster than other rare earths early in the year, because of restricted supply from China,” reported Ajay Makan, for the Financial Times.

While cerium and lanthanum have risen dramatically, they were not trading on fundamentals. When the demand fell, these elements’ prices fell dramatically due to the glut of supply. The Ministry is hoping these new regulations minimize this volatility.

Mining share prices fall 

The announcement from Beijing has affected the share prices of many rare earth mining companies, as lower prices for rare earths are expected in the first half of 2012.

On the day, shares of Molycorp (NYSE:MCP) were down 14.14 percent to $24.04. While Rare Element Resources (NYSEAMEX:RES) lost 11.57 percent down to $3.21 per share.

Australian rare earth miner Lynas Corp. (ASX:LYC) fared better in today’s trading, losing only 3.43 percent down to $1.10 per share.

I, Michael Montgomery, hold no positions in any company mentioned in this article.

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