Rare Earth “Mega-company” Taking Shape

In a move that reflects China’s intent to retain its dominance over the rare earth element (REE) market, the country’s largest producer confirmed that it is taking steps to gain control of 12 other firms. If successful, it will effectively form the world’s first REE “mega-company.”

Inner Mongolia Baotou Steel Rare-Earth (SSE:600111) recently signed an integration agreement with 12 other rare earth producers in the Inner Mongolia autonomous region, China Daily reported. The move marks the boldest step yet in the establishment of the Northern Rare Earth Group and highlights the company’s intent to concentrate the light REE industry primarily in Northern China.

The agreement, which will be valid for a one-year period, state that the 12 parties will each transfer a 51-percent stake to Baotou Steel Rare-Earth at no cost, according to China Daily.

Although its reserves account for only 35 percent of the world’s total, China remains the world’s largest REE exporter, producing more than 90 percent of global output.

Timing questionable

News of the integration dates as far back as May 2011, when China’s regional government issued an integration plan for upstream REE enterprises in the area.

At the time, the Chinese government professed its intention to consolidate the industry over a period of two years, allowing the largest companies to take over smaller producers. Inner Mongolia Baotou Steel Rare-Earth was touted as the most likely candidate to benefit from a consolidated market. China justified the move by citing the need to eliminate small-scale rare earth producers due to environmental concerns.

The State Council confirmed its aim to concentrate 80 percent of Southern China’s heavy rare earth mining assets in three of the country’s largest companies, local media reports noted at the time.

The announcement had an immediate effect on the market, with the cost of most REEs defying analysts’ predictions with steep price increases; dysprosium, for example, doubled in value. However, this rally proved to be short-lived, and prices plummeted back down in 2012.

Though the plan has been in the making for years, the timing of Baotou Steel Rare-Earth’s most recent move was a curveball as it came straight after the company’s announcement that it will continue production halts at its factories for a third consecutive month in an effort to stabilize slumping market prices.

Plan outline

Details of the latest plan suggest there are 35 rare earth miners and processors involved in the framework. Baotou Steel Rare-Earth will be in charge of mining, selection of mine locations, processing, management and separation, according to China Daily. In April last year, the organization offered subsidies to 22 upper-stream rare earth companies that had closed as a result of struggling market conditions. It also opened up an integration process to another 13 enterprises.

The China Daily article states that the final list of companies to be integrated includes Baotou Jinmeng Rare Earth, Baotou Xinyuan Rare Earth Hi-tech and New Material and Baotou Xinye New Material.

When the integration is complete, Baotou Steel will be responsible for marketing and sales strategy, as well as the industry and product layout of all parties concerned. For now, it will support the 12 parties in areas relating to production and export quotas.

Only the beginning

Investors will be watching the effects of this scheme with much interest, especially considering comments made last year by Baotou Steel’s general manager, Zhang Zhong.

Zhong said that if this initial stage is successful, Baotou Steel will also expand and will eventually team up with major rare earth producers in the provinces of Gansu, Sichuan and Shandong, according to China Daily.

A global concern

While some feel that a potential eastern conglomerate is none of their concern, others are of the impression that the project has the potential for cross-border consequences.

That idea was underlined when in a China Daily report, Li Yizhong, a former minister of industry and information technology and current member of the Chinese People’s Political Consultative Conference National Committee, stated that it is plausible that the large groups created through the restructuring may consider transnational operations.

An operation of this size and nature could have a telling effect on a market looking to bounce back from a challenging 12 months. With a number of other international operations — such as Molycorp (NYSE:MCP) and Australia’s Lynas Corporation (ASX:LYC) — gaining momentum, investors are bound to be weary of the challenges presented by a mega-company of this scale.

 

Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.

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