Hongpo* writes: The Jiangxi Daily, a local newspaper, reports that the Jiangxi government has made a decision to stockpile copper, tungsten, heavy rare earth production. Further, the local government hopes that stockpiling could stabilize rare earth metals prices also to help their enterprises to get out of the difficult situation, but no further details of the stockpile plan have been disclosed in this report. I do believe that their stockpiling will focus on the tungsten as well as heavy rare earth production.
We all know that the price of rare earth elements (REEs) has fallen drastically in the past year. According to data from the Shanghai Metals Market (October 12, 2012):
- The price of neodymium oxide (Nd2O3/TREO 99.0-99.9%) produced in China had dropped more than 65% in price in the past 12 months to between 377,000-387,000 Yuan per metric tonne.
- The price of Lanthanum oxide (La2O3/TREO 99.5-99.9%) fell more than 56% to 58,500-60,500 Yuan per metric tonne.
- The price of dysprosium oxide (Dy2O3/TREO 99.5-99.9%), a crucial element in engine motors, fell more than 69% to 3,000-3,100 Yuan per kilogram.
According to data released by various Chinese rare earth enterprises in China, the price of rare earths has fallen so drastically that it has also to led to a decline in earnings for rare earth producers. Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co. Ltd. (SSE: 600111), the largest REE producer in northern China, announced that its net profit fell by over 20% in the first half of 2012 from a year ago. The company’s net profit was 1.57 billion Yuan for the first six months of 2012 compared to 1.97 billion Yuan in the same period in 2011.
In the southern provinces of China, large heavy rare earths producers are also reporting that their earnings in the first six months of 2012 have also fallen, such as:
- In Ganzhou, Jiangxi province, China Minmetals (Ganzhou) Rare Earth’s, net profit was 368 million Yuan for the first six months in 2012, less than half of the total net profit in 2011 of 885 million Yuan.
- Ganzhou Chengguang Rare Earth’s net profit fell to 148 million Yuan for the first six months of 2012, compared to a total net profit 314 million Yuan in 2011. You will again note that the six month 2012 figure is also less than half of the total 2011 figure.
- In Guangdong province, China Nonferrous Metal Industry’s Foreign Engineering and Construction Co. (NFC Rare Earth) reported a net profit of 83.42 million Yuan for the first six months of 2012 compared to a total net profit 166 million Yuan in 2011. In this case the 2012 figure is slightly over half of the total 2011 value.
- Rising Nonferrous Metals Share Co. reported a net profit of 9.41 million Yuan for the first six months in 2012, compared to a total net profit of 173 million Yuan in 2011. In this case the 2012 value is much less than half of the 2011 figure.
Industry insiders from Ganzhou have said that China’s rare earth stockpiles will focus on dysprosium, terbium oxide and the raw materials that are rich in dysprosium, terbium elements.
In my view, these companies’ decline in net profit for the first six months in 2012 is alarming from an investor aspect. The reasons attributed to these falling prices is a global slowdown in demand; the low demand for neodymium magnets; the overcapacity in the rare earths industry; and especially the rampant illegal mining and smuggling of the ores that has caused many companies to decrease production or halt production altogether. If the price of rare earths keeps on felling and with a difficult situation of the majority money-losing companies, the government will use their local finance capital and swiftly move to launch their stockpile mechanism because only a sizable stockpile of rare earths can bring about a striking effect on the REE markets.
Jiangxi is one of the most important mineral sites for rare earth resources in China. The ion adsorption type deposit is the most typical rare earth deposit in the area. Heavy rare earth mining has existed for over more than 40 years. Over the past four decades, 70% of China’s heavy rare earths have been produced in the Ganzhou region.
On October 12, 2012, China’s Ministry of Industry and Information Technology (MIIT) gave an urgent announcement asking to crack down on all violations of laws and regulations immediately. The MIIT commented: “Illegal rare earth enterprises should be ordered to immediately stop production. All the illegal production equipment should be removed and the illegal rare earth miners, producers and traders must be severely punished by law.” The urgent announcement further added that the eradication of illegal rare earth enterprises must be completed by November 15, 2012. I think that the Chinese government’s active efforts curb illegal rare earth supply chains would also be helpful in controlling rare earth price fluctuations.
*Disclaimer: While we have a full name for Hongpo, we have never met him in person. We made some minor grammatical changes to the text he submitted and edited some of the content on a best-case effort towards capturing the editor’s intent.