China to Stockpile Heavy Rare Earths Again

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:

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  • 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.


  1. Hongpo,

    Have rare earth price drops within China been sustained over a long enough period of time to have directly affected the recent earnings of the company’s you name? If so then those companies either have a very large profit margin or make their money from other things. How else to explain that they are still in profit at all even after such large drops in selling prices. I was told that Ziangxi stated that “after the reorganization of the REE industry in their sector is completed” their, Ziangxi’s cost of processing per kilogram will be around 25. If this is true then Ziangxi has a very long way to go before it can lose money on REE prices. In fact even if their cost is USD$25/kg rather than 25 reniminbi/kg they would still make money on neodymium and on the heavier rare earths.

    No matter which currency the 25 stated above turns out to be the costs of producing rare earths in China will be less than producing them outside of China. I have a difficult time understanding why American investors simply accept bald statements from REE juniors about low cost production when we are given no data to back them up. I think if we had a normalized set of costs of goods sold and we knew exactly which of the underlying costs were distributed we would then we could rank the REE producers and juniors honestly and brutally as to their probability of success in the real world where the lowest cost, lowest priced producer of a commodity is the survivor. The Chinese domestic market is currently undergoing such a “shakeout” and contrary to some of the commentary this will result in lower cost more competitive producers.

    I suspect that after the Chinese shakeout now underway that Chinese politicians will lift the protective veil of quotas and allow the large profitable survivors to export just enough to keep them profitable in the case of the light rare earths. I also suspect that Chinese demand and the limitations of its domestic supply will require the production of heavy rare earths outside of China. The winners will be the lowest cost, lowest selling price, producers of the products that the markets demand. There is room in the non Chinese market for one major LREE supplier to the Japan, one to the USA, and one to Europe. The is concomitantly room for several HREE suppliers to China, and to each of the minor markets (relative to China) just named.

    I don’t know if Molycorp will survive it’s increasingly complex and changing business model, and I don’t know if Lynas will overcome the political problem I has in Malaysia. I think it is foolish for investors to overlook Rare Element Resources and even Frontier as LREE players. Each Has an advantage of lower break even than the other large potential LREE suppliers. For HREEs I am betting on Ucore in the USA, Tasman in Europe, and I am watching Tantalus, in Madagascar, and the two Australians, Hastings and Northern Minerals. But even when I add to this group those producing HREEs as byproducts, such as Alkane, Orbite Aluminae, and AMR (private) I do not get enough production of the HREEs to allow even a doubling of the world’s production by 2020.

    I must therefore predict a decoupling of LREE and HREE prices.

    Investors need to do the math.

    • Hey Jack – Just got out of a meeting where you name was dropped (smile)….positively of course. Just received an email from internal asking if we need to provide all of the answers to the above “grocery list” and here’s what I suggest…we will take your letter and reply with several upcoming blogs. But we would all like to thank you for your commentary and when will we see you write again? Call me….

    • Jack,

      Re Chinese COP, extract from analysts report following LAMP site visit Nov 11:

      “Chinese marginal costs of ~$20-25/kg…and increasing
      The LAMP includes state-of-the-art gas scrubbing and water treatment processes which currently do not feature on Chinese plants. LYC believe marginal costs in China are heading towards ~$20-25/kg as environmental costs are increasingly priced into operating costs. The risk, of course, is that should these initiatives push the industry into an uncompetitive position relative to the global peer group, they will be reversed/ignored. However, LYC believe there are two key drivers which mitigate against that dynamic emerging:
      1. The Chinese government appears genuinely committed to environmentally-sustainable growth.
      2. Customers are increasingly demanding a clean supply chain. That theme was reflected in our conversations with suppliers, with CSR coming very high on most people’s list of priorities, particularly those focussed on “green” products.”

      Given LYC’s Rhodia connection I think it’s a fair assumption they’d be as right as anyone else. With LAMP COP estimated at circa $15kg Lynas would enjoy a significant advantage. Of course a license to operate and successful commissioning are a couple of little things they need to tidy up first!

      Moly’s next Quarterly Report will be very interesting from the COP POV. Last Q they finally admitted that COP was over $10kg so it will be interesting to see if the commissioning of their CoGen plant has had an impact. Could be a significant pointer to their survival chances IMO.

      China’s clumsy quota/tariff system has totally distorted the RE market and it will be more than interesting to see if the trading platform/stockpile can introduce some ST stability.

  2. Nice reply jack,was interested to read your take on the rare earths market at the moment.Been following a couple of rare earth stocks here in Australia,and Arafura Resourses(ARU)today recieved $10mill investment from the chinese govt owned ece.I think this is significant that the chinese are willing to invest in HREE projects outside of china,and suggests that they are expecting shortages of HREEs in the future.Anyway,all the best with your investments,hope this info is helpful.

  3. Jack, I am not sure why you failed to mention Great Western in your above comment. I know that in its current form it will not produce enough to solve the worlds HREE problem. However, the HREEs it will produce have customers that will pay for the product. Those customers then do not have to buy their HREEs from another source thereby denting the the demand. Also, they have expanded SKK exploration and also have gotten access to an additional 500+ hectares of surrounding land to explore. So the size of SKK could turn out to surprise some. Nonetheless, Great Western should be considered a “player” in the HREE space.

    • Jake,

      Great Western is funded and technologically equipped through to production. It’s HREE production from Steenkampskraal is fully committed to LCM for existing customers. It is the only genuinely vertically integrated mine to magnetics producer with experience in the commercial production of both Sm-Co and Nd-Fe-B magnet alloy powders for sintered REPM production. It has no where to go but up. I have said this so many times that I thought it unnecessary to keep saying it.

      • Jack,
        Apparently Great Western is still a mystery to some. Hopefully not much longer though. Thank you for your reply as always. Hope you have a great weekend!
        Jake

  4. Tony & Jake …. you have to be kidding in suggesting either Arafura or Great Western are HREE plays – have a look at the composition of the ore and you will see both are predominantly LREE players

    Jack Lifton, an excellent reply, thankyou – given you do not see enough production of the HREEs to allow even a doubling of the world’s HREE production by 2020 – then I take it you see China as a net importer of HREE sometime in the near future?.

    In relation to Northern Minerals, should they prove up a JORC compliant resource of sufficient size to support a reasonable term mine life – would you then assess them as a likley HREE producer especially given their very low capex and low operating cost estimates?

  5. Nico story Jack.
    How about this Tantalus Stock. Heard the had a new CEO, Hannam, but could not find anything on their site. Anymore insights into this?

    • Geert,

      Tantalus’ new CEO is Juergen Schillinger, a Munich based financier. Ian Hammen is a new member of the supervisory board. He is a former head of mining finance for J P Morgan in the UK, and a very well known person in the UK mining finance world. I am also a member of the supervisory board, and I just attended Tantalus’ AGM last week in Munich. The new Chairman of the supervisory board is Prof. Dr Ernst A. Burger, who was a professor of economics specializing in natural resources in Zurich.Additionally joint the supervisory board is Mr Thomas Hoyer, the CEO of the very successful RUUKKI Group, a major high grade Ferrochrome producer in Germany with operations in Finland and South Africa. I feel that I am in very distinguished company and I can tell you that
      any league that has players like these gentlemen is major.

      Thanks for your interest,

      Jack

      • Jack – I literally just had a conversation about whether or not you were on Board of Directors for Tantalus. On the website you are, and above you say Advisory Board: can you please correct me? Thanks.

        • Tracy,

          I am, and have been for more than a year, a member of the Supervisory Board of Tantalus. Under German corporate law we elect the management board. I am also a technology and marketing advisor to the company. The Supervosory Board was restructured at the AGM last week. I remain along with Mr Ben Paton from the previous board and newly elected to the supervisory board were Mr Ian Hammen and Dr Ernst Burger. Mr Juergen Schillinger was elected as CEO and MD of the management board, which runs the company on a day to day basis.

  6. Well done Jack. As we wake up in Australia, it is pleasing note that finally the world is recognising the disconnect between LREO projects and HREO projects, and those between. Whilst I agree with most of your comments, I would challenge the development model of HREO projects. You claim there will be a battle over lowest opex. I would assert that given your statement (that I agree with) that only half of the world’s demand of dysprosium will be met by existing projects, then a different model of development will be seen. My call is that all HREO projects will be shortly tied up by high value end users and there will be little free market Dy on which to compete.

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