EDITOR: | December 23rd, 2013 | 14 Comments

Breaking China’s stranglehold on the Rare Earths Industry

| December 23, 2013 | 14 Comments

REE monopoly2013 was a horrendous year for rare earth elements companies outside of China. And if you are a speculative investor who understands the fundamentals of the REE industry — the backbone to the technology that underpins modern life — and the geopolitical dynamics surrounding it (meaning China), this past year is one you may very well try to forget. The rapid decline in the rare earth exploration companies’ share prices (and those of Molycorp and Lynas, the only two REE producers outside of China) have led many investors to make the financially painful decision to sell their positions for tax-loss reasons. But there is light on the horizon. Like everything in life, nothing stands still. And the REE industry is no different. The importance of rare earths has only grown as emerging markets increase their demand for technologies made with it, as does the renewable energy industry.

When it comes to China’s monopoly of rare earths, it appears we are approaching the beginning of the end. As the Chinese REE stranglehold is reduced through increased production from the only two non-Chinese sources currently, and Chinese rare earth prices rise due to continued efforts by the Chinese government to address environmental concerns and stop illegal rare earth mining, rare earth investors could potentially see higher prices in 2014, which in turn would translate into higher stock prices for REE companies.

According to the Pentagon’s latest assessment of the rare earths industry, China’s virtual monopoly on the industry has been disrupted. In it’s annual report to Congress (dated October 2013, but not yet been released publicly), the Pentagon report (prepared by Elana Broitman, the Defense Department’s top official on the US industrial base), stated: “Global market forces are leading to positive change in rare earth supply chains, and a sufficient supply of most of these materials likely will be available to the defense industrial base. Prices for most rare earth oxides and metals have declined approximately 60% from their peaks in the summer of 2011.”

In 2011, Congress required the Pentagon to examine the use of rare earth materials in defense applications, determine if non-U.S. supplies might be disrupted, and suggest ways to ensure long-term availability, as well as secure an assured source of supply by 2015.

One of the notable excerpts from the Pentagon’s report was: “An increase in supply of material from outside of China and the substitution of other substances have reduced reliance on China since 2011, when it controlled 95% of the world’s supply and imposed export restrictions.” The comment regarding substitution of other substances was particularly interesting, especially when one considers the recent Yale University study that conclusively demonstrated that we are nowhere near finding substitutes for rare earth elements. The Yale University research team investigated possible substitutes for 62 different metals (including REEs). The study’s conclusion is that there are no “readily apparent” substitutes for REEs that would not compromise on quality or performance. Though corporations have kept much of the current use of metals as confidential trade secrets, it is no secret that most of today’s advanced technologies rely heavily on REEs and will for the foreseeable future. Simply put, when it comes to rare earths, there are no substitutes.

The Yale authors further asserted that society would need to pay more attention to the acquisition and maintenance of non-renewable sources than has been the case in the past; after all, growing populations, growing affluence and modern technologies are beginning to strain resource supply. In other words, many of the materials used in high-tech products, including rare earth metals, have no satisfactory substitutes, underscoring not only our vulnerable reliance on them, but also our need to access them. The Yale study concluded: “The situation need not inspire panic, but should instead stimulate more diligent and more comprehensive approaches to the balance between supply and demand.” Which is precisely what InvestorIntel’s Publisher and Editor-in-Chief Tracy Weslosky has been espousing for over half a decade.

The criticality of rare earths were only recently understood after China, which dominates the world’s supply of the minerals, cut exports by 40% in 2010, citing concerns over how polluting the rare earth industry was (though it fully maintained domestic supply levels). The subsequent massive price spike in REEs as the supply of the metals dropped was a wake up call for governments and those in the industry.

Strategic policy advisor Jeff Green, President of J.A. Green & Co. in Washington DC, staunchly disagrees with the Pentagon’s report. “These conclusions are wishful thinking, not a defense strategy,” explained Green. “We still have no producers of the more defense-critical heavy rare earths, and significant gaps remain in the domestic production of metal, alloy and magnets, all found in our most critical weapons — with no appreciable investment planned to solved the production problem.”

Mr. Green’s comments appear to bode well for non-Chinese producers and especially REE explorers, who are hoping to bring more supply — in particular heavy/critical rare earths — to provide a steady, stable supply of these vital materials outside of China.

In order for countries to become competitive, we need a sustainable rest of the world, total rare earth supply chain. In a recent conversation with Daniel McGroarty — one of the North America’s leading critical materials sustainability experts — Dan stated: “We’re tremendously dependent on foreign supply when it comes to the rare earths. The United States in particular is costing itself, in every sense of that term, by not bring mines into production more readily. We’re going to lose access to metals which are critical in high-tech and that are totally dependent for the transition and advancement of green technologies. Regarding US National Security, these metals are so widely utilized in our advanced weapons systems and we are dependent on a foreign country supplying them to us.”

Our conversation eventually addressed the 1,000-elephant in the room. Touching on China, McGroarty commented: “China’s REE monopoly wasn’t achieved by some sort of strategy or imagination. It’s rather a monopoly we have handed them and the Chinese have basically exploited it. We need to get back in the game.”

When China decided that they would limit exports, the declared reason was environmental. Although a very believable and understandable justification, the general assumption was that the actual reason was quite different. The Chinese limited exports of the raw materials, but not of anything made from them. Neodymium, for example, had an export limit, coupled with significant export taxes, but FeNdB-based magnets, made from neodymium could be exported without limits or taxes. Many in the industry assumed that the intention was to attract manufacturing to China and thereby increase the amount of value-added production in China.

But before I go into what could be easily misconstrued as an anti-Chinese rant, let me clarify my position. The Chinese saw an opportunity and pursued it. And they became the dominant players with a virtual monopoly over the entire industry as a result. (Admittedly, perhaps being a communist country where industry trumps even the most basic of human rights might have facilitated this; however, one could easily argue that any country could have achieved the same level of industry dominance — if that country played by the same rules). That said, I believe the rest of the world has to stop having China do all of our heavy lifting when it comes to the REE industry. We let the Chinese control the REE industry because we were too cheap and too lazy (meaning adhering to the strictest of environmental protocols and being subjected to a seemingly endless permitting process) to do it ourselves. If China wants to restrict REE exports, and can present a completely valid, linear and cogent argument (which is essentially has — there is less than two decades of medium to heavy REE reserves left in China, environmental concerns, resource nationalization concerns) to justify its actions, I believe China should be able to do so. Perhaps China’s actions will force countries like the US and others to realize what they should have a long time ago… that it is significantly overdue to create a total rare earth supply chain outside of China. Heavy and critical REE sustainability is a ‘critical’ issue that the rest of world outside of China must address. I’ve said this before, but it bears repeating: we have the deposits, we have the technology, we have the infrastructure, we have talent, and most important we have the need — and we will for the foreseeable future.


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  • Robin Bromby

    Yes, but you have to keep in mind that Chinese interests, direct and indirect, are also securing stakes in non-China REE projects. Just a few examples: the announcement this week by Peak Resources, the Singapore connection with Hastings Rare Metals and the recent Hong Kong-sourced investment in Australia’s TUC Resources. There is also the Chinese involvement in Northern Minerals. Who can blame them? They know they are facing a crunch in HREE so why not have access to those elements from foreign sources and conserve what’s left of your own (and give you time to clean up your environmental act). Moreover, Peak has done a great deal of the chemical work which is the real back-breaker for a REE project. If only we in the West had the foresight to plan ahead. Instead, as Ty shows, the U.S. is still trying to figure out which way is up as far as REE security goes.

    December 23, 2013 - 2:43 PM

  • Dean

    One of the best articles I ever read on this website!!

    December 23, 2013 - 4:55 PM

  • Aat Oskam

    http://www.chinadaily.com.cn/china/2013-12/22/content_17189746.htm: Quote: “In 2012, the production quota for the southern ionic rare earth mines was 134 million tonnes. However, later statistics showed that the real output was 347 million tonnes,” said Ma Rongzhang, secretary-general of the Association of China Rare Earth Industry.” Unquote
    If this is true (and who am I to doubt it, I have no other source regrettably, Hong Po, do you?) no wonder REE-prices are at the low levels they are today. I wonderhow central government is able (and willing!) to regulate the (imo corrupt) local government (who doesn’t love easy money?)?

    December 23, 2013 - 6:22 PM

    • Hongpo

      In 2012, the production quota for the southern ionic rare earth mines was 13400 tonnes. the real output was 34700 tonnes,according to the Association of China Rare Earth Industry.

      December 23, 2013 - 8:45 PM

      • Bill Keenes

        Thank you Hongpo

        December 23, 2013 - 10:52 PM

      • Aat Oskam

        Thanks, Hong Po!

        December 24, 2013 - 6:28 AM

  • Nevada George

    China is in no jeopardy of losing political
    or economic power… My opinion.
    The China Investment Corporation (CIC) is
    All over the planet cutting their deals and making
    Acquisitions… Securing China’s future.
    The rumor is that the CIC office in Toronto will
    Relocate to New York City.
    Our leaders in the Obama-Nation are anxiously awaiting
    with their palms out.
    The CIC will get what they want… On the cheap.
    Say goodbye to Kansas farmland… Back channel deals
    will be on the increase.

    The only constant is change.

    Merry Christmas to all… From Gothenburg, Sweden

    December 24, 2013 - 4:37 AM

    • Dave G.

      Great comment and great insight here. All the Season’s Best.

      December 24, 2013 - 9:20 AM

  • hackenzac

    “We let the Chinese control the REE industry because we were too cheap and too lazy (meaning adhering to the strictest of environmental protocols and being subjected to a seemingly endless permitting process) to do it ourselves.”
    Oh really? Is that so? The Chinese control the ree industry for the same reason they’re taking control of other industries and manufacturing. It’s called globalization. I guess when lowest cost is the primary motive, it is a matter of being cheap. Multinationals let this happen. These supply problems are corporate failures. The added expense of conscientious mining ie. “strict environmental protocols” is hardly the roadblock that you imply when it really comes down to the lowest denominator forces of supply and demand. China controls it because they’re the cheapest. Good piece otherwise, a call to arms, sound the trumpets.

    December 24, 2013 - 4:43 AM

    • Bill Keenes

      There has been a widely held view that the reason China is able to produce REEs so inexpensively is due to cheap labour and lax environmental regulations. This is incorrect as labour makes up a fractional portion of costs and environmental controls are stricter than most Western countries. The reason the cost of production is cheap in China is due to simple metallurgy coupled with
      commercial and technical infrastructure.

      December 24, 2013 - 10:51 PM

  • Tim Ainsworth

    Most are aware of Deng Xiaoping’s statement in 1992 “The Middle East has its oil, China has rare earth” but Deng also made the following remark in the same speech: “…..it is of extremely important strategic significance; we must be sure to handle the rare earth issue properly and make the fullest use of our country’s advantage in rare earth resources.”
    A bare 3 years later the US allowed China to steal its RE magnet business, probably the most important & fastest growing RE segment:
    “Magnequench began its corporate life back in 1986 as a subsidiary of General Motors. Using Pentagon grants, GM had developed a new kind of permanent magnet material in the early 1980s. It began manufacturing the magnets in 1987 at the Magnequench factory in Anderson, Indiana.
    In 1995, Magnequench was purchased from GM by Sextant Group, an investment company headed by Archibald Cox, Jr – the son of the Watergate prosecutor. After the takeover, Cox was named CEO. What few knew at the time was that Sextant was largely a front for two Chinese companies, San Huan New Material and the China National Non-Ferrous Metals Import and Export Corporation. Both of these companies have close ties to the Chinese government. Indeed, the ties were so intimate that the heads of both companies were in-laws of the late Chinese premier Deng Xiaopeng.”

    China has had a strategic plan for RE for 20yrs and we’re now seeing the culmination where they have matched their resource with the technology & capital (often ceded by ROW) to export high value added componentry & end product, rather than cheap oxides.
    Part of this strategy has been establishing two price levels, domestic & ROW, which begs the question how can the ROW MSC compete unless input prices approach some form of parity? Forget FOB pricing, it’s a temporary illusion created by the Chinese to suit their long game.

    December 25, 2013 - 7:45 PM

  • JPRS

    So cleaver people what is going to be the price of various rare earth for 2014? A lot of talk but what about pricing analysis?

    December 26, 2013 - 1:16 AM

    • Nevada George

      We will have to ask China…Eh!

      The one who controls the majority of
      the supply for a product in demand …has
      the ability to influence the price by controlling
      the distribution.

      China still has the “comparative advantage”.

      They will try to maintain that advantage by locking up
      REE projects outside of China.

      We might get some surprises in 2014???
      Mergers, acquisitions, etc.
      Maybe even by becoming a long term contract
      buyer of rare earths from outside of China.
      Thus, elbowing out other country purchasing ability.

      China knows how to play the game and they
      Do not want to give up their seat at the table.
      They are stepping up their Geopolitical strategies.

      December 26, 2013 - 5:36 AM

  • vacuum


    ^ hot potatoes galore 2014 oughta whet the appetites for those REE pigs in your portfolio

    December 30, 2013 - 10:04 PM

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