Lifton’s rare earth market update: China is NOT standing still.
China’s semi-official China Daily, which is an English language version for foreigners of the Chinese People’s Daily, the official newspaper of the Chinese Communist Party, ran an article on Saturday, September 13, which read in part:
“The 13th Five-Year Plan (2016-20) for the petroleum and petrochemical industry will focus on eliminating obsolete capacity and raising coal chemical output, officials said on Friday. Excess capacity will be the sector’s biggest challenge during the next five years, Gu Zongqin, head of the China National Petroleum and Chemical Planning Institute, said during the 2014 China Petroleum and Chemical International Conference in Tianjin. ‘Overcapacity will be eased during the 13th Five-Year Plan period, but it will be difficult to resolve the problem entirely,’ he said. According to the plan, which is still under discussion, seven petroleum and chemical production bases will be developed in Hebei, Jiangsu, Zhejiang, Fujian and Guangdong provinces. Coal chemical output will rise from about 10 million metric tons annually to 100 million tons by 2020, according to the plan. Li Yongwu, chairman of the China Petroleum and Chemical International Federation, said that the nation’s petrochemical industry has made huge efforts to upgrade its structure and become more innovative during the years since the 2008 global financial crisis. Many companies in the sector fell into the red as the global economy weakened during and after the crisis. But the sector has since rebounded, and in the first…”
The boldface highlights above are mine.
The above methodology of restructuring China’s natural resource industry has been in use in the rare earths space since the initiation of the twelfth 5 year plan in 2011. Just substitute “rare earths” for “petroleum and petrochemical” and you will understand the changes that have been occurring in the Chinese rare earth industry during the last 3 years.
It is commonly stated by contemporary journalists that China produces 95% of the world’s new rare earths each year. More sophisticated, or at least more knowledgeable, writers like to point to the fact that what was once even more than 95% is now dropping because of the new production from Molycorp and Lynas. The projected drop (projected because it is based on full production, which neither company has yet achieved) could bring Chinese dominance in total rare earth production from 95% to a mere 60% or less. But this is all very misleading, because this could only come about if Molycorp and Lynas were both able to not only produce at their targeted capacities but also to sell their output competitively against the Chinese producers. Moreover it would and will only apply to the light rare earths.
The promoters of the shares of Molycorp and Lynas tell investors that such leveling of costs is just around the corner, that, for example, just one more installation of acid reclaiming capacity or a tweak in their separation plant is all that stands between either of them and the end of overwhelming Chinese dominance in the production of the rare earths.
This is wrong and misleading for two very good reasons.
- The Peoples’ Republic of China, the PRC, is by far the largest consumer of technology metals in the world. I believe it has held this position for at least a decade when it surpassed Japan after that nation had surpassed the United States in that category. Today China has supplanted both Japan and the USA to become the world’s majority consumer of all metals, structural as well as technology. China in 2014 will consume nearly 60% of all of the metals of all types produced in the world in 2014! One group of technology metals, the rare earths, is being consumed in China at a level of 80% of the world’s (currently that means China’s) annual production. The tens, perhaps, hundreds of billions of dollars of end-use products that require rare earth permanent magnets, alloys, and phosphors to be and to remain competitive globally are the focus of the Chinese rare earth production and processing industry’s current restructuring!
- Contemporary China does not like to import raw materials that it can itself produce unless it cannot produce them cheaper than it can buy them-To those who do not know this is called market capitalism, and is the very reason that the USA stopped producing rare earths altogether as mineral concentrates in 1998. Four years after that, in 2002, the USA stopped separating the rare earths from one another and in just another two years more, in 2004, the American production of rare earth metals and magnet alloys ended. The Chinese command (centrally controlled) economy will not let happen to the Chinese rare earth industry what it saw happen to the USA’s rare earth industry, because not only must Chinese products remain competitive globally but now, even more importantly, they must be and be perceived by the Chinese people to be better and cheaper than imported goods. This is critical to the change of the Chinese economy from export driven to consumption drive…
In order for the USA to resume the domestic vertical integration of the production of rare earth enabled components, such as rare earth permanent magnets, it is necessary that there be produced domestically rare earth mineral concentrates and that such concentrates be separated into individual rare earths which are then purified, reduced to metals, blended into alloys, and formed into rare earth permanent magnets. No single step or even combination of steps in the vertical integration agenda itself is sufficient to re-ignite the domestic American rare earth permanent magnet manufacturing industry. All of the processes must be done domestically and if anyone of them, anyone at all, is not profitable as a freestanding business then it can only be possible if it is combined with another step that generates enough profit to make the combination profitable.
Some of you are now thinking “isn’t that in fact exactly what Molycorp has achieved?” I, for one do not think so. It is trivially obvious that Molycorp is not vertically integrated in the production of rare earth permanent magnets domestically-not at all. When this thought is promulgated as it often is in the blogosphere I wonder how the promoters of this idea can have forgotten that Molycorp is vertically integrated globally but not domestically and that the very reason for its, Molycorp’s, original rebirth was to re-start a domestic rare earth industry so that the US military could have a secure DOMESTIC source of rare earth permanent magnets.
If Molycorp now moves to deliver into China, the world’s largest market for such materials, rare earth resources and products that are competitive with those made by Chinese domestic vertically integrated companies then although it must mine its raw materials in California it must make those products in China that it wishes to sell in China.
In the same fashion rare earth resources and end-use products intended for non-Chinese markets must be produced and made outside of China.
This is the lesson the restructuring of the Chinese natural resources industries.
Some final thoughts about the heavy rare earths. The most critical rare earths of all are those with atomic numbers at and above 65 and Yttrium and, perhaps, scandium. What all of them have in common is that they are very very scarce in minable concentrations; they are found only in small proportions even in relatively “high grade” rare earth deposits and although they are found in high proportions in some specialized types of deposits those deposits are typically of extremely low overall grade.
China only gets its domestic supplies of heavy rare earths from very low grade weathered deposits that can be extracted-though not as efficiently as they might be-with simple salt solutions. No hard rock deposits producing commercial quantities of the heavy rare earths are known to exist in China. Yet the growth of the rare earth permanent magnet and phosphor industries is critically dependent on there being more production of the heavy rare earths than there is today.
China says that it has limited reserves of heavy rare earths in “minable” deposits, and it has developed due to this fact rather rapidly a recycling industry that may already as much as double the supply of heavy rare earths recovered from mine tailings, processing scrap, end-of-life magnet scrap, and lighting scrap. But even so the numbers do not work in the long run. The Chinese domestic rare earth industry does not have enough existing and projected feed stocks to grow for much longer.
If as the Chinese plan to do they convert their economy from an export driven to a consumption driven model then their internal consumption of rare earth permanent magnets, specialty rare earth structural alloys, lighting and display phosphors, and medical imaging chemicals will skyrocket. This means that so long as China is the world’s sole source of the heavy rare earths as it is today then the necessary supplies of the heavy rare earths needed to underpin the restart of total rare earth supply chains outside of China not only do not exist but that their availability is lessening by the day. In this situation why would any businessman take the risk of investing in an industry that has a clear risk of having insufficient raw materials?
If the non-Chinese world is to have an independent (of China) rare earth total supply chain then it is mandatory that not only light rare earths be produced outside of China but also heavy rare earths. The best choices for American investors today are Rare Element Resources, the large and accessible deposits of which, in Wyoming, will produce significant heavy rare earths as well as significant light rare earths; Ucore Rare Metals, a large hard rock source of heavy rare earths; and Texas Rare Earths, a unique, easily worked deposit with one of the highest proportions of heavy rare earths known outside of China. North America will need all three of these companies to come into production just to satisfy the demands of an independent (of China) North American total rare earth supply chain for critical rare earths.
Europe, which is much further along in addressing its current and future needs for domestic production of rare earths to insure the survival, not just the continuation, of an independent high tech manufacturing industry, has in Tasman Metals’ Swedish deposits a readily accessible solution to its critical shortage of critical rare earths.
Both of the above named regional centers can be supported by light and heavy rare earth production from South America, southern Africa, and Australasia.
Note well that China is not standing still in all of this. Even as we debate the risk of investing in all of the above companies Chinese investors and mining companies are scouring the world for such opportunities. They, the Chinese, do not have the goal of developing natural resources, overseas (to them) to make a profit; they have the goal of assuring Chinese continued access to the critical rare earths necessary to underpin the growth of their high tech manufacturing economy so that Chinese domestic consumption can grow.
You will make money no matter who develops the heavy rare earth hard rock resources outside of China, but which is the language of future commerce, English or Mandarin, as well as which countries in the future have the highest standards of living are also being made by your decisions.
Did I mention that you may one day have to convert your dollars into Yuan to buy gold, and that the Peoples Bank of China will then be setting the price of gold?
Jack Lifton is the CEO of Jack Lifton, LLC and is a consultant, author, and lecturer on the market fundamentals of technology metals. “Technology metals” ... <Read more about Jack Lifton>