EDITOR: | April 9th, 2015 | 11 Comments

China still distorting the rare earth market

| April 09, 2015 | 11 Comments
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It has been a few years since China set its sights on clamping down on illegal mining and exporting of rare earths. And the result? It seems the problem has got worse, not better.

According to Dudley Kingsnorth, REE expert and now professor at Curtin University in Perth, Australia, some 30% of neodymium being sold in China is moving through the illegal channels. One in three magnets contains illegally obtained rare earths. In China, illegal magnets are selling at half the prices obtaining in the official market. The result is twofold: rare earth prices are being suppressed, and the whole REE market is being distorted, with obvious impacts on those trying to get projects up outside China.

Alkane-125And, in another conversation I had this week, Ian Chalmers of Alkane Resources (ASX: ALK | OTCQX: ANLKY) expressed a few concerns about the impact of the China situation on the global REE industry. He considers that both Japan and South Korea have a false sense of security about REE supplies in the light of the World Trade Organization ruling. They think the REE supply problem has gone away. But, in his view, the new export licensing system and China’s planned introduction next month of a new resource tax will see supply to the rest of the world reduced rather than eased.

In the short term, Japan is taking advantage of the availability of illegally mined and exported rare earth elements to get around Chinese restrictions, especially on the elements vital to magnet manufacture. Ian Chalmers agrees with the assessment that some one-third of rare earths mined in China is being produced outside the official system. He is concerned that, if China does start moving against the illegal mining, ready availability of praseodymium, dysprosium, terbium and neodymium could dry up in as short a time as 12 months.

No one can say for sure whether China will move on the issue of illegal mining. But, given the measures Beijing has taken in recent years to conserve its reserves of strategic and technology metals, it seems strange that the illegal REE sector seems to have got so far out of hand. After all, in January we saw Chinese officials make arrests concerned with smuggling of magnesia out of the country and destined for a South Korean steel maker.

Moreover, with China intent to develop downstream products from its REE output, why allow Japan and others access to those elements and compete with China in the value-adding field?

As Kingsnorth points out, the Chinese rare earths magnet industry demand for praseodymium and neodymium exceeds the production quotas by 10,000 tonnes, effectively condining illegal mining and processing. He adds: China is moving too slowly to eliminate illegal production. In a recent presentation, he quotes a senior official from the China Rare Earth Industry Association telling a conference in Chengdu that illegal mine output accounts for between 40,000 and 50,000 tonnes a year of rare earth oxides.

Last August China launched a program to stockpile rare earths. The stockpiling was expected to push up domestic prices – after all, the targets were 4,000 tonnes of praseodymium/neodymium oxide, 500 tonnes of Nd oxide, 1,200 tonnes of dysprosium oxide, 300 tonnes of erbium oxide, 500 tonnes of europium oxide, 500 tonnes of terbium oxide, 2,500 tonnes of yttium oxide and 90 tonnes of lutetium oxide.

But Dudley Kingsnorth comments that prices have not appreciated to any degree in 2014 and 2015. To date the increases have been minimal.

DZP DPP Shed external

Then there is the question of prices and profitability. Beijing has pressed on with the plan to merge all REE operations into six corporate entities. But just last week two of the more significant miners reported sharp falls in their 2014 profits. They blamed poor demand and weak prices – both of which factors reinforce the concern about the scale of illegal production. REHT saw a 57.4% plunge in its bottom line compared to the 2013 result; at least it stayed in the black, if only to the of equivalent of $102 million. China Minmetals Rare Earth Co posted a loss, its revenues falling by 64.8%. As Xinhua reported, rare earth prices are at a multi-year low despite a slight rebound at the end of 2015. Xiamen Tungsten also reported losses for 2014 in its rare earth division.

These are three of the six merged entities, the others being Aluminium Corp of China, Guangdong Rare Earth, and China Southern Rare Earth Group.

So far as Alkane is concerned, Chalmers says he is not locked into supplying any customer once the Dubbo project is in production (he says now that will be 2017). He sees European customers still keen not to be beholden to China. In addition, Alkane will be able to compete with Chinese pricing structures (Alkane using the Chinese denominated spot price in its calculations).


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Comments

  • hackenzac

    You could perhaps likely exchange the words ‘rare earth’ with ‘fish’ or ‘Gucci bags’ and the situation would be similar, one third illegal and damn the public health, environmental protections and copyrights. China business across the board is one third pirate if rare earth serve as an indicator. I know the fisheries industry somewhat and those unmarked Chinese trawlers on their little incursions, there’s a lot of them out there. We don’t have a choice with rare earth yet but we do have one with salmon and shrimp. And what do we think about Japan being the demand driver for illegal Chinese business? Shouldn’t that also be illegal? Maybe China should be the one filing the WTO complaint.

    April 9, 2015 - 11:59 AM

  • Michael

    Once the tariffs are lifted and the new resource tax is implemented prices may well settle above current levels and this would generate a return of restocking demand and major prices increases as companies and traders enter back into the spot market for higher volumes.

    April 10, 2015 - 1:14 AM

  • Robert Richardson

    I guess we all thought a couple of years ago that the regional corruption in China would be extremely difficult to curb – and that’s proved to be true. Too many official ‘snouts in the trough’. The only way to get to attack this would be to execute a couple of key protagonists – but I’m not holding my breath!

    April 10, 2015 - 3:06 AM

  • Alex

    I think quota for mining and processing and resurse tax will give some effects on single elements depending of ore content.
    Sm-Gd-Eu able to get from LREE production and from ionick clays sourse
    So, the Tax will be different or if equal it will influence on other LREE elements. Also, the plant have to process all elements but demand are only for Nd-Pr and Dy, Tb so Ce and Y, Sm will be not interesting to process.
    Does it means that Chinese just stop processing cheap rare-earth because of quota for processing , so it will be better for them process only expensive rare-earth.
    I guess the Sm and Y and Ce will be stoped to process soon

    April 11, 2015 - 2:32 AM

  • Ricki

    It is important to understand that it is relatively easy to convert the clays of southern China into a marketable heavy rare earth product. The Chinese government at all levels (Central, Provincial and Local) can introduce all the laws and regulations they want but it is not going to stop a farmer or whoever acquiring acid and running his own DIY RE processing facility and then shipping the product over the border through Myanmar or Vietnam disguised as bags of rice or whatever. It is a matter of survival for some unfortunate individuals to provide for their families whatever the risk of penalty. Then there is also the larger scale illegal production from legitimate producers fudging paperwork. Perhaps the solution could be an internationally recognized accreditation proving that the product is from a legitimate and sustainable source such as the diamond Kimberley Process. I guess this is also open to fraud??
    It doesn’t appear to be any different to illicit drugs being produced in the jungles of Colombia. While there is demand (Japan you naughty boy) the supply will be there.

    April 11, 2015 - 5:56 AM

  • Alex

    you have to understand that it is not truth.
    only processing plant able to process the ore or concentrate of Hree.
    there is no processing plant able to process Hree in Vietnam or other country exept Shinyetsu japan.
    you need 99.999 or 99,9 purity for industrial grade
    It is faritail about Farmers. yes they can add acid at hole and get some ore but only at the plant with cost of investments of 600 milions Usd you can process it.

    April 11, 2015 - 10:32 AM

  • JJBeswick

    The farmers just need to dissolve the stuff and sell it. There are plenty of processing plants.
    Just look at the Vietnamese exporting around 2800 t of REE to Japan. There isn’t a single RE mine in Vietnam but they have separation facilities. Any guesses where the raw material comes from??

    April 11, 2015 - 12:13 PM

  • Alex

    Around 1000 tones LREE come from Russia as LREE Carbonate

    April 11, 2015 - 3:23 PM

  • Ricki

    Very good observation JJBeswick. If it isn’t farmers the scenario is even worse – larger plants flouting the law. Regardless of the source. The fact of the matter is that illegal RE production is still rife in China, having a negative impact on legitimate suppliers. In a perfect world with unlimited capital the ROW would become self-sufficient and China would become a closed system taking imports from excess ROW production.

    April 12, 2015 - 8:52 AM

  • Alex

    If in May the govermant delite export Tax 25% and will make 20% Tax on Netural Resurs for all rare earth – it will not be economical reason for illegal export.

    April 13, 2015 - 9:40 PM

  • Investor

    Good article, and good photo of the Dubbo “Zirconia” Project. Japanese and Koreans have indeed the distorted view on many things. What is their view on Zirconia?

    April 13, 2015 - 11:02 PM

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