EDITOR: | August 20th, 2015 | 14 Comments

China’s rare earth situation: rampant illegal production, inadequate quotas, imperfect tax system (but great market expansion!)

| August 20, 2015 | 14 Comments
image_pdfimage_print

China’s rare earth industry is a tangled web. The government in Beijing recently announced it would step up efforts to stop illegal production and sales of rare earths. Really? Haven’t we been hearing this line for several years? Yet the evidence is that smuggling is still thriving. But here’s a twist: Beijing’s own quotas may (if inadvertently) encourage the illegal traffic in rare earths.

In his most recent presentation (delivered at Las Vegas, Nevada), rare earth expert Dudley Kingsnorth of Industrial Minerals Company of Australia (and Curtin University, Perth) makes the point that China’s production quota for neodymium-praseodymium oxide is 20,995 tonnes a year. Yet the demand from magnet makers is running at 30,348 tonnes, a gap of 9,353 tonnes. Presumably these industries are making up the difference by means of the illegal market. For dysprosium, the quota is 717 tonnes, the demand 930 tonnes. (Dudley Kingsnorth points out these are not his figures, but have been cited by the China Rare Earths Society.)

Here’s another factor that is no doubt affecting prices. Melanie Debono of London-based Capital Economics, in her latest rare earth note, notes that the new system is not working exactly the way most observers had expected. She explains that the previous tax system charged on the amount of ore mined; the new regime, introduced on May 1, levies the tax on the value of concentrate sales. According to Capital’s calculations, the tax payable on each tonne of rare earth oxide should be higher under the new system than the old. Yet export and domestic prices of all REE have continued to fall.

Debono thinks three factors are at work:

First, the prices of all industrial metals have been slumping recently (as I have been pointing out; copper fell below $5,000/tonne on Wednesday, an ominous sign). REE are caught up in a wider commodity cycle down-dip.

Second, the impact of the tax could have been partly offset by the removal of the export tariffs, which also occurred on May 1. Domestic and export REE prices have now converged at prices lower than domestic prices were at before the tariff was removed.

Third (and this is important), the new tax applies only to new ore. Concentrate sold after May 1, but produced from ore mined before that date, is exempted from the new tax if it has already incurred the old tax impost. The effect of the tax change will therefore impact prices at a later date, and only when stocks of previously produced ore and concentrate have been run down. “These inventories are estimated to be quite substantial,” says Debono. “What’s more, given that the tax is based on the value of the concentrate, it may also take a while for the impact to feed through to final oxide and metal prices.”

Nevertheless, she adds, there are signs that some producers have begun to pass on higher costs to consumers. She cites Ganzhou Rare Earth Industry Association having hiked price guides three times since May.

Getting back to the tangled web, we have to keep in mind that so many Chinese REE producers are operating at a loss. Debono thinks some may have to close by year end so that makes her hope that the longer-term prospects for REE prices is still positive.

Also on the brighter side, Kingsnorth points out the extraordinary growth shown by the REE sector. Not many commodities will have seen demand grow 30-fold over 50 years. He lists the demand (in tonnes) for rare earths since the 10 years 1955-1965, with the following totals for the final year of each decade:

1965: 5,000 tonnes

1975: 20,000

1985: 30,000

1995: 55,000

2005: 110,000

2015: 145,000

But, using europium as a yardstick, the price has been declining:

1965: $2,500/kg

1975: $1,000/kg

1985: $750/kg

1995: $600/kg

2005: 300/kg

2015: Between $200/kg and $300/kg (but remember that europium hit $3,000/kg in the heady days of 2011).

Dudley Kingsnorth continues to make the case that China must tackle the illegal production and smuggling of REE. The fact that illegal mining is responsible for somewhere north of 30% of the country’s production is of real concern, he says.

But he also reminds us that, while Chinese production has expanded so significantly since the 1960s, so has China’s capacity to expand its downstream use of its own REE. The decades show the advances:

1970s: China produced REE concentrates

1980s: China produced mixed REE concentrates

Early 1990s: Produced separate REE oxides and metals

Late 1990s: Produced magnets, phosphors, polishing powders

2000s: Produced electric motors using REE, along with computers, batteries, LCDs, mobile phones, electric and hybrid vehicles.


InvestorIntel

Editor:

InvestorIntel is a trusted source of reliable information at the forefront of emerging markets that brings investment opportunities to discerning investors.


Copyright © 2016 InvestorIntel Corp. All rights reserved. More & Disclaimer »


Comments

  • Jeff Thompson

    The incentives for the government to end the illegal production are strong as it would then allow additional tax revenue to be generated by channeling all production through the higher tax system, as well as perhaps allow greater oversight that environmental codes are followed in the future as they have not been in the past. But are their also any counter-incentives for their government to turn a blind eye to the illegal production?

    August 20, 2015 - 7:57 AM

  • Jack Lifton

    Robbin,

    In Ganzhou in March 2013 at an CSRE/ACREI conference the discrepancy in Nd/Pr USE vs PRODUCTION figures were discussed. I asked how it was possible, and the answer was “RECYCLING and ILLEGAL production. Although I’m sure that there was a bit of exaggeration the Chairman of China’s largest vertically integrated magnet manufacturer told me that the answer was “recycling” and that just his company alone “recycled 10,000 tons per year of rare earth permanent magnets [I note that this would provide sufficient Nd/Pr for 10,000 tons of “new” magnets]. I visited a 3,000 ton per year magnet plant in the city later that same day, and its Chairman told me that his feed stock was entirely from recycled magnet materials.
    A common theme of conference presenters that day was to avoid waste. And it was commented upon by more than one speaker that in the West waste was endemic.
    Now, of course, I understand that in the country where most of the world’s rare earth magnet alloy as well as most of the world’s rare earth permanent magnets are made there will be a huge amount of machining residue (swarf) and of metal making residues as well as, of course, end-of-life scrap.And so we cannot avoid the conclusion that such materials may be counted as a significant source of feed stock. The question, of course, is how is this recycling reported? Is it to be added to the Nd/Pr totals or is it to be counted as “in addition to” new material production? Certainly THAT PORTION of recycling that consists of the re-use of materials from end-of-life scrap MUST BE COUNTED AS ADDITIONAL FEED STOCK over and above official production figures for new material.
    I think that the above discussion needs to be addressed before making any definitive statements about the supply and demand of Nd/Pr.

    Jack Lifton

    August 20, 2015 - 8:39 AM

  • Alex

    The European rececling companies collected all scrap from Nd-Fe-B magnets for many years all other the world – make concentrates 60-90 % and send it to China for further production of metal Nd and Y2O3 and Eu2O3 . Those was possible because bubble – the prices was high. So, this concentrates was sourse of additional production in China and the same concentrates from Chinese scrap of NdFeB was the sourse of this additional quantaties of Nd-FeB which Daddly consider as additional.
    The production from ore connected with metallurgical production of iron at Baotou . and content of Nd-Pr around 20% , so Daddly multiply 10 000 t Nd-Pr on 5 and get 50 000 t illegal production.
    Really sourse of illegal production scrap NdFeB magnets which was collected many years

    August 20, 2015 - 6:11 PM

  • Chris

    Mr Lifton
    What sort of impact do you believe recycling of NdFeB magnets is having on supply of Dy?
    Considering that the price of Dy in China is currently just under US$200/Kg, does this mean that magnet recycling also affects the supply and demand of Dy?

    August 20, 2015 - 6:44 PM

  • Jack Lifton

    Chris,

    I do believe that Dy prices are affected by Nd-Fe-B magnet recycling, since the average magnet has 2% Dy and 1/2% Tb. In addition the recycling of phosphors produces Y, La, Eu, and Tb.

    If the Chinese are recycling in the volumes told to me then the recoveries of Dy and Tb would be substantial.

    This having been said I still think that if magnet production is to increase by 10% per year additional sources of new Dy and Tb must be brought on line.

    Recycling has certainly helped but, by itself, is only one piece of the puzzle.

    Jack

    August 20, 2015 - 8:19 PM

  • RareEarthKing

    Jack, I would sure hope new Dy and Tb must be brought on line otherwise your very own Texas Rare Earth Resources would not fair so well.

    August 20, 2015 - 11:35 PM

  • Jack Lifton

    RareEarthKing,

    TRER, RER, UCORE, Tasman, Northern Minerals, Hastings, Namibia,etc. are the solutions to the problem. The market, not me, will decide which come into production.
    Delusional and/or terminally greedy institutional investors screwed up the market in the recent past. The law of supply and demand is currently operating to puncture the bubble, but nonetheless the supply and demand for the individual rare earths are still out of balance. This favors the production of the high demand heavy rare earths over the satisfied demand for the light rare earths.

    Jack

    August 21, 2015 - 8:37 AM

  • Chis

    Mr Lifton
    Rather confused by your comments regarding supply and demand of HREE.

    It’s rather obvious that Dy demand is currently being satisfied by processing of Virgin material and recycling of NdFeB magnets in China. Sluggish demand and the current low prices of Dy suggest a possible over supply situation.
    It seems that the only scenario that would change the current situation would be if NdFeB magnet production increases 10%pa. If this growth does not occur, does it mean Dy supply will be ample to meet demand?

    As for the demand of other HREE, it seems their is ample supply to meet demand now and in the future. The lighting phosphors market is being decimated by the increased use of LED technology as is evident by the recent closure of numerous phosphor powder producing companies in China.
    Not sure their are many other end use markets that could be considered large enough consumers of HREE worth mentioning where supply could become an issue in the future.

    With ongoing research and development into the reduction of Dy in NdFeB magnets and the increasing use of LED technology in lighting applications, I believe the supply/demand dynamics of HREE will be well in balance for the foreseeable future.

    August 21, 2015 - 7:48 PM

  • Chis

    A few references to substantiate my reasoning above.

    This from two years ago.
    “JLMAG Rare-Earth (JLMAG) is one of the
    biggest manufacturers of sintered NdFeB
    magnets in the world, with an annual capacity
    of 6,000 tons. This will increase to 10,000 tons
    within the next two years as the Chinese company
    ramps up production.”

    “This offers good potential to reduce the content
    of heavy rare earth elements because the nominal
    value of HcJ can be reduced when the variation is
    reduced as well (Figure 6).
    The combination of these efforts to
    reduce heavy rare earths has resulted in heavy
    rare earth free N, M and most H grades Other
    heavy rare earth free grades are currently under
    development.”
    http://www.ewea.org/offshore2013/wp… rare-earth reduction (10-29-13-10-32-06).pdf

    BEIJING Asian Metal 21 Aug 15 – Asian Metal learnt from a source from Yixing Lvyuan Fluorescent Material Co., Ltd. “Yixing Lvyuan” for short that the company has exited rare earth phosphor powder industry in mid-August. Being attacked by LED indu…
    http://www.asianmetal.com/news/data/1252313/Yixing%20Lvyuan%20exits%20rare%20earth%20phosphor%20powder%20market

    And now this.

    US researchers claim to have developed a less expensive, more sustainable white LED, which they will discuss this week at the 250th National Meeting & Exposition of the American Chemical Society (ACS). ACS is the world’s largest scientific society.

    Experiments with some materials have shown that the team’s technology can cut LED costs by as much as 90 percent from current methods that rely on rare-earth elements. They have several granted and pending US patents and are exploring manufacturing possibilities.

    Funding for this research was provided by the National Science Foundation and Rutgers University. Hu is currently funded by the Department of Energy’s Critical Materials Institute.

    http://www.compoundsemiconductor.net/article/97745-a-more-sustainable-white-led.html

    August 21, 2015 - 8:38 PM

  • JACK LIFTON

    The Price of Europium today is too low to allow a freestanding recovery of Rare Earths from spent phosphors to be profitable. Europium will need to be well above $350/kg for such a venture to be undertaken. Solvay has found that it is difficult to get a regular supply of phosphor scrap in such quantity as to make it a good feed stock addition.

    August 22, 2015 - 7:44 PM

  • Chris

    Seems the same discussion should apply to supply and demand of Dy also, not just Nd/Pr.
    Although the Dy discussion will need to take into account reduction/elimination efforts by magnet manufacturers also.

    August 23, 2015 - 1:48 AM

  • James

    Dy elimination from “all” permanent magnet applications is pure fantasy.

    Chris, if you are correct (which I doubt) then there will be little need for Dy rich rare earth deposits. If you are wrong then Dy rich rare earth deposits will come into production.

    Northern Minerals an Australian rare earth developer – whose deposit is rich in Dy is presently chasing production funding. We await the markets verdict.

    It’s interesting that Chinese company Jien Mining has agreed to invest AUD$48.50M for around 33% share of the company.

    I am long Northern Minerals and have no doubt that their is plenty of demand for Dy.

    Along with Northern the other ROW rare earth developers that have been able to raise funding are leading in the race to production.

    Money talks …

    August 23, 2015 - 4:30 AM

  • Jack Lifton

    Chris,

    The “elimination” of dysprosium/terbium in rare earth permanent magnets is NOT likely. Continuing development both by magnetics scientists and manufacturing engineers has in the one case determined the lowest levels of Dy/Tb that can be used and in the other reduced the need for extreme conditions (high temperature or high cycle rate) capability wherever possible. BUT the ongoing increase in demand for consumer goods is driving the demand for rare earth permanent magnets steadily upward. Therefore it is likely that the growing demand for dysprosium and terbium for magnet applications will grow.
    It is a false analogy to cite the demise of a Chinese or Dutch magnet maker as evidence that the demand is slowing. General Motors did not go bankrupt because no one was buying cars or trucks; people were just not buying them from General Motors.

    Jack

    August 23, 2015 - 8:10 AM

  • Tracy Weslosky

    Thanks Jack. I am on your side on this one.

    August 23, 2015 - 7:14 PM

Leave a Reply

Your email address will not be published. Required fields are marked *