EDITOR: | September 15th, 2014 | 30 Comments

Lifton’s rare earth market update: China is NOT standing still.

| September 15, 2014 | 30 Comments
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China-REEChina’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.

  1. 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!
  2. 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

Editor:

Jack Lifton is the CEO for Jack Lifton, LLC and is a consultant, author, and lecturer on the market fundamentals of technology metals. Technology metals ... <Read more about Jack Lifton>


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Comments

  • hackenzac

    The article I’m looking forward to is the one titled, The United States is NOT Standing Still.

    September 15, 2014 - 11:50 AM

  • DANIEL

    Interesting conclusion but not very accurate. Its half past midnite, Russia and China will complete an analogue of SWIFT within a year and then its over no matter what mine comes into operation in North America. The phrase will be USD no longer accepted and oil will be priced in RMB.

    September 15, 2014 - 3:44 PM

  • freethinking

    Another brilliant article !

    Jack Lifton: He is a paid business operations/marketing consultant to Rare Element Resources (TSX: RES | NYSE MKT: REE), Ucore Rare Metals (TSXV: UCU | OTCQX: UURAF), Tasman Rare Metals (TSXV: TSM | NYSE MKT: TAS).

    I need to have a word to the company I am invested in – we need you on the payroll Jack !

    The promotion you provide is second to none.

    September 15, 2014 - 5:02 PM

  • slava Ukraina

    Agree with freethinking. Terrific and well-thought out article. I wish Commerce Resources had Mr Lifton on board. (Although Stephen Bogner has written a thorough comparison of about 15 REE projects, and has CCE coming out on top.)
    For the sake of retaining control of strategic resources, I’d love to see work on the Quest Rare Minerals Quebec REE separation plant get a fast track. (meaning operational for regional and North American miners within the next 4-6 years) Sometimes a little benign government involvement helps get the ball rolling.

    September 16, 2014 - 12:46 AM

  • Simon_Strauss

    “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 re the above: How would that come about?
    ………………………………………………………………………..
    I would think that the US would be able to get quite a lot of the required “critical” REE’s from Australia and that would represent “secure”, albeit not highly processed, supply.

    What seems surprising is that US investors are not piling into some of the world’s largest and richest H-REE resources owned by small cap ASX listed companies. Google: Australian rare earths

    September 16, 2014 - 10:28 AM

    • Tracy Weslosky

      I would like to congratulate Simon on having an intelligent comment, and showing other commentators on how to add input towards debate and the development of our understanding….welcome.

      September 17, 2014 - 1:42 PM

  • Investor

    Jack is the only one to listen on rare earth outlook/future. Some will need time to understand/digest what is written above and some will never get it and will continue to chase their tail. They may get eventually tired and run out of energy!

    September 16, 2014 - 10:39 AM

  • The Critical Investor

    No new information here, and Jack is obviously missing all Chinese action on buying in on HREE projects, besides the usual lashing out on MCP and Lynas. REE is a LREE project, Ucore is not profitable, in the middle of nowhere and behind, and TRER cannot be taken serious. Last year they were thinking about going uranium, then they came with an astonishing capex on Round Top, some time later they just slashed 90% of this capex. And no word on the extremely toxic hazards and therefore unavoidable permitting issues the project incorporates. Tasman is in a league of its own. I would be a bit more picky when I was Jack. And a bit more consistent (GWG yes/no, Lynas yes/no, vertically integrated yes/no, big is better, etc).

    September 16, 2014 - 11:53 AM

  • John

    Here we go again! A paid promoter of UCU, REE, TAS and some Texas ree wannabe with a deposit about as rich in ree as the dirt in your own backyard, promoting “his” companies and, just as predictably, bad-mouthing or totally ignoring companies that have not agreed to pay a ransom. Why in the world would InvestorINTEL publish these advertising pieces without labeling them an “Advertisement”. To do otherwise is to diminish the value and reputation of this online publication. I now ignore EVERYTHING this man has to say about specific ree companies. Is anyone else still foolish enough to care what he has to say in his advertisements?

    September 16, 2014 - 3:01 PM

    • Tracy Weslosky

      John; This is not an advertisement. Jack Lifton is an esteemed member of the REE and Critical Materials sector. What your tapping into that you do not like is how few companies are left from the days of the bubble heydays in 2010-2011. The industry is getting smaller, and the real players remain. I publish Jack Lifton because he is one of the sharpest players in the industry. Undoubtedly the highest writer & speaker up the food chain of security clearance in the US, please feel free to disagree with Mr. Lifton: but your blanket statements are incorrect. There are so few experts left in the industry that they are indeed used as professional consultants — because of their knowledge. If you have further crap to sling, take it to a site that does not utilize the top experts in the industry and that repaginates our text to make your comments. And yes, your welcome. Tracy

      September 17, 2014 - 12:50 PM

  • JOE O

    tas been getting crushed lately Thinking on speculating for a couple k more in shares IDK if ucore will not be profitable and bokan isn’t middle of knowhere (well not totally) having alaska behind has to give it some kind of advantage (like 145 million)
    REE and TRER who the heck knows
    QRM is huge but doubt they get any $$ this decade some of these I think u buy, forget and hope that 10 years from now someone does something

    September 16, 2014 - 4:17 PM

    • Tracy Weslosky

      The TASMAN Management is undoubtedly one of the most highly regarded in the REE sector Joe and are overdue for an excellent update. Let me see if I can get Jack to do an update with Mark. As for UCORE, they too are excellent players in not only HREEs but for brilliantly building a finance model towards full vertical integration and US sustainability that we applaud here at InvestorIntel every single chance we get…

      I left a message for REE’s IR professional Robbin Lee as we are always interested in updates from the sophisticated management team led by Randy Scott for great leadership. As for TRER, they have been significant leaders in education in the sector, a top contender for sustainability for critical materials in the USA…and have an impressive management team, and world class Board. Anyone insulting TRER has not followed the space, because there is no evidence to support some of these ill-intended comments.

      For those of you all onside on the merits of REEs and balancing out your portfolio with an understanding of necessary these critical materials are towards advanced technologies…well, InvestorIntel’s quarterback line-up of talented writers and industry experts, are for….us.

      Thank you. PS. Peter Cashin from QRM called me a couple of weeks ago, but we have not gotten to an update on Quest due to storyboard workload…and we have provided more extensive coverage on QRM, AVL, GWMG and any other REE company in the world to date.

      September 17, 2014 - 1:01 PM

  • The Critical Investor

    Addendum: I just read an article on this site on TRER stating the company lowered the capex again to $60-90M. In my view just the waste management of this toxic project will cost more, let alone producing and refining.

    September 16, 2014 - 4:48 PM

    • Tracy Weslosky

      This weak effort to promote your site is unacceptable. Last warning, do it again: and your off. Now, if you would like to as the self described critical investor write something that shows you have any qualifications as a CRITICAL materials writer, send me a note at info@investorintel.com and win me over with something more than your childish propaganda. For all of our readers — the CI’s comments have been edited due to their vitriolic nature and intent to cause pain. Behave.

      September 17, 2014 - 1:08 PM

  • John

    In fact, I took my initial position in TAS today. As someone above pointed out, this HREE miner is in a class by itself. In part this is related to the Sweden/Europe geography and the seriousness of Europe’s concern for an assured supply of CREO. The stock also has a history of bouncing back strong and this time I will not miss out! I believe Europe will make ree happen and that the totally incompetent US Congress will not do anything concrete re. American ree, all to the detriment of UCU and REE.

    September 16, 2014 - 5:39 PM

  • Asher Berube

    Jack,

    Excellent Insight as always, However do you have any thoughts on whether the other BRICS Nations will end up more involved in the development and production of rare earths and how this could relate to China. Also considering China’s concern of pollution doesn’t this give them (China) further incentive to import more rare earths.

    September 17, 2014 - 1:07 PM

  • Peter Epstein

    I come out strongly in favor of what Jack has to say. I know him and he does not say things he does not believe in. He has the utmost integrity. He’s also traveled the world over and has a network of experts to tap into.

    If one checks his previous articles, he always generates a healthy debate, with lots of comments, which is what expert journalism is all about. Let’s not waste time attacking the author, let’s focus on the content of the articles!

    September 17, 2014 - 2:49 PM

    • Tracy Weslosky

      Hallelujah…a voice of wisdom speaks. Thank you Peter.

      The online media world has become a great outlet for cowards to lash out at others, with zero repercussions. Because of this, the next online version of InvestorIntel that comes out will only allow individuals that reveal their true identity to pen their opinion. After all — if you lack the courage to stand behind your words, chances are — no one cares.

      September 18, 2014 - 11:40 AM

  • John

    Tracy: I don’t question Mr. Lifton’s expertise in the global ree arena–he is one of the few recognized experts. That isn’t what I am questioning. I am questioning why any publication would allow anyone who is on the payroll of a company to present comments related to that/those companies and potential competitors as objective/nonbiased journalism. Name me one other respected publication in any arena that permits such biased exposes. My point is that, over the years, I seems that it just so happens that his comments are highly favourable re. companies from whom he receives a paycheck, even those that don’t stand a prayer of a chance of ever “making it”. I can’t think of a single case when he was highly critical of a company from which he receives remuneration–my guess is that he isn’t permitted to be by agreement with those who write him his checks. Thus, the reasons why I totally ignore what he has to say about SPECIFIC ree companies but eagerly read what he has to say about the ree INDUSTRY. And yes, your welcome. John

    September 18, 2014 - 1:10 AM

    • Tracy Weslosky

      John; I am afraid the way you perceive journalism and media is incredibly naïve. We disclose who our writers work for and there are many….many sites that do not. Again, the REE sector is too complex for most journalists to walk in and cover with any insight of any value, but if you want to find one for me — I am presently hiring.

      Honestly, I am not sure where all of this attitude is coming from. Perhaps you have a stock you would like Jack to cover? Try him…he is quite open minded. And I can name several he says nice things about regularly that do NOT pay him.

      What I do not comprehend, is why must loving one story constitute a need to diss another one?

      Not sure why you think I should thank you. But sure, ok — I am in good mood today: so thank you for trying to really give it to me for hiring world class experts to provide great content.

      September 18, 2014 - 11:36 AM

  • The Critical Investor

    Seems like my last comments are removed? Nevermind.

    September 18, 2014 - 11:14 AM

    • Tracy Weslosky

      Yes, Critical Investor — and allow me to savor the word “Critical” in your name, I would like to thank you for your onslaught of comments as they have created a stir…but not the way you intended. Due to you, we will in our future editions of InvestorIntel be publishing comments made by people that disclose there name only. After all, if you cannot stand behind your comments with your true identity so that you can be reviewed with the same critical eye that you seem to place on others, then we are the wrong site for you. May I add how relieved I am that you are growing weary of being a dedicated PIA.

      September 18, 2014 - 11:26 AM

  • Urban Girl

    First even though I am going to lose my moniker on this site, I have to say I come to this site for the editorials and the exchange of well thought out opinions/knowledge.

    September 18, 2014 - 11:33 AM

  • Russian grant revs Stans Energy while battery market fuels Stria Lithium | InvestorIntel

    […] In this week’s #1 most read article of the week, Jack Lifton highlights a half a dozen in Lifton’s rare earth market update that reminds us that China is NOT standing still. Tomorrow, Ellis Martin of our new IntelRadio […]

    September 22, 2014 - 1:49 PM

  • Bill Keenes

    Jack, I believe I saw evidence last week that America is not standing still either !

    September 22, 2014 - 9:09 PM

  • JOE O

    damn
    ucore and tas getting whacked
    is it all jacks fault? 🙂
    accumulate and shut my eyes till 2020?
    qrm market cap at 12 million ouch!

    September 23, 2014 - 6:38 PM

  • jack cummins

    I am amazed that Stans Energy was not mentioned in Jacks’ article. Would Jack please do an article on Stans?

    September 24, 2014 - 3:45 AM

  • Investor

    The ancient plant in the fairly unstable country!

    September 25, 2014 - 3:10 AM

  • jack cummins

    Exactly. Stans will be the first company outside of China to produce the HREEs with their ancient plant and Russian processing technology.

    September 27, 2014 - 7:30 AM

  • Tim Ainsworth

    jack, you might want to do a little more research & a little less fantasy.

    September 27, 2014 - 8:11 AM

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