Lifton ‘Unchained’ (Part 4): China is officially shifting focus to domestic consumer demand
This is the fourth installment in our five-part Lifton ‘Unchained’ commentary on the Rare Earth & Critical Materials Market. In case you missed them, be sure to check out Jack’s first three articles in his ‘Unchained’ series: Part 1: The State of the Rare Earth Market, Part 2: The Driver for Global Rare Earth Demand and Part 3: Forecasting Chinese Rare Earth Demand.
The late and unlamented Soviet Union created this planning model, but could not make it work, and so the Soviet Union became a hypocritical dead end benefiting only privileged elites that in the end simply went bankrupt. Even though it had produced immense stockpiles of natural resources. It had not managed to create an economy that could consume them.
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China, over the last 25 years, just one generation, has created the largest export led economy in the world. It has accumulated US$3 trillion of reserves in doing so. China is now officially shifting gears. It has announced that it will shift its focus to domestic consumer demand so as to be able to maintain the vast productive capacity it has built as a low labor cost exporter. The Chinese mining industry and its downstream value chain are part and parcel of this shift in emphasis. Let’s see how exactly this is affecting the rare earth supply chain in China and how this will affect any forecast of future global demand for the rare earths collectively and individually.
First of all please note that China today, notwithstanding the entry of both Molycorp and Lynas into the light rare earth supply market, remains the overwhelmingly largest supplier of light rare earths in the world. I estimate that during the last 12 months China has produced and sold 90% of the world’s legally traded light rare earths. I say “sold” to emphasize that Molycorp has stated that it has built a large inventory of material and it is not clear to me how much has been actually sold into the market. Lynas, hopefully due to start up issues, has so far produced almost nothing in finished goods (at its entry point into the market).
Three weeks ago when I was in China at the ICRE in Ganzhou a speaker from Baotou dramatically emphasized that his company is the world’s largest vertically integrated producer of light rare earths all the way through to metals, and that, by itself, Baotou could easily supply the world’s demand for such products indefinitely. Keep in mind that of the 200 or so people in that audience only a dozen, at most, were not Chinese. Ganzhou is the heavy rare earth processing center of the world. There are, as I mentioned above, some 38 rare earth separation plants with more than 60,000 tons per year of capacity in the three-province local region of southern China. The Baotou speaker wasn’t trying to impress us, few, non-Chinese, he was very pointedly telling the other Chinese to stick to mining and refining heavy rare earths. Why? Because he is worried about competition in refining not from Molycorp or Lynas but from other increasingly stressed Chinese rare earth refiners who are being told by the central government that unless they are legal, environmentally in order, and profitable they can be ignored by the new consolidators of the rare earth industry appointed by the central government who, the consolidators, are the only ones who can give out production and end-use allocations and licenses. Interestingly enough there was a list shown of the individual capacities of the 38 rare earth separation plants in the region. The largest was of 5000 tons per annum capacity, the smallest was 1000 tons, and the average was 2000 tons.
There are a small, relative to the total, number of much larger light rare earth separation plants in China. Notably in Baotou’s home, the Autonomous Region of Inner Mongolia. I was told that China Minmetals, now appointed as a rare earth consolidator, for example, is building a new 10,000+ ton per year capacity SX plant. The statement was made in the conference that 90% of China’s rare earth refining is done by the largest 6 SX plants and that 97% is done by the top 20 SX plants. There is clearly a vast excess rare earth separation and refining capacity in China and there is clearly a bloodbath underway among them to see which will survive. These “communists’ are doing a very good job of using market capitalism to sort out a problem. When this type of behavior occurs in a free market economy it normally results in temporary low prices during the oversupply period followed by price stability as inefficient companies fail and then price rises by the winners to compensate for their losses in the battle for survival . I think this is exactly what we’re seeing today in the, still dominated by China, rare earth markets.
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>