EDITOR: | October 5th, 2015 | 8 Comments

Lifton: The Global Rare Earths Industry from the Chinese Perspective

| October 05, 2015 | 8 Comments
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specterI think that a specter is haunting global capitalism; the specter of the success of a uniquely malleable Capitalism with Chinese characteristics. China is a one party state, and that party, the Communist party of China, the CCP, has been ironically experimenting with capitalism as a means to rapidly create wealth across the board for 35 years to advance China on the road to socialism and then communism. Chinese industry has until now been and is still mostly dominated by huge State Owned Enterprises, SOEs, controlling the production and supply of natural resources; the processing of those resources into downstream products; and the manufacturing of the goods made from them. All of these activities are primarily and selectively financed by the People’s Bank of China, PBOC, and an arm of the State. All of these centers of production and finance have been all along also centers of waste, mismanagement, nepotism, and corruption just as in the failed Soviet experiment. Yet, even so, and very distinctly from the Soviet failure the Chinese economy, utilizing its own version of Capitalism with Chinese Characteristics, has now grown to be the second largest in the world and some even hold that on a Purchasing Power Parity, PPP, basis China’s is the world’s largest economy.

The CCP leadership has now come to the conclusion that just eliminating massive overcapacity, corruption, mismanagement, waste, and outright theft in China’s resource and manufacturing economy can itself add significantly to China’s gross domestic product. This would help immensely to counter the natural slowdown in GDP growth that is occurring in China as its annual GDP has become world-class, second only to the USA. It’s been accepted by the Chinese that 10% annual GDP growth is a thing of the past, and that even the official target of 7% for this year will be difficult to attain. The Chinese leadership seems to believe, however, that a 4-6% growth in GDP indefinitely is not a fanciful target. They note that in the USA a 4% rate of growth of the GDP would be considered ideal and robust.

I think that the Chinese rare earths’ industry has been a microcosm of the development of capitalism with Chinese characteristics, and now that China under President Xi Jinping has undertaken the massive reform of SOEs in general and of the natural resource sector in particular the very small size of the Chinese rare earth industry as a component of the Chinese natural resources industry means that its reorganization can be effected more easily as there is less entrenched inertia resisting change from the local government officials, central government bureaucrats, because there are relatively small amounts of money to be sequestered and stolen.

To put the Chinese rare earths industry in perspective let’s compare it with the Chinese steel industry. In 2014 China produced 822.7 million tons of steel of all types (more than half of the world’s output!). The October 2015 price in China for hot rolled band (the benchmark steel product) was USD$261/ton ex works, so that the revenue from the sale of steel within China would be 214 billion dollars! In his presentation at the Shanghai conference of Argus Media Dr.. Chen Zhanheng stated that for the Chinese rare earth industry the comparable figure of total sales of the legally produced quota of individually separated rare earth oxides for 2015, priced on Sep 15, 2015 would be 1.3 billion dollars. In simple terms the revenues of the Chinese steel industry every two days equals that of the Chinese rare earths industry for a year. Which industry do you think that the Chinese government is most concerned about?

Chinese statistics are known to be unreliable and so statements of current demand and of future growth must be accepted only as direction vectors. The information on supply and demand coming from outside of China is also not reliable. Double counting is rampant among national customs’ data. For example, the USGS lists France as the largest source of rare earths for the U.S. market when in fact France produces no rare earth minerals whatsoever and never has. The imports from France come mostly from Chinese mixed concentrates and some also are produced from process leach concentrates from Australia pre-processed in Malaysia. It is the same for so-called Estonian exports of rare earths to Japan. Silimae as part of Molycorp was processing mixed concentrates from California for Japanese customers. No European mined rare earths were processed in Estonia. Most rare earth trade is by private treaty so that prices and actual quantities therefore are obscured.

The Chinese rare earth industry according to Dr. Chen will finish a mandatory restructuring into 6 groups each under the control of a large resource based SOE by the end of this year. The six will then each tackle the vast overcapacity in separation, metal/alloy making, and magnet manufacturing in its assigned segment.

In the USA such a “consolidation” would result in only the lowest cost, most efficient operations, surviving. There is no reason that the Chinese result will be different. The wild card in all of this is the illegal mining AND refining sector in China and in nearby countries such as Viet Nam, Thailand, and most likely North Korea. There is unlikely to be any rare earth mining by the Chinese outside of China other than perhaps in North Korea. Again according to Dr. Chen since 2011 the Chinese government has cracked down on illegal rare earth mining, refining, and trading and made considerable progress.

Finally, Dr. Chen predicts that China will demand domestically more than a third more rare earths in 2020 than it does in 2015. If illegal mining is curtailed this will mean a substantial increase in legal mining and refining, but if the industry is to be profitable then it will not only have to consolidate as it is doing now but also raise prices across the board.

China’s domestic economy is being redirected to consumption from its current emphasis on savings and (over) investment. If the Chinese Communist Party is successful in reorganizing the resource sector, then Chinese domestic demand will of course take precedence over exports in all categories.

Japanese end-users and trading companies currently China’s largest export customers for rare earths (about 50% of the total exports) have invested between 500 million and two billion dollars in developing non-Chinese resources of rare earths and non-Chinese refining and fabricating facilities for the rare earths in just the last couple of years. These investments have been in property, plant, and equipment in places like Viet Nam, Malaysia, India, and Brazil. North Americans have only “invested” in the shares of junior mining ventures and Molycorp. It is time for far-sighted North American investors to invest in property, plant, and equipment to bring domestic mines into production. This can only be of any value if a North American domestic total rare earth supply chain is reconstructed simultaneously.

The Chinese rare earth industry’s perspective does not really go beyond China’s growing internal demand. If we do not establish an independent total supply chain, there is no point in developing any mines here. We need to emulate the Japanese not the Chinese.

Publisher’s Note: Jack Lifton will be a speaker at the upcoming Global Technology Metals Market Summit on Wednesday, October 14. For more information, go to TechnologyMetals.com or email Sue@InvestorIntel.com.


Jack Lifton

Editor:

Jack Lifton is the Sr. Editor for InvestorIntel Corp. and is the CEO for Jack Lifton, LLC. He is also a consultant, author, and lecturer ... <Read more about Jack Lifton>


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Comments

  • Andrew

    “Chinese rare earths’ industry has been a microcosm of the development of capitalism with Chinese characteristics” , I think it is the best description to explain the current depressed price situation other than so-called illegal mining. If you try to use the point of view as a rare earth consumers inside China running business in that environment…

    October 5, 2015 - 7:30 PM

  • Jeff Thompson

    Any chance the Chinese government is turning a blind eye to the illegal production, and funneling that “lost revenue” back into the SOEs that are ostensibly running at a loss, so as to make the “market” price appear lower than the real supply/demand balance equilibrium would achieve? Or are they just caught up in the general commodities downturn like so many others? Or perhaps not enough inventory has been worked through yet for the new-ish (5/1/15) 27% HREE tax to have really propagated through the supply chain yet.

    October 6, 2015 - 11:28 PM

  • Jack Lifton

    Jeff,

    Your conjecture that ” the Chinese government is turning a blind eye to the illegal production, and funneling that “lost revenue” back into the SOEs” is held to be true by many China-rare-earth-hands of my acquaintance. In fact it appears to be a prime reason for the slow pace, perhaps failure is not too strong a word, of the “crackdown” on illegal production. Perhaps “illegal” might be better described as “off the books.” This is why I take supply/demand projections by pundits with a grain of rice.

    Best regards

    Jack

    October 7, 2015 - 6:50 AM

  • Andrew

    Until now the biggest change in the rare earth msrket has two. First one is approval of restructuring plan for six giants and second one is two big trading platforms.
    “Restructuring” this idea is orginally from the west in free market. Companies usually have commercial reasons to do that. China is trying to develope capitalism of course this is an option for them. However, the six giants also carry specific mission from the government to “stablize the rare earth market”. This is their special characteristic.
    Trading platforms aims to provide easy access for trading rare earth.

    Very simply, if these two things exists well before or set up before rare earth price rocket it actually provide benefit to this industry. But the yime they set these up was after many companies increased stock level because of scare of supply and price rocketing…so… why companies need to keep high stock level now if some groups want to keep them stable and can access them easily? So, can you see jow chinese gov destroy rare earth by changing people’s EXPECTATION?

    October 7, 2015 - 7:21 AM

  • Jeff Thompson

    Thanks, Jack. Let’s hope the various North American rare earth exploration companies can hang in there in a tough environment then, until true market forces eventually unmask any “off the books” transactions, if that is indeed some component of the recent price drops. Personally, I’m rooting for a more conventional explanation (like general commodities downturn, or tax propagation time), as I don’t much like conspiracy theories, but there’s something about this one that strikes me as plausible.
    Jeff

    October 7, 2015 - 7:06 PM

  • springer

    Jack,
    any news from Tasman. I saw a news ticker saying that
    Moly sells it non-assets. What happens with its european assets?

    Springer

    October 11, 2015 - 2:51 PM

  • Jack Lifton

    Springer,

    I don’t know what’s happening with Tasman, but I know that its CEO is extremely active in the European critical metals “scene.” I met with him two weeks ago in Brussels, and he was very upbeat.
    I know nothing about Molycorp’s European “assets” if you can call Silmet that. No one wanted it before Molycorp came along, and I suspect that it is the same situation now.

    Jack

    October 11, 2015 - 10:16 PM

  • Zander

    Great article,
    Any news on NovX21? It’s dropped off the face of the earth.
    Ta

    November 26, 2015 - 12:11 AM

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