EDITOR: | February 14th, 2016 | 21 Comments

The Smokescreen Theory of Illegal Chinese Rare Earths

| February 14, 2016 | 21 Comments
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I have been asked by several commentators to go to print on the recent conclusion that the Chinese rare earths industry is plagued by up to 40,000 tonnes of “illegal” production. Before I detail my response, I will first qualify my understanding of their definition of “illegal” by those commentators as “outside of official production quota” and hence “illegal”. Let’s go back a few years ………………

Remember when all the fuss was about export quota and the World Trade Organisation (WTO) rulings, well, was there illegal rare earths production then? Clearly, yes! Southern China was awash (literally) with mums and dads in creek beds getting whatever heavy rare earths out of ionic clays they could. Why? Obviously for the money, but what? Dysprosium! How much? Unknown, but probably no more than 200 tonnes per annum. It is very important to consider what the Chinese rare earths industry was doing whilst all this “noise” was about. I reckon they were engaging in a very deliberate attempt to move the value add in rare earths to be solely located in China. I explained how this process worked to an acquaintance using magnet-destined rare earths as an example, but it applies to catalysts and phosphors alike.

Imagine 7 businesses, A, B, C, D, E, F and G. A is the mine and produces rare earth mineral concentrates. B buys the mineral concentrate from business A and produces rare earth chemical concentrate (a mixed carbonate for example). Business C buys from business B and produces separated rare earth oxides. Business D buys from business C and produces rare earths metals. Business E buys from business D and produces magnet feed materials. Business F buys from business D and produces magnets. Business G buys from business F and produces wind turbines (for example). Historically, the 7 businesses were located all over the globe, but China discovered the opportunity for business A. They discovered rare earths, developed a flow sheet and started to produce mineral concentrates. And they did it cheap! And they did it nasty! And they undercut the rest of world (ROW) mining businesses, to the extent that almost all of the rare earth mineral concentrate came from China. Then they developed business B! Then they developed business C, then D and so on. With each progressive development of the next business in that supply chain, the ROW businesses declared their woes of unfair advantage and went to the WTO for resolution. Meanwhile, at that time, there were no successful competing mines being developed outside of China. Why? The impact of the export quota!

With the export quota now gone, and rare earths prices still depressed what does the ROW blame the situation on? The “illegal” 40,000 tonnes keeping the price down! With low prices, ROW business A-hopefuls cannot justify their projects, get finance and commence development. China has to fix the “illegal” production issue. And China claims to be doing just that. It has consolidated the rare earths space into the 6 big producers and is progressively clamping down on the illegal production. But are they? Well, I will now throw my response into the ring! Is the 40,000 tonnes actually “illegal”? How can 40,00 tonnes go un-noticed? That’s like a Baotou sized enterprise! Not likely! What if the 40,000 tonnes is sanctioned, but not allocated or reported in the normal production quota system? What would this mean? In fact, why would they do that? A little devil’s advocacy here.

What if the “illegals” issue is just a smoke screen? What if whilst the ROW complains about the inability of China to eliminate the “illegal” production, businesses A through G are happily consolidating these businesses inside China. All value add is being targeted for China. All ROW development is stifled (except for, and congratulations to Lynas). What will happen in the not too distant future when Chinese business G (and its entire supply chain) is China mainland only? Now expand the discussion to include all the other rare earth products and their supply chains. All of China’s mined rare earths will be value added through to business G, and all within China. But not the “illegals” you say. Well at about this time, China will announce it has successfully closed down all of the “illegals”, (at the insistence of the ROW), and now, unfortunately there is not enough rare earths to export since all of China production is fully utilised and forms the basis of massive employment. No export! Will this happen?

Of course not! Under my devil’s advocate scenario, China will have identified the ROW need for rare earths related high value add products and will (may?) provide them (at the right price). From where you may ask? From the ROW mine projects that they will progressively take over at bargain basement price! Very, very smart.

I can hear the nay-sayers! Why would they do that when the current prices have all of the China businesses losing money? Well are they? What if business A’s loss is being absorbed by business B? Or C? or D? You can do this when you have consolidated the supply chain. What if only business G (the OEM) is the only one to declare a profit? And a big one at that!

Will this all happen? Is it already happening? Well watch this space. I am in the process of putting together a network of associates who together can keep a view on this situation as it progressively unfolds. If we can get the right information at the right time, we may be in for a very interesting journey.


Steve Mackowski

Editor:

Mr Mackowski is a qualified engineer in mineral processing with over 30 years technical and operational experience in rare earths, uranium, industrial minerals, nickel, kaolin ... <Read more about Steve Mackowski>


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Comments

  • Jeff Thompson

    Thanks for the excellent article, Steve. Any thoughts on whether rather confusing “resource concentrate taxes” at a finished product level of between 7.5% to 11.5% for LREEs and 27% for HREEs, which were supposed to have gone into effect in May 2015 after replacing the prior regimen of “export tariffs”, is also part of the smokescreen? Chinese domestic prices and FOB prices have largely converged since May 2015, indicating the “resource concentrate taxes” are not yet in effect. Legitimate time delay effect in using up the oversupplied material produced prior to May 2015, or another part of the smokescreen to buy China more time to continue strengthening their expertise in vertically integrating the entire supply chain through companies A, B, C, D, E, F, and G, while ROW flounders and prospective alternates struggle to survive?

    February 14, 2016 - 11:03 AM

  • Steve Mackowski

    Jeff, to properly answer your question would take a while so I’ll try to limit. One, my exposure to and experiences in China have taught me one very important lesson. The Chinese Government knows how to plan. They achieve. Look at population control, economic advancement of rural populations, economic advancement in general. As an aside, this is the direct opposite of Western Governments whose ongoing policy (planning) failures never cease to amaze me. So when you think of China policy details, think this as a very clear message, is this a very clear direction to success? If yes, then it’s deliberate. If not, you have confused the message. If you can’t quite understand, then look for the smoke and mirrors. Your tax question and the stockpiled REO is a good example. There must be still tens of thousands of tonnes of cerium, lanthanum, yttrium, in China warehouses to balance the previous use of Nd/Pr and Dy. A few years ago I had dinner with a cerium sales manager who had 50,000 tonnes of cerium oxide in warehouses. He was trialling its use as a coating on wheat seed to improve drought resistance! Believe me there are major stockpiles out there. So would China be able to recognise pre-May 2015 stock when they apparently can’t identify and stop “illegal” production? The logic does not fit. So the policy does not fit. So for mine, the pre/post May 2015 tax policy is destined to fail. So, therefore, it was never set up to succeed.

    February 14, 2016 - 11:54 PM

  • Alex

    I think that States which donate “green energy” from Tax of people to promote wind turbins and HVD cars increase using NdFeB magnets. This dotation (when the part of market was rather small) increase demand on Nd and this demand growth up 10% per year. The price of Nd metal was 8 USD per kg at 2006-2007 but now still 4 times more
    The owners of G level tecknologyes want to keep their profits because the market of NdFeB magnets monopsonic (Hitachy patent owners or licenced companies can only legally import their goods in USA).
    There are only 5-6 such companies. So they make monopsonick agreement to buy Magnets from China with low price and produce goods with high additional cost.
    Only this companies need additional supply chain instead of China , other can buy wind turbins and cars in China instead of Germany, Japan and USA.
    Those countrees which have no G level production not interesting to participate in supply chain for those countries because additional suggestion at the market like Lynas and Molycorp means that Chinese Works which also produced the same quantaty of rare earth can not sale it. This additional quantaty occur low prices. And if it’ll be more goods at the market it never increase prices. So, you can not make money investing at new rare earth chain (A-F). It needs only owners of G level to keep profit, so they have to invest their own money to keep their supply chain, not other !

    February 15, 2016 - 2:41 AM

  • Jeff Thompson

    Thanks for your thoughts, Steve, on how to interpret the frame of mind in China that governs their decision making. For someone raised with Western values, that sort of vagueness would be intolerable, where a clear and consistent set of rules is considered a minimum requirement. Vagueness is beautiful in art and poetry, but not in taxes. For example, if I don’t file my income taxes by April 15th, I know with high certainty that the IRS will aggressively pursue me until I do. Similarly, if my neighbor doesn’t file his income taxes by the same date, the IRS will also pursue him. So I file my taxes for two reasons; one, because I know I need to, and more importantly, two, because I have a reasonable degree of confidence that the same law is being consistently enforced on my neighbor, which partially alleviates a person’s natural reaction to not want to do something unpleasant, if he at least knows that everyone else is also in the same boat.

    So back to China, if I understand you correctly, the new May 2015 concentrate tax levels on LREEs and HREEs both 1) have not been enforced from May 2015-Feb 2016, and 2) have no realistic chance of being enforced after Feb 2016 not simply because they are working through large stockpiles produced before May 2015 and therefore not subject to the tax, but actually because the large stockpiles have no traceability, no provenance, and the authorities have no ability or perhaps even interest to separate out which material were sourced before or after the May 2015 cutoff date, so the new taxes go inconsistently enforced or even completely unenforced. So your average miner in China living in province A who just produced new material in December 2015 (should be taxed) dumps it into a pile of material that was produced in December 2014 (should not be taxed) because he knows the tax inspector won’t know the difference, and his neighbor told him he did the same thing and the tax inspector didn’t ask any questions, but he still has a vague fear because he heard from his cousin living in province B that the tax inspector in that province did ask him to separate the material and pay taxes on the relevant portion. Whether this vagueness is intentional to put pressure on Western competitors, or simply the result of a poorly organized bureaucracy, is still to me an interesting and important question (intentions matter!), or perhaps a mixture of both depending on what part of the country you live in, but the effect is the same regardless of the question of intent.

    Did I get interpret that correctly, or am I still lost in the smokescreen?

    February 15, 2016 - 8:52 AM

  • Patrick Wong

    Hi Steve,
    Many years ago, before the WTO ruling, I tried to tell people that the whole WTO case was a red herring and you are partially correct in identifying some sort of ‘smoke screen’ but it started long before and it was even partly due to the personalities involved in the Chinese oligopoly. I visited the refineries themselves and spoke with many players, even had my good contacts help us with the technology we needed to replicate the rare earth separation process but in the end they were just pawns in a larger game.
    There’s no conspiracy here, if you understood the factors, you would see that you can quite easily predict what the Chinese will do because they are some of the greatest capitalists I’ve ever seen. It’s what we do and how we respond that seems to put them on an undeserving pedestal. You are correct in that the amount of illegal production was actually much lower than people thought and the simplest of indicators was in the value of an export quota itself. There’s no point in smuggling anything if the value is low and every year the cost of an export quota would fall to such low levels that it would be silly for anyone to risk going to jail when they could simply buy export quotas which were traded. Also, the levels of separated rare earth oxides could easily be monitored since there were only a handful of them around as they cost a lot to build and sat on huge swaths of land.
    Anyways, feel free to contact me and I wouldn’t worry so much about Chinese dominance. RE Separation has always been the bottleneck and the key to an economic industry outside of China and there are a few good alternative technologies out there including one that we have which reduces the capex of RE Separation by over 80%. We are committed to delving into A-F, not just making RE oxides but it begins with processing since getting access to RE concentrate is not a problem.

    Cheers,

    Pat

    February 15, 2016 - 9:07 AM

  • Ann Bridges

    Thanks, Steve, for your insights and explanation of the supply chain. I will certainly keep an eye on your future posts and the facts on the ground. While I depict the worst-case fictional scenario in “Rare Mettle” to grab the attention of the population uninformed of this issue, the realities are often much stranger than I could ever imagine!

    February 15, 2016 - 12:13 PM

  • GeoBob

    Excellent insights, Steve. I was under the impression that much of the so-called illegal rare-earth mining was for HREE in the Southern China ion-absorption clay deposits, basically in-situ leach of weathered bedrock or slimy pits with laborers carrying bags of ooze. You certainly don’t see anything in the photos that looks like a hi-tech REE refinery, so the Q is: where does the concentrate go for extraction and RE-metal production. My guess is that it doesn’t leave the country and Beijing knows EXACTLY where B thru G are. Vertical integration works well for the major producer of anything, as Henry Ford figured out. He bought vast tracts of timberlands in northern Michigan when Model T’s still had wooden frames. Ford Motor Co still is a minority partner in some big Lake Superior Iron Ore mines, so iron ore pellets enter one end of the mile-long River Rouge plant and Mustangs roll out the other.
    r

    February 15, 2016 - 8:26 PM

  • Alberto Lobo-Guerrero S.

    What a mess! It seems to come from a bad mafia novel.
    Rare earths are not the only mineral substances in which China is the dominant player. Antimony, tin and tungsten are also among the Chinese trump cards.

    February 16, 2016 - 9:17 AM

  • HB

    So how does the South China Sea situation affect this should things get hotter with race for oil and saving face as factors. China clearly needs ROW markets for Industry G and the ROW needs Industry G output.
    Is the symbiosis enough to keep things controlled or not..If not will the small amount of ROW REE supply become more valuable.. I think of the fishing captain affair prior to the short term embargo…or was that orchestrated to have the ROW sources develop a little until they were ripe for the plucking by China by subsequent devaluation. A very cunning 5 yr plan…if.
    I have suspected Lynas will be kept afloat by the Japanese as a cheap insurance in the off chance diplomacy starts to fail.

    February 17, 2016 - 5:32 PM

  • Bill

    Steve, I keep revisiting this article for another read – it appears you have nailed it – that’s exactly what the Chinese are up to

    so the next / current phase to play out must be the Chinese take over of ROW developers – for pennies

    and when they have secured the projects they want, then they will stop exporting rare earths to the ROW – and bring those projects online as ROW rare earth suppliers

    how can the Chinese be stopped – or is it too late already?

    February 28, 2016 - 1:24 AM

  • Jeff Thompson

    If the Chinese government are succeeding in moving more fully to monopolizing the rare earth industry because a) they are either essentially subsidizing production of rare earths at the mine level by being willing to allow their “private” businesses to operate at continuous losses and keeping them afloat through some indirect means (direct subsidies, “illegal” production kickbacks, suitcases of cash delivered in the backdoor, whatever mechanism) or b) they are recouping the losses occurring at the mine level further up the vertical integration chain during the refinement stages/production of alloys/production of magnets, or some combination of those two, then the answer for the rest of the world is clear: if there are any countries out there who desire to not be partially or wholly dependent on Chinese imports of critical materials, then their governments must also be willing to subsidize this industry, at the very least at a mine level to start, or ideally also further up the value chain later. Fair play to the Chinese for their technical skills and for their long-range strategic planning, but they’ve essentially turned this into a state-sponsored enterprise to stifle foreign private enterprise so that it cannot compete on an economic basis any longer, trying and succeeding to drive foreign private competition out of business. Other country’s governments must become involved as well if they wish to establish any degree of independence of supply. So far I only see the Japanese having the foresight to do this with their accommodative loans to keep a secure non-Chinese source from Lynas flowing.

    If other countries don’t have the political will to do so, then their industries, both commercial and military, will suffer the long-term consequences of ceding that authority away. Here I look to my own government in the United States and see nothing that strikes me with any confidence that we are even broadly aware of the problem, never mind it being a priority. Perhaps other countries are thinking more strategically or perhaps we will again in the future as well. There is plenty of economic ability, it wouldn’t take more than a few hundred million dollars to get some of these projects into production, orders of magnitude below the tens of billions of dollars we regularly throw away on countless useless programs that add no value to society but just create a nation of non-contributing dependents, who constantly demand more anyway and are never content. It would not be hard to trim the fat here and there to find the money to develop a critical, value-added industry at home that would provide the raw materials for a broad array of high-tech commercial and military applications. The problem isn’t one of economic will (there’s plenty of power in the machine), it has now been turned into one of political will (what direction that power is focused), having unfortunately left the realm of traditional and purely private enterprise competitive concerns, and now necessarily involving other sovereign governments by the actions of the Chinese government to subsidize the entire industry, essentially requiring the same by any rest-of-the-world nation who wishes to now allow their private enterprise to compete, or who wishes to remove a subtle and growing dependency for a critical supply from an adversarial nation. Our own fault for having let those skills migrate away decades ago.

    The only positive thing I can think of to say is that, no, it is never too late. We can always get back in the game. Would rather see that happen today, rather than five, ten, fifty years from now, but if that’s how long it takes, so be it. We have the mineral deposits that aren’t going anywhere, we have a nation full of bright people who know how to develop them and make use of what we produce from them, and we easily have the money in the system to do it, we are only lacking the burning desire to actually focus that money in the right direction and seem to be waiting for another catalyst, either economic or military, to actually prompt us to do it (how about the recent deployment of surface-to-air missiles and radar stations by the Chinese government on the manufactured islands in the South China Sea a few weeks ago, trying to restrict freedom of navigation on the high seas in a busy commercial shipping corridor, after claiming in 2015 that there would be no military development on the manufactured islands, obviously a deception that the rest of the world was all too happy to believe – think Neville Chamberlain in the World War II). No, it will never be too late, it’s only a matter of time until we put this tool back in our tool chest.

    This time, we’ll lock the tool chest before we go home for the night, as anyone who’s ever worked in a manufacturing environment can relate to.

    February 28, 2016 - 7:34 AM

  • Steve Mackowski

    Too late? The number of earth science graduates drops every year. The experienced ones retire. I reckon 20 years is almost irreversible damage to a capability.
    As to the China solution. I have spoken to many Chinese operators. They are all interested in ROW partnerships. What makes them back out is the price. ROW expects someone else to stump up the $1 billion startup money and ROW to get the lions share of the NPV. Not an attractive deal. The Chinese are prepared to bring $s, expertise, market and management if needed. ROW needs to reconsider its value proposition.

    February 28, 2016 - 10:19 PM

  • Bill

    Thank you Steve.

    It appears to me you may now be critical of ROW developers needing start up money as being unrealistic in their expectations, and maybe you are correct – you are closer to the action than most of us.

    However isn’t it a fact as reflected by your article above that the Chinese have artificially supressed the prices of rare earths, thus devaluing every ROW project in development and in production (Lynas).

    Therefore aren’t ROW developers justified in seeking a premium in return for Chinese investment – after all it is the Chinese manipulating the prices down for their own advantage.

    Perhaps some ROW developers have reconsidered their value proposition and come to the realisation they are being ripper off by the Chinese via their price manipulation tactics.

    Perhaps the way forward is for the west to put in place its own supply chain – without the Chinese.

    February 29, 2016 - 5:39 PM

  • Steve Mackowski

    Bill, I cannot agree with you more on the issue of ROW development through to OEM. However, I do not see proponents out there shouting from the rooftops about their REO smelting project, or their Nd/Pr metal powder project, or the hi-tech phosphor plant etc. There is only a small group of junior explorers with development aspirations to become REO producers. Until we see ROW project in the downstream production chain, then CHina is the only real option.

    February 29, 2016 - 6:13 PM

  • Jeff Thompson

    Bill, the west building it’s own supply chain is exactly what we should do, the problem is there doesn’t appear to be any institutional group with enough long-term vision out there to fund the several hundred million dollars needed, either from private bankers or government-funded, or some combination. Yes, it would only be the first leg in the total chain, but the mine it where it all starts, and would encourage development of later stages. As I sit and look around me at every single thing in my home, I am reminded of the fact that they were all mined out of the ground at some point in the past.

    February 29, 2016 - 7:28 PM

  • JJBeswick

    Guys the West HAS built its own supply chain. Lynas is at its base; currently supplying around 60% of Japanese NdPr demand as well as supplying to US, Europe Vietnam etc.
    They’re currently expanding production by a third (bringing on line the 4th SX circuit). Count about 5ktpa from India as well and the Japanese/ Vietnamese metals & magnet capacity and that’s what I call a supply chain.
    Capable -at this stage- of supplying around 50% of ROW demand.

    March 1, 2016 - 5:40 AM

  • Jeff Thompson

    You’re right, JJ. Would like to see Lynas also develop the smaller HREE component with any amount they may be able to product alongside their La/Ce/Pr/Nd output at some point in the future as well, or for another one or two western sources to move to production of both LREE/HREEs at some point for geographical/political/competitive diversity, but right now Lynas and their Japanese financiers are leading the charge for non-Chinese supply.

    March 1, 2016 - 7:28 AM

  • Tim Ainsworth

    Jeff,
    The original Lynas BP involved toll processing the SEG/HRE at La Rochelle, and the Eu was a significant second revenue stream after PrNd.
    LAMP now working up towards the potential 1000tpa SEG/HRE, La Rochelle certainly has the capacity, wonder why they are not rushing to put that supply chain together?
    Mind you SEG con selling inside China $8kg & HRE < $17kg might have something to do with it, function of supply over demand.

    March 1, 2016 - 8:38 AM

  • Tim Ainsworth

    JJB,
    Not to mention autocat via world’s largest manufacturer in Rhodia/Solvay, plus FCC via BASF.
    Rather ironically US imported 8kt Chinese La into FCC last year when Mt Pass was 33% full of the stuff.
    Don’t hold out much hope for building MSC’s when they couldn’t even get that basic import replacement sorted over several years

    March 1, 2016 - 8:50 AM

  • Technology Metals Monthly – Quiet times can be deceiving in the Rare Earths Space | InvestorIntel

    […] REO. What does this mean? This is the interesting part. We have all heard of the “illegal” REO. I have previously called this a smoke screen but that’s another story. Apparently, research by Prof Kingsnorth and others puts this […]

    March 8, 2016 - 8:47 AM

  • Lara Smith

    “They discovered rare earths, developed a flow sheet and started to produce mineral concentrates. And they did it cheap! And they did it nasty! And they undercut the rest of world (ROW) mining businesses, to the extent that almost all of the rare earth mineral concentrate came from China.”

    No! This gives a partial truth and is one-sided and is extremely misleading! And this is also a very typical diatribe of what Western analysts choose to convey.

    If you follow the trajectory of rare earth mining, how it moved Sweden/Norway ( 1880’s) to Brazil (late 1880’s) to from South Africa (50’s)/Russia &US (60’s-80’s, though there was mining way before in the US) and eventually to China (only in the 90’s!!). It was not only a cost consideration. There were concerns by suppliers, first in South Africa, then in Russia and the US regarding the nuclear nasties (radioactivity) that comes extracting rare earths and countries were happy to let these mines go and have their material mined in China. Make no mistake, it’s not that China drove traditional end users out the market ( this happened in lithium in 1997 with SQM’s extraction of Lithium carbonate from brines), rare earths was different, it SUITED countries to have China deal with the hazardous material and rather import according to their needs. There was no PUSH BACK. There was no major investment by the ROW to develop their native resources, to make more efficient flow diagrams etc etc. Hell I have a 1st class degree in chemistry and I can show you in my second year text book a big line across the rare earth elements saying “Ignore for examination purposes!”

    The rub is that no one predicted in the 90’s the increase in applications for REE and the associated increase in demand. No one thought that most processing know-how in the ROW would be lost or that China might eventually exert their control over their resource.

    Make no mistake, China has paid an enormous social cost for mining rare earths. And at the same time, China has saved Western countries this enormous social cost. True they could have employed better pollution controls, safety measures etc. But this was not a wealthy country. Today, while Western Rare Earth conferences are focused on “Is there enough? ” ” diversify away from China” etc etc, if you actually go and speak/ attend a Chinese rare earth conference, one speaker after another will be speaking about “how to combat this kind of cancer caused by rare earth mining” or “Or these pollution measures” etc etc.

    Let me conclude by saying, I am an advocate of fair trade practices. However, there are two sides to a coin and we don’t hear the other side often enough in Western-produced publications.

    March 3, 2017 - 11:38 AM

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