The Smokescreen Theory of Illegal Chinese Rare Earths
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?
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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.
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>