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China's rare earth situation: rampant illegal production, inadequate quotas, imperfect tax system

Post Date: 21 Aug 2015    Viewed: 563

China’s rare earth industry is a tangled web. The government in Beijing recently announced it would step up efforts to stop illegal production and sales of rare earths. Really? Haven’t we been hearing this line for several years? Yet the evidence is that smuggling is still thriving. But here’s a twist: Beijing’s own quotas may (if inadvertently) encourage the illegal traffic in rare earths.

In his most recent presentation (delivered at Las Vegas, Nevada), rare earth expert Dudley Kingsnorth of Industrial Minerals Company of Australia (and Curtin University, Perth) makes the point that China’s production quota for neodymium-praseodymium oxide is 20,995 tonnes a year. Yet the demand from magnet makers is running at 30,348 tonnes, a gap of 9,353 tonnes. Presumably these industries are making up the difference by means of the illegal market. For dysprosium, the quota is 717 tonnes, the demand 930 tonnes. (Dudley Kingsnorth points out these are not his figures, but have been cited by the China Rare Earths Society.)

Here’s another factor that is no doubt affecting prices. Melanie Debono of London-based Capital Economics, in her latest rare earth note, notes that the new system is not working exactly the way most observers had expected. She explains that the previous tax system charged on the amount of ore mined; the new regime, introduced on May 1, levies the tax on the value of concentrate sales. According to Capital’s calculations, the tax payable on each tonne of rare earth oxide should be higher under the new system than the old. Yet export and domestic prices of all REE have continued to fall.

Debono thinks three factors are at work:

First, the prices of all industrial metals have been slumping recently (as I have been pointing out; copper fell below $5,000/tonne on Wednesday, an ominous sign). REE are caught up in a wider commodity cycle down-dip.

Second, the impact of the tax could have been partly offset by the removal of the export tariffs, which also occurred on May 1. Domestic and export REE prices have now converged at prices lower than domestic prices were at before the tariff was removed.

Third (and this is important), the new tax applies only to new ore. Concentrate sold after May 1, but produced from ore mined before that date, is exempted from the new tax if it has already incurred the old tax impost. The effect of the tax change will therefore impact prices at a later date, and only when stocks of previously produced ore and concentrate have been run down. “These inventories are estimated to be quite substantial,” says Debono. “What’s more, given that the tax is based on the value of the concentrate, it may also take a while for the impact to feed through to final oxide and metal prices.”

Nevertheless, she adds, there are signs that some producers have begun to pass on higher costs to consumers. She cites Ganzhou Rare Earth Industry Association having hiked price guides three times since May.

Getting back to the tangled web, we have to keep in mind that so many Chinese REE producers are operating at a loss. Debono thinks some may have to close by year end so that makes her hope that the longer-term prospects for REE prices is still positive.

Also on the brighter side, Kingsnorth points out the extraordinary growth shown by the REE sector. Not many commodities will have seen demand grow 30-fold over 50 years. He lists the demand (in tonnes) for rare earths since the 10 years 1955-1965, with the following totals for the final year of each decade:

1965: 5,000 tonnes

1975: 20,000

1985: 30,000

1995: 55,000

2005: 110,000

2015: 145,000

But, using europium as a yardstick, the price has been declining:

1965: $2,500/kg

1975: $1,000/kg

1985: $750/kg

1995: $600/kg

2005: 300/kg

2015: Between $200/kg and $300/kg (but remember that europium hit $3,000/kg in the heady days of 2011).

Dudley Kingsnorth continues to make the case that China must tackle the illegal production and smuggling of REE. The fact that illegal mining is responsible for somewhere north of 30% of the country’s production is of real concern, he says.

But he also reminds us that, while Chinese production has expanded so significantly since the 1960s, so has China’s capacity to expand its downstream use of its own REE. The decades show the advances:

1970s: China produced REE concentrates

1980s: China produced mixed REE concentrates

Early 1990s: Produced separate REE oxides and metals

Late 1990s: Produced magnets, phosphors, polishing powders

2000s: Produced electric motors using REE, along with computers, batteries, LCDs, mobile phones, electric and hybrid vehicles.

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