Rare earths, imperfect market

How China's policymakers should tackle the country's rare earth overcapacity

Nabeel A Mancheri

Economics and finance, Trade and industry | East Asia

19 June 2015

China has a monopoly over the global rare earth market, and the result is a complicated industry.

The global market is hamstrung when a single country has complete monopoly over resources, and this stalemate is compounded if the monopoly country is not a free market democracy. So it is with China and its complete power over the rare earth resources market.

China controls more than 90 per cent of the world’s supply of rare earths, and consumes close to 70 per cent these, while other major consumers such as Japan, the United States and the European Union have no option but to depend on China for materials to run their industries. To complicate things further, the global rare earth market is so intricate and unpredictable that investors are reluctant to commit to any future projects.

In recent years, the Chinese Government has strictly controlled mineral output by monitoring legal exploitation and cracking down on illegal mines. But there is still a problem of supply exceeding demand. China puts an average 200,000 tonnes of minerals on to the market each year, while actual global demand is for significantly less.

The estimated annual capacity of rare earth separation nationwide is more than 450,000 tonnes, while the actual output is between 200,000 and 300,000 tonnes, and the actual demand, on a global scale, is about 120,000 -150,000 thousand tonnes. This is the major reason for low prices, and has caused other projects outside China to be financially unviable and uncompetitive.

Prices were pushed further down after the Chinese Government’s abolition of export quota on rare earths in January this year, in compliance with the World Trade Organization ruling.

The removal of the export tariff of 15 to 20 per cent from 1 May has also negatively affected prices. However, the Chinese plan to impose a new resource and environment tax may push the price above current levels by end of this year. The tax reform is expected to adjust resource tax on rare earths from quantity-based collection to ad valorembased collection, where tax is based on an assessed value. Such an adjustment is expected to be more realistic to international market conditions.

Prices have fallen since the peak in 2011, and have not changed much in 2014 and the first quarter of 2015. Mid-March saw an increased supply from separating enterprises, and this has lowered the price further, especially for dysprosium oxide, praseodymium oxide and neodymium. Consequently, predictions for the rare earth market in 2015 are mixed.

The problems are also exaggerated by sluggish demand, as both domestic and external demand have weakened in the last two years. Demand is weak from downstream deep-processing industries such as fluorescent powder, and traditional applications such as ceramics and the metallurgical industry, while selling prices for refining and separation enterprises have dropped against their purchasing prices. As a result, the raw materials market is stagnating.

A minerals price rise this year is likely on the condition there are substantial adjustments in the mineral resource tax and good market anticipation. However, drastic changes are less likely. Based on the supplydemand relationship, the excess supply situation remains unchanged in the overall rare earth market.

The expectation for an increased rare earth price is limited, since China’s domestic economy is weak, with a less-than-robust robust manufacturing industry. Moreover, there is a price war among domestic companies fighting for orders.

The demand from other major consumers like Japan or US, constituting about 20 per cent of global consumption, remains weak and will not be in a position to alter the market.

For countries besides China, rare earths are not just a resource issue. For example, just two industries, Phosphate and Uranium-Thorium in the US, dump their rare earth composites as waste due to regulatory requirements, and if they are allowed to process with proper arrangements for monitoring radioactive materials, this can contribute to 85 per cent of global rare earth demand each year. These resources are easy and inexpensive to recover.

State support is a possible solution for governments worried about China’s market dominance, and their dependence on China for various rare earthbased products. It may help to offer financial incentives to the domestic mining and processing companies, and facilitate vertical integration in the supply chain.

Even if there are a considerable number of mining projects and concentrate or oxide production outside China, this will not solve the problem and the free market cannot replicate a State Owned Enterprise (SOE)-dominated value chain.

It’s pointless to expect a change in the market imbalance while the Chinese Government’s hold on the rare earth industry strengthens.

It would have been better for China to improve environmental and labour standards, and target illegal mining and smuggling. This would have naturally increased domestic resource prices, compensated loss-making SOEs and reduced the huge imbalance between the domestic and international rare earth price.

This would also help China reduce its overcapacity and command a better price for what it produces. It would be a win-win situation for China and the world.

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