Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Strategy Metals Bulletin: Chinese Rare Earth Element Policies


Published on

This bulletin looks at the ongoing changes in Chinese REE policies, and muses how this will affect western access to rare earths in the relatively short term. There is also a discussion of the developments in the world of niobium.

  • Be the first to comment

  • Be the first to like this

Strategy Metals Bulletin: Chinese Rare Earth Element Policies

  1. 1. Strategy Metals Bulletin (46)Terence van der Hout Sep 11 - 17, 2011Gold&Discovery FundAims to update investors on developments in the world of strategy metals – crucial inputs to industry, defense and technology innovationThis week’s bulletin looks at the ongoing changes in Chinese REE policies, andmuses how this will affect western access to rare earths in the relatively shortterm. We also briefly halt at developments in the world of niobium.How are China’s policies affecting western rare earth availability?The rare earth industry is undergoing profound changes as a consequence ofChina’s strategy. Despite all the banter and public outcry over the previous year,ultimately the west has had access to just about the same amount of rare earthswith the same demand levels as previous years. This is about to change. China’sapparent success in executing their strategy will structurally affect the availabilityof rare earths in the west moving forward, I believe as early as next year. Fourpolicy measures are affecting China’s production of rare earths.Production quotas set by Chinese officials in the past have not been strictlyadhered to in the past. Experts have calculated that the actual production ofChinese REO over the last 4 years has exceeded the quotas by a margin of 43%. Inother words, Chinese companies have been allowed to mine and produce moreREO than was planned under the production quotas. Substantially more. This year,however, it looks as though a turning point is being reached. China has justannounced the closing of three mines as a consequence of their reaching theirproduction quotas. However diminutive the mines may be, they will no longer addto production volumes this year. They may also not be the last mine closures to beannounced, adding emphasis to the seriousness of China’s intentions on executingits rare earth strategy. Production figures are bound to be lower than in the past.Another element that is undergoing a crackdown is in the area of rare earthsmuggling. Allegedly, between 20,000 tons – 40,000 tons of REO are smuggledacross the Chinese borders every year, eventually ending up in the hands of SouthKorean and Japanese manufacturers. There is no checking the validity of China’ssmuggling claims, and there is a remote possibility that China is using the theme asa scare tactic, but assuming there is some truth in both the existence of smugglingand China’s success in curtailing it, there is an obvious impact on rare earthavailability moving forward.A further aspect influencing availability is China’s activities in building a stockpileof rare earths amounting to 200,000 tons, over the next couple of years. This 1Terence van der Hout Strategy Metals Bulletin; Sep 11 - 17, 2011If you wish to receive this bulletin, please email me at:
  2. 2. equates to more than 1½ times the total annual production, and seriously impactsavailability.A fourth Chinese policy measure is the inclusion of iron alloys containing morethan 10% of REE under the export quota provisions. Some expect this measure toreduce REO coming to the west by between 5-8%.So how does all this add up? Well, on the demand side, the Japanese earthquakehas impacted the need for rare earths. This has relieved some of the stress on REOmarkets, although the drop in demand is judged to be temporary. What we haveseen is that the lack of availability of REO, as well as the destruction of supplychains following the Fukushima disaster, has forced Hitachi to move a substantialpart of their magnet production to China. They will receive a secure supply ofChinese rare earths, presumably in exchange for ‘sharing’ their magnet productiontechnologies, a value-adding art not yet practiced in China.On the whole, we may assume that demand for rare earths for next year willcontinue at the relentless 7-8% growth. Furthermore, and with any luck given themeasures set out above, we may be seeing Chinese production just about reachingtheir targeted levels (approaching 90,000 – 95,000 tons), which is 20% less thanproduction levels of the last 5 years. China’s own need is barely covered by theseforecasted production volumes. How many tons of rare earths are the Chinesegoing to leave for the rest of the world? Basic maths tells me it will be preciouslylittle, and in no way approaching the 30,000 tons that were allowed out of thecountry under the quotas this year.Either China will swallow the deficit internally (highly improbable), or exportquotas will be decimated next year. A third and more subtle approach would befor China to differentiate the export quotas according to individual rare earthelements. In that case, China might keep total rare earth quotas in line with thisyear’s, but flood western markets with the much less rare and valuable light rareearths such as cerium and lanthanum, keeping all the heavy REO in the country,and effectively hijacking the world’s high performance magnet production usingHitachi’s technology. iPads Made in China as of next year?China secures niobium supplyIn completely unrelated news, three Chinese firms have jointly acquired 15% ofBrazils CBMM, which supplies about 70-80% of the world’s niobium needs. TheChinese stake was acquired for just under $2 billion.The main market of niobium is in the production of High Strength Low Alloy Steels(HSLA). Taking the standard grade ferro-niobium and adding it to steel produces a steelwith enhanced strength, toughness and formability, and is therefore a strategicadditive in China’s 5 year plans related to building domestic infrastructure. It is input tothe automobile industry, used in gas pipelines, in durable cutting tools, jet and rocketengines and land turbines, to name but a few applications. 2Terence van der Hout Strategy Metals Bulletin; Sep 11 - 17, 2011If you wish to receive this bulletin, please email me at:
  3. 3. 2010 production came primarily from 3 operating mines, two Brazilian and oneCanadian (the Niobec mine operated by IAM Gold), jointly producing around 63,000tons of metal. Niobium has a number of substitutes, but its replacement comes at aperformance loss and at extra price. Reserves of niobium are sufficient to account fordemand for the next 500 or so years at today’s rate of use, but China’s thirst and lackof domestic mines clearly add a critical spice to the ingredients.Roskill foresees a healthy demand for niobium moving forward. MDN Inc, CommerceResources and Globe Metals & Mining are juniors that have advanced projectsdeveloping deposits containing niobium.Disclosure: The Gold&Discovery Fund holds shares in IAM Gold and Commerce ResourcesTwitter: @GoldDiscFundDisclaimer: The author is a researcher for the Gold&Discovery Fund, and neither he nor the Gold&Discovery Fund hascommercial ties to, or shares in, the companies reviewed, unless explicitly stated in the text. The information in this bulletinis the author’s independent opinion of developments in markets and at companies, and hence may contain factual errors,and may not reflect the opinions of the Gold&Discovery Fund. The content of this bulletin is not intended as an investmentrecommendation.Copyright: The information in this bulletin can be forwarded, cited or used otherwise, but only within the context asintended by the author, and with complete reference to the source. 3Terence van der Hout Strategy Metals Bulletin; Sep 11 - 17, 2011If you wish to receive this bulletin, please email me at: