It's got a five year plan to help China retain control of the global supply of rare earths.
FARMINGTON HILLS, Mich. (ResourceInvestor.com) -- Chances are very good that you’ve never heard of” Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co Ltd” (600111.SS). Nonetheless that mouthful is the official name in English of a Chinese company that is today one of the world’s largest producers of rare earths in the nation, China. It’s essentially the world’s only miner of rare earths.
Let’s just call the company “Baotou” as it in fact is usually referred to outside of China. Inside China, however, and among the world’s small band of rare earth cognoscenti it becomes necessary to give the company its entire name so that, in conversation, or on paper one will know that one is speaking only of a part of the operations of Baotou Steel. It’s known in the west as one of China’s largest steel producers, iron ore miners, and iron ore consumers and as the main proprietor and mine operator of the sedimentary carbonate-hosted giant Bayan Obo (rare earth element) REE-Fe-Nb ore deposits of Inner Mongolia, the world’s largest known REE ore deposits.
On Monday, 25 August, Reuters carried the following headline: Baotou Rare Earth plans 300,000 tonne stockpile. Neither the headline nor the story under the headline seems to have yet attracted much attention. However, it is a report of the plans and intentions of the largest operator of REE mining, refining, and end-use product manufacturing on the largest REE orebody in the world. So it bears a close examination by end users and investors operating in the REE space.
The story, in fractured English, some of it confusing, seems to say that Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co Ltd will:
1. Invest 675 million Yuan ($98.62 million) in a reserve project that will store 300,000 tonnes of rare earth concentrates; 2. Is trying to consolidate the sector [rare earths] and boost efficiency; and that 3. It would take five years to build up the stockpiles, which would boost its production by increasing its recycle rate.
Before we look at the serious implications for the global REE market of the above points let’s look at some official statements of production by Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co Ltd.
On 29 May, NewsnChina, reported that the “China Securities Journal” had said: Rare-earth Concentrate Production Halted (by INNER MONGOLIA BAOTOU STEEL RARE-EARTH HI-TECH CO., LTD (600111). The report’s stated reason for the halt was, “To stabilize decreasing market prices for rare-earth products, Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co., Ltd. (600111) announced that it would halt the supply of rare-earth concentrate for one month and halt its own refining for one month.” It continued saying that, “The company expects the suspension to reduce its production volume of separation products by 1,400 tons. The company said it would make up for the production losses in the second half of the year. During the suspension in production, the company will sell products from its inventory, thus sales revenue for 2008 will not be affected.”
I think we can deduce from this earlier report that INNER MONGOLIA BAOTOU STEEL RARE-EARTH HI-TECH CO., LTD (600111) normally produces at least 1,400 x 12 = 16,800 tonnes of rare-earth “concentrate” a year.
I will add here, myself, that a fairly typical REE ore from Bayan Obo will consist of bastnaesite and monazite and that the ore concentrates form the first will contain 55-60% REOs and from the second 47% REOs (rare earth oxides), so that the mixed concentrates will report at above 50%. This is the richest concentrate of so-called “light rare earth elements,” LREEs, that can be produced today anywhere on earth.
It’s clear that, at this point in time, the Chinese government is trying to “encourage “economies of scale in many of its basic industries. Historically in China this has meant that the large eat the small, literally. Compare this approach with the West where a relatively small player like ArcelorMittal Steel, at its beginnings in India, can by superb financial manipulation acquire larger companies, which are typically not well managed, and grow to become the world’s largest steel producer. This is not what is happening or is allowed to happen in China. Those natural resource producers with the largest numbers of direct employees—typically state-owned—are the only ones that can adapt to sudden changes in government regulations that favor larger and larger entities. This is happening in the Chinese steel industry and it is now happening in the Chinese rare earths’ mining industry where what we perceive as a monolith is, in fact, a mélange of companies ranging from artisanal individual miners all the way up to INNER MONGOLIA BAOTOU STEEL RARE-EARTH HI-TECH CO.,LTD (600111).
The 14,400 tonnes minimum of concentrate production—that I am estimating just for Baotou Steel Rare-Earths—represents probably 10% of China’s most recent annual production of rare earths. Nonetheless, it is very small compared to the projection for what I am going to call an ”inventory build” of 300,000 tonnes of concentrates in just the next five years.
I am not today even going to try and decipher what the Reuter’s article is reporting; I am just going to tell you what it cannot be reporting.
Even if Baotou Steel Rare-Earth were speaking as the representative of the entire, Chinese rare-earth mining, refining, and fabricating industry, building an inventory of 300,000 tonnes of concentrate in just five years would require increasing current yearly production of rare earths by 25-50%! This number wildly exceeds any estimates that have been made of the Chinese rare-earth industry’s ability to increase its concentrate output.
Now the Chinese rare-earth mining industry is entering a period of intense concentration. Common sense tells us that this will decrease not increase annual production until it is over. Logic and experience tell us, for example, that small mines will be closed and evaluated and those deemed worthy to continue will have to be upgraded in equipment, safety, and health.
Are we being told that with Chinese internal demand increasing, or, at worst, holding steady that concentrates will be withdrawn from the export market or even from the domestic market in order to build this immense inventory?
Are we being told that equipment capacities of which we in the west are unaware have been or will be shortly built and in operation across the Chinese rare earth mining industry?
Is this ‘report’ a trial balloon to try and reduce the world price for rare earths? How could that be? If there is the capacity and finance to build an inventory of more than a year’s worth of total global demand by 2013 then surely the REEs market is already in surplus. But prices have increased this year sharply on a net, year to year basis.
On top of that I was myself interviewed by the Washington Post’s Beijing Bureau last June about the pricing trends for REES. I was assured by the interviewer that Chinese REE producers felt that they were being ‘short changed’ on the prices they were getting for REES. They cited those to whom they directly export and that large prices were being obtained by resellers such as trading companies in privately negotiated contracts—from which the 25 official Chinese exporters of rare earth official allocations were not benefitting. Therefore it’s possible therefore that Chinese producers, such as Baotou, want to drive these intermediaries out of business by depressing prices long enough to force them out. This was done in the 1990s with strontium and in the 2000s in tungsten, both now Chinese monopolies.
Of course the same strategy would go a long way to killing any incentive for the non-Chinese rare earth producers to continue or to even get additional funding. The result would be that no matter whether or not the inventory building goal was met or not pricing control would remain with the sole producer.
I will be at the Minor Metals and Rare Earths Conference in Hong Kong next week, and I’m going to try and find out for all of us just what is going on in Inner Mongolia. Let me share with you my own theory. I think that Reuters may have gotten something else wrong besides grammar in their translation of the official announcement of the inventory building program. I think that Reuters got the decimal point location wrong. I’ll let you know.
choice
ARU Price at posting:
29.5¢ Sentiment: Buy Disclosure: Held
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