China's rare earth restrictions could lead to supply...

China's rare earth restrictions could lead to supply shortage

China posted a 568% year-on-year surge in the value of rare earth exports to $314 million in the first two months of 2011.but some estimate it could be a net importer by 2015?
Author: Shivom Seth
Posted: Tuesday , 05 Apr 2011

MUMBAI - -

It could well signify the end of an era. With China curtailing its total output of rare earth oxides at 93,800 tonnes this year, up a meagre 5% from last year, and also hiking taxes on rare earth elements for the second time in recent months, cheap rare earths could well be a thing of the past.

China is the world's largest producer of rare earths. The government decided to slash export quotas this year in a move that sent shock waves across the world.

Rare earth ores are utilised in the production of high-tech appliances and strategic industries. Most analysts tracking the scene say China's move to limit exports is more of a political move aimed at encouraging foreign companies to set up processing facilities inside the country.

They point out that China posted a 568% year-on-year surge in the value of rare earth exports to $314 million in the first two months of 2011.

The volume of rare earth exports inched up to touch 7,084 tonnes. Prices, too, have been keeping up the tempo.

Rare earths is the collective name for a group of 17 elements in the periodic table, and are among the most sought after materials for modern manufacturing.

According to a report by Guolian Securities, the prices of neodymium, dysprosium and praseodymium rose 4.3%, 9.5% and 12% in just one week following Japan's earthquake and tsunami.

Prices jump

For some time now, prices of rare earth metals have been on a bull run. Since the beginning of the year, average prices of the 17 elements have almost doubled. Analysts maintain that there are several speculative funds that have been targeting the industry for huge returns.

Analysts have added that enormous funds have begun entering the industry shortly after the Chinese Lunar New Year. The government has decided to crack down, since there are allegations that speculators could be hoarding the material for profiteering purposes.

``Chinese government policies have also been placing strict controls on the exploration and exports of rare earth minerals. These are the major causes of the almost six-fold surge in export value,'' said an official of China Enfi Engineering Corporation to a news agency.

Moreover, taxes are another burden. The country's tax bureau has said that taxes would rise to either 30 yuan (about $3) or 60 yuan ($9) per tonne, depending on whether the elements were categorised as light or heavy.

The new rates have come into effect this week. Analysts maintain that the taxation move is also meant to tackle concerns about an over-expansion of rare earth mining and accompanying environmental damage.

China is believed to hold about 30% of the world's rare earth deposits, but roughly accounts for 97% of current global production levels.

Curbs in place

According to a statement from the Ministry of Land and Resources, the country will also not grant any new licenses for rare earths prospecting and mining before June 30, 2012.

The statement holds total output of light rare earths at 80,400 tonnes and that of medium and heavy rare earths at 13,400 tonnes for this year.

The Asian country adopted the output quota system for rare earth in 2007, in a bid to balance out environmental protection needs and industrial demands.

From the latter part of last year, China announced a series of policies for the rare earth industry. These include export quota cuts, higher taxes and tighter regulation on mining companies.

The move has already hit the domestic industry hard. Zhang Zhong, general manager of Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co, the country's leading rare earth producer, said the tax would increase the company's production costs by about 720 million yuan this year.

While the move will elevate production costs for most companies operating in China, the Chinese government claims that the move is justified and that they had to put quotas in place to protect their own industries and environment.

Analysts also point to the fact that there is significant pressure being put on lawmakers in Washington to develop and fast-track a domestic supply of rare earths rather than relying only on China.

They have warned that the taxation issue should be looked into closely, especially since rare earth mining company Molycorp has said that China may be looking for rare earth targets and may actually be an importer by 2015.

M&A surges

As rivalry for commodities among the fastest growing economies spurs prices, a recent Ernst and Young report said that China (and India) would lead the mergers and acquisitions brigade in the metals and mining sector this year.

Global deals rose 89% last year. The report said Indian companies were the seventh most acquisitive in mining and metals last year, up from 14th a year ago. India recorded $4.6 billion worth of deals, and for the first time surpassed China which clocked $4.5 billion worth of deals.

A similar situation happens to be playing out for rare earths. On April 5, rare earth mining company Molycorp said it plans to spend $89 million for a 90% stake in a European rare earth mining company, AS Silmet.

While the acquisition will help Molycorp carve a niche into Europe, it will also double its rare earth manufacturing capabilities.

Similarly, shares of rare earth miner China Shen Zhou Mining & Resources and others of its ilk have been on an uptrend on the stock market, given that money has been flowing into all rare earth plays.

Canadian rare earth group Rare Earth Metals Inc has also said it is poised to capitalise on the supply shortage of rare earth metals following changes in Chinese export regulations. The drum beats, as they say, have just started to roll.