China often complains of being at the mercy of the international market when it comes to commodities, especially iron ore.
With rare earths, the situation is somewhat different. In controlling the huge majority of global supply (97% according to some estimates), it has much more say over prices. Rare earth metals are used as components in anything from the latest Samsung smartphones to F-22 fighter jets (for WiC’s first mention of rare earths, see issue 13).
China’s dominance has also led to accusations that it manipulates its position for political purposes. Exports of rare earths to Japan fell last year following a diplomatic dispute, although China denies ordering a halt to shipments.
But might the rare earths boom now have come to an end, with prices falling more than 30% from the all-time highs reached in the summer?
The miners themselves seem concerned and have been curtailing production. Last week, Baotou Steel Rare Earth announced in a stock exchange filing that it was shutting down operations for a month in order to “balance supply and demand” as the economic crisis in the US and Europe had forced a fall in prices.
Baotou Steel accounts for 60% of China’s rare earth production, so the measure should have a marked effect on the market.
The move comes two months after Minmetals Ganzhou Rare Earth also shut down its operations. A company executive told 21CN Business Herald that operations remain suspended and that there is no timetable for returning to work.
The closures point to an industry suffering from a post-boom hangover. Prices climbed steeply at the beginning of the year, forcing some downstream industries using the materials to decrease consumption. But even as demand showed signs of levelling out, producers were expanding capacity.
Global economic conditions also look much weaker today than they did at the beginning of the year. Rare earth consultancy IMCOA recently cut its forecast for full year demand to 40,000 tonnes, from its summer prediction of 58,000 tonnes, reports the Financial Times.
Higher prices have also encouraged customers to work more efficiently, and even look for substitutes. “If you think you can keep raising the prices for those materials and still keep your customers, you’re crazy,” Jack Lifton, an industry expert told Forbes earlier this month. “The principal customer for rare earth metals is a global automotive industry using rare earth permanent magnets. That industry will engineer this stuff out.”
Rare earths aren’t always quite as rare as their name suggests. Some are actually fairly abundant in places like the US – which stopped mining them previously because of concerns about environmental damage (as well as many years of lower prices before the recent boom).
If other countries prove capable of setting up their domestic supply chains, Chinese producers could lose much of their market power, although opening mines abroad and associated refinery infrastructure will take time.
Other industry insiders also whisper about conspiracy in the latest shutdown. The accusations date back years within the industry, suggesting that Chinese producers flooded the market in the 1990s to force miners elsewhere into closure, but then cashed in on their monopoly position to push up prices.
Now the conspiracy theory is getting an update. The application of rare earths in manufacturing processes is said to be much more profitable than digging them up. And that means that Beijing is limiting supply to give its own manufacturers of electric vehicles and next-generation electronics a window of opportunity to draw level with their international rivals.
That presupposes market coordination much harder to achieve today than 20 years ago.
And it would also be a dangerous game: it assumes that China can catch up in the industrial application of rare earths before production picks up again in other countries.
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