Energy & Resources

Welcome to Magnetic Valley

Beijing orchestrates a mega-merger as it seeks control over rare earths

Baotou-mining-w

Baotou: one of China’s hubs for the mining of rare earths

For the past half century, the part of the world most associated with technological progress has been Silicon Valley. If you fancy living there, a house in Atherton Valley, just outside San Francisco, costs an average of $7.5 million. It is America’s most expensive zip code.

Contrast that with China’s Magnetic Valley near Baotou, which is one of Inner Mongolia’s most populated cities. The average house price there is about Rmb1.1 million ($173,000). But over the coming years, Magnetic Valley could become an increasing focus of international attention as the battle to secure supply of the planet’s 17 types of rare earth elements (REEs) intensifies. Many of the world’s REEs are mined and processed in the area, with global manufacturing of many electronic products depending on them.

Baotou is unlikely to take China’s residential housing crown anytime soon. As the BBC has previously reported, the city is bordered by a “dystopian” lake “filled with a black, barely-liquid toxic sludge”. Local citizens must contend with the “constant, ambient smell of sulphur”.

Then there are the health consequences of living near the mining districts of many of the rare earth deposits. This can involve the separating of REEs from the uranium and thorium deposits they’re typically discovered in. Exposure to both radioactive metals has been linked to an increased risk of many types of cancer, for instance.

The dangers of environmental damage and health side effects are the main reasons why the Western world has ended up relying on Chinese exports of REEs as key components for smartphones, electric vehicles (EVs), wind turbines, nuclear power stations, missile systems and many more goods. The world’s strongest magnets, for example, contain neodymium and are often bolstered with terbium and dysprosium (also REEs) to aid magnetism at even higher temperatures. They’re integral to EV drivetrains.

US government statistics show that China accounted for 140,000 of the 240,000 tonnes of rare earths mined globally in 2020. However, over recent years, there’s been a growing realisation that relying on China for rare earth supplies no longer makes sense, especially in a world with deepening geopolitical fault lines.

This sentiment will strengthen following Beijing’s recent decision to consolidate its domestic REE sector in a bid to raise prices, retain tighter control of supply and speed up industry innovation.

In December, the State-owned Assets Supervision and Administration Commission (Sasac) announced a three-way merger between Shenzhen-listed China Minmetals Rare Earth, Chinalco Rare Earth and Metals, plus Ganzhou Rare Earth Group. All three will each own a 20.3% stake in the new China Rare Earth Group, with Sasac keeping a 31.2% stake for itself.

The Jiangxi province-based entity ranks second domestically to Baotou’s China Northern Rare Earth Group (Baogang), with a 37.6% share for overall rare earths mining. However, it has a 70% proportion of the heavy rare earths market, which include terbium and dysprosium.

Chinese news site K50 heralds the new group’s formation as the “rare earth Big Mac” while the South China Morning Post in Hong Kong says it will hand Beijing “a trump card in the global fight for resources”.

It marks the end of a long period of depressed prices in the sector, which has often been blamed on cutthroat and chaotic competition between multiple domestic operators (in some cases prices have doubled over the past year as rivalries have reduced).

As we reported as far back as WiC13, Beijing has been concerned for some time about selling strategic REE reserves at low rates. The domestic press referred to this situation as selling industrial gold at cabbage prices. Xiao Yaqing, Minister of Industry and Information Technology, elaborated on the same theme in answering journalists’ questions about the recent merger. “We haven’t been selling our rare earths at the price of rare earths, but at the price of soil,” he acknowledged. “Some countries accuse us of restricting rare earth exports but in fact most of what they buy is exported from China,” Xiao added.

An editorial on Sohu.com added a geopolitical filter, claiming that the US government would be “panicking” about the efforts to consolidate production across the Chinese market. “Where can it find another seller equivalent to China?” it asked.

One option is Mongolia, which is estimated to have among the world’s largest deposits after the Chinese. However, the Sohu editorial doubted that exports there could be easily scaled up. “Mongolia is landlocked. Can rare earths be shipped out if the Mongolians are under siege from two large neighbours [China and Russia]?” it asked.

In REE mining the Western world finds itself in a similar position to the Chinese in semiconductors – i.e. catch-up mode. Japan provides one example of how to respond. A decade ago, it relied on the Chinese for 100% of its REE imports. After Beijing imposed an export ban in 2010 in retaliation over a dispute about territory known as the Senkaku Islands in Japan and the Diaoyu Islands in China, the Japanese decided to diversify, urgently. Since then they have reduced their dependence to a little under 60% of supply, mostly by investing heavily elsewhere.

One London-based think tank has urged Five Eyes nations (the US, UK, Australia, Canada and New Zealand) to do something similar, perhaps by considering Greenland as a production alternative instead. However its government clamped down on mining activity recently over concerns about environmental degradation.

Other countries with larger REE reserves include Vietnam, India and Australia. This year Australia will host a clean energy summit with Japan, India and the US to discuss ways to build an Indo-Pacific supply chain free of China. But in the meantime Baotou is following President Xi Jinping’s exhortation to “transform the traditional method of digging and selling soil”. China’s Inner Mongolia aims to increase its rare earth earnings fivefold by 2025 (to Rmb100 billion). And it seems likely to achieve it based on International Energy Agency calculations that the world needs six times more REE production by 2040 to hit 2050’s net zero carbon emission targets.


© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.