Usually around this time of year I would have already posted an update on the export quotas issued by the Chinese Ministry of Commerce (MOFCOM) to rare-earth element (REE) producers in China.

Not so this year.

The twice yearly announcements on the specifics of the allocations were always met with a degree of interest that far outweighed their real importance. It was the illusory nature of the export quotas and the complete misreading of the 2010 quota allocations, by entities outside of China, that led to the completely unnecessary, yet unfortunately destructive run up (and subsequent crash) in prices for these materials in 2010 and 2011.

On December 31, 2014 MOFCOM announced that dozens of products previously subject to export quotas would instead now be subject to an export licensing regime. Perhaps the fact that REEs can be found cheek to jowl alongside live cattle, frozen meat, tungsten, sand, motorcycles and paraffin, to name but a few of the commodities listed, will finally correct the notion that some folks have of REEs as unique, precious snowflakes in the grand scheme of nefarious Chinese strategy. Or perhaps not…

We must remember that the export quotas were only one aspect of the overall export regime for REEs and other commodities, subject to the 2014 WTO ruling against China and a subsequent rejected appeal. Another important aspect was the imposition of export tariffs on REE products. The mid-December announcement from the Chinese Ministry of Finance, detailing the export tariffs for REEs in 2015, shows that such tariffs are still alive and well. At the very least, they indicate that China is taking a phased approach to the elimination of its export-control system for REEs in a manner that satisfies the WTO ruling. The continuation of export tariffs on REEs comes in the face of reported recent discussions on the imposition of a new value-added tax on REEs, as a replacement for the revenues generated by export tariffs. There are some indications that a switch over may occur later in 2015, but for now, the export tariffs are here to stay.

Since the announcement on the elimination of export quotas, we have seen dozens of inevitable headlines proclaiming the death of Chinese control over its exports of REEs. The reality is that China is still as much in charge of its REE supply chain as it ever was. An additional MOFCOM announcement indicated that REEs are now to be exported through only 9 designated ports. Export licenses will be “handled” through a Special Commissioner’s Office within MOFCOM, on a case-by-case, shipment-by-shipment basis. A number of sources in China indicate that to date, there is little guidance available to would-be exporters on the criteria to be fulfilled, for an export license to be issued, beyond the presentation of a sales contract with a buyer outside of China.

Such ambiguity would seem to resonate with the third aspect of the WTO complaint and ruling against China, concerning the lack of transparency internally with respect to specific rules and regulations pertaining to exports. Perhaps more details will be officially forthcoming, or perhaps not.

It is unlikely that the announced changes will have any meaningful impact on the “bandwidth” of REE exports that are exported from China via non-official channels (i.e. smuggled out). A number of the recent news stories have lamented that the elimination of export quotas will see increased exports and further decreases in REE pricing. I disagree. Perhaps some of the smuggled materials will now go through official channels, especially in the wake of the ongoing consolidation of the Chinese REE industry into six conglomerates; but the overall supply, through official and non-official channels, is unlikely to be affected.

Furthermore, the discussed new VAT proposed would be at similar levels to the existing export tariffs for REEs, thus the ongoing imposition off export tariffs and the subsequent change over, if and when it happens, is not likely to affect FOB China (export) prices either.

So for the time being at least, it is business as usual for Chinese REE exports.

Update (02/01/15): since this article was originally published, the authorities in China announced plans to eliminate the export tariffs on REEs in May 2015.

Earlier this week the Chinese Ministry of Commerce (MOFCOM) announced the second round of allocations of rare-earth export quotas for 2014, to companies operating in China. This follows the initial announcement on the first allocation for 2014, which was made in December 2013.

A total of 15,501 t of export quotas was allocated in this second round, comprising 13,692 t of light rare-earth (LRE) products and 1,809 t of medium / heavy rare-earth (M / HRE) products. This brings the total allocations for 2014 to 30,611 t, which is similar to the totals for the past four years.

We can now take a look at the specific allocation numbers associated with this week’s announcement, before reviewing allocations over the past few years. The companies below, highlighted in green are Chinese / non-Chinese joint-venture (JV) companies – the rest are Chinese-owned. The list is sorted from highest-to-lowest total allocation:

* Part of Solvay, which was allocated a total of 1,736 t.
** Part of China Minmetals Group, which was allocated a total of 781 t.
*** Part of Molycorp, which was allocated a total of 1,173 t.
**** Part of Baogang Group, which was allocated a total of 1,303 t.

Here is a comparison of the quota allocations for the past six years:

In 2014, the proportion of M/HRE to total allocations was 11.8%. This compares to 11.7% for 2013 and 12.5% for 2012, the first year that the quotas were split in this way.

There is once again no reflection in the quota allocations, or in the system as a whole, of the findings of the recent WTO case against China concerning export quotas and tariffs. The WTO ruled that the export-control system for rare earths (and other metals) is at odds with the trade rules of the WTO. The case in the latter stages of the appeals process.

Introduction

On March 26, 2014, the World Trade Organization (WTO) issued its long-awaited findings in response to formal complaints made by the United States (USA), the European Union (EU) and Japan (collectively the Complainants), concerning China’s approach to the exports of rare-earth elements (REEs), tungsten (W) and molybdenum (Mo).

The 257-page document, combining the individual sets of findings for each Complainant (the Report), was completed by a three-person Panel of the WTO’s Dispute Settlement Body (DSB). It is an exhaustive evaluation of the measures that China has put in place to regulate the export of these materials, and follows a two-year investigation by the WTO into the complaints made.

My March 2012 article on the initiation of the WTO actions, reviewed the details of the initial complaints, and the mechanism behind the WTO dispute process, including the DSB. In it I suggested the potential arguments that China might make to defend its export measures, using certain exceptions to the WTO rules, and the potential consequences of various outcomes.

In the following article, I will review the main findings of the DSB Panel, the basis for their determinations, and the key takeaway points from the Report. We’ll also look at what China’s next moves might be, and the potential consequences for REE supply and pricing. I’ll also highlight the ongoing key advantage that the Chinese downstream REE supply chain has over other countries, even in light of the recent WTO findings.

The Complaints

Since the initial request for the formation of a DSB Panel to review the issues at hand, the specific complaints were refined. They focused specifically on measures relating to export duties, export quotas and the limitations placed on companies that are permitted to export these materials. The Complainants alleged that these measures are inconsistent with China’s obligations under its Accession Protocol – the document that codifies China’s acceptance into the WTO. They also alleged that the measures were inconsistent with the 1994 General Agreement on Tariffs and Trade (GATT) – specifically Article XI on the General Elimination of Quantitative Restrictions.

Initial claims relating to “an alleged lack of uniform, impartial, or reasonable administration of the export quotas” were dropped soon after the process began.

China responded by claiming that the country’s export-related measures were permitted, by virtue of Article XX of the 1994 GATT, related to General Exceptions. China pointed specifically to Article XX(b) relating to measures “necessary to protect human, animal or plant life or health” and Article XX(g) relating to measures for the conservation of “exhaustible natural resources“.

Process Timeline

• The process started on March 13, 2012, when the Complainants each requested consultations with China, under WTO rules, with respect to the initial measures and claims that were detailed in my previous article;
• Consultations were held during April 25-26, 2012. These consultations did not resolve the dispute between China and the Complainants (collectively the Parties);
• On June 27, 2012, the Complainants each requested that a DSB Panel be established;
• On July 23, 2012, the DSB established a single Panel to hear the cases presented by the Complainants;
• On September 12, 2012, the Complainants requested that the Director-General determine determine the specific membership of the Panel;
• On September 24, 2012, the Director-General appointed Mr. Nacer Benjelloun-Touimi to chair the Panel, and Mr. Hugo Cayrús
 and Mr Darlington Mwape as the additional members;
• The Panel adopted a set of Working Procedures and a timetable on October 18, 2012;
• The first substantive meeting of the Panel with the Parties took place during February 26-28, 2013, during which an additional session with interested third parties also took place;
• A second substantive meetings of the Panel and the Parties was held during June 18-19, 2013;
• The Panel sent questions to the Parties on February 13, 2013, March 1, 2013, April 11, 2013, May 30, 2013 and June 21, 2013;
• The Panel issued the descriptive part of its Reports to the Parties on July 31, 2013;
• The Interim Reports were issued to the Parties on October 23, 2013; and
• The Panel issued its Final Reports to the Parties on December 13, 2013.

Summary of the Panel’s Findings

The final combined Report from the Panel went into painstaking, exhaustive detail on every aspect of each specific complaint, and China’s responses to those complaints. In summary, the DSB Panel found that:

• Because its Accession Protocol does not form part of the permanent ‘framework’ of the 1994 GATT, China could not claim the benefit of the exceptions noted in Article XX of the 1994 GATT for the imposition of export duties or export quotas, or for imposing certain restrictions on the activities of companies that export REEs, W and Mo, which otherwise contravene the provisions of its Accession Protocol;

• Even if Article XX was available to China as a justification for export duties, those duties were not “necessary to protect human, animal, or plant life or health“, as required under Article XX(b), and thus the imposition of export duties was “inconsistent with China’s WTO obligations”;

• China’s export quotas “were designed to achieve industrial policy goals rather than conservation”, thus negating China’s ability to use Article XX(g) to justify the imposition of export quotas. The Panel further found that these measures did not work together with other measures imposed on domestic Chinese use of REEs, W and Mo, as also required by Article XX (g); and

• Although Article XX did allow for “restrictions on the rights of enterprises to export” REEs and Mo, China did not demonstrate how such restrictions on the basis of Article XX(g) specifically, were justified. The Panel found that these “trading rights restrictions breach its WTO obligations“.

Analysis

Having reviewed the Panel Report in its entirety, there are three overarching themes to take away from it:

1) The negative environmental impact of mining and processing in China is undisputed
During the WTO process, China strongly asserted that the mining and production of REEs and other metals in China has caused significant harm to its environment, and to the health of people, animals and plants in the country. China presented extensive evidence on the environmental risks associated with the REE supply chain, including reference to the toxicity of mine tailings and the challenge of air and water pollution. The Report included China’s statement that:

[T]he risks to human, animal or plant life or health and the costs of controlling such risks are key reasons why rare earth production was shut down outside China. In this regard, China submits that companies outside of China that were producing, or had the capability to produce, rare earths were not ready to bear the high costs of implementing technology that would tackle environmental harm and meet national regulatory environmental requirements.

The EU and the USA did not dispute China’s assertion with respect to environmental damage; Japan indicated that it deferred to the Panel’s judgment on this particular issue.

After reviewing the evidence, the Panel stated in the Report that it considers that “China has demonstrated that the mining and production of rare earths, tungsten, and molybdenum have caused grave harm to the environment and to the life and health of humans, animals, and plants in China“.

The initial announcement of the Panel’s findings at the end of March met with significant criticism from entities within China, the implication being that the WTO had not considered the environmental impact of the REE industry in China, in its findings. On the contrary, the Panel made it crystal clear that it did in fact recognize that such harm had occurred. The Panel insisted however, that the existence of such damage “does not suffice to demonstrate that export duties are necessary to protect human, animal or plant life or health“.

2) China did not demonstrate that export duties have a material effect on environmental protection
In response to the complaints made, China insisted that its export duties on REEs, W and Mo were “an integral part of a comprehensive policy that has the goal to reduce pollution and protect the health of China’s population, its animals and plants“.

The Panel noted that it was not sufficient to simply state that the imposition of export duties was part of a wider “comprehensive policy for environmental protection” in China. In fact, the Panel found that no part of the comprehensive environmental policy that China cited, showed a link between export duties and “a pollution reduction objective“. There was no evidence to suggest that putting export duties in place would have or had had any material effect on the stated goal of pollution control. This was a similar finding to a previous WTO dispute involving China.

This assertion of a connection was always going to be a problem for China to prove, since the final destination of a resource (i.e. outside of China) really has no bearing on the way that it was produced in the first place.

3) China did not demonstrate evenhandedness with measures associated with resource management
The Panel noted that export duties increase the price of REE products that are exported for use outside China. China failed to demonstrated that there were any corresponding measures that increase the price of REE products that are intended for use inside China.

The discussion on export quotas centered on China’s insistence that it was allowed per Article XX(g) to impose such quotas on the basis of “the conservation of exhaustible natural resources“. However, this exception also requires that “such measures are made effective in conjunction with restrictions on domestic production or consumption“. The Panel acknowledged that each member of the WTO has permanent sovereignty over its natural resources, and that member countries may adopt “conservation measures should they wish to do so, in the light of their own objectives and policy goals, including economic and sustainable development“.

However, the Panel noted that:

no WTO Member has, under WTO law, the right to dictate or control the allocation or distribution of rare earth resources to achieve an economic objective. WTO Members’ right to adopt conservation programmes is not a right to control the international markets in which extracted products are bought and sold.

The Panel found that China had not demonstrated evenhandedness in its approach to domestic and foreign entities, with respect to access to REEs, and thus the imposition of export quotas was not made in conjunction with other measures that would affect the domestic supply chain. There was significant discussion on the role of production and separation quotas, but the Panel was not convinced that the impact of the measures was anything other than discriminatory against foreign entities.

What’s Next?

China has up to 60 days from the date of the Report’s publication, to decide if it will appeal against the Panel’s findings. If it does not, or if it does and the findings are upheld, then it is likely that China would be required to drop its export duties and export quotas on REEs.

The export duties on individual REE products varies from 15-25%; in addition, since the price spike of 2010-2011 there have been additional costs associated with ‘quota surcharges’ on individual REE products. In the absence of other measures, the elimination of China’s REE export measures would have the effect of reducing the export prices for REEs to those currently enjoyed in China, for use in China.

While this is great news for end users of REEs, it is not particularly good news for the operators of existing REE mines outside of China, or the developers of new REE projects. Many developers have for some time been using erroneous price assumptions when reviewing the economics of their projects, since they have assumed that they could sell intermediate concentrates into China, at discounts to FOB / export prices. The reality is that such sales would have to be competitive to internally sourced concentrates, and so the correct approach is to discount in relation to domestic, not FOB / export prices. If the prices converge as a result of the elimination of export controls, then the ambiguity goes away, and we are left with similar prices regardless of the destination of the products.

That said, there have already been discussions within the industry in China, concerning the imposition of across-the-board resource taxes on REE products, which would elevate the prices above the current domestic levels, presumably to some point below current FOB prices. If China is genuinely concerned about controlling the environmental impact of REE production, and in protecting its resources from exhaustion, then the imposition of such taxes, as well as a reduction in the overall production quotas, and the imposition of pollution taxes, could be effective measures – measures which do not discriminate against foreign entities, thus conforming with the WTO rules.

It should be noted that regardless of the outcome of the WTO dispute, downstream users of REE products in China, that incorporate these materials into components and other goods that are then exported from China, will still have a distinct advantage over downstream users outside of China. Apart from labor costs, exports of finished goods are eligible for a rebate on the 16% VAT paid on the original raw REE materials, a rebate that has not been given on exported raw materials since 2007.

We will keep an eye on the appeals process for this WTO case, and will of course share what we discover, when we have more to report.

It is fuel-cell-vehicle (FCV) season again as many of the world’s premier car makers make their annual ritual announcement that they are ‘studying’ or putting into ‘limited production’ passenger-carrying vehicles for personal use (i.e. cars), propelled by electricity generated by ‘fuel cells.’

Once again, the perception of greeniosity is meant to trick us into thinking that the fundamental laws of economics have been suspended.

As far as I can determine, the electricity for FCVs will be generated when diatomic hydrogen molecules are split into hydrogen ions and free electrons, by the action of passing the hydrogen over a catalyst. This previous sentence is totally intelligible to a chemical engineer with the only undefined word in it being ‘catalyst.’

As far as I know the only such ‘practical’ catalysts known for such a reaction are the platinum-group metals (PGMs), primarily the metal palladium (Pd). There has been a lot of research over the last 20 years on trying to produce a fuel-cell chemistry based on a more readily available catalyst than a PGM but the results have not been economical. One such program backed by no less than Kleiner Perkins is for a Solid Oxide Fuel Cell (SOFC), which uses the extremely scarce rare-earth-element (REE) related metal scandium (Sc) in its catalyst.

The thing that all current fuel-cell technologies have in common, is that they rely for their operation on large amounts of very scarce materials such as PGMs or Sc, as in the discussion above.

There is another problem, the relative value to achieving the goal of reducing carbon emissions of a FCVm versus an internal combustion engine (ICE) vehicle, using a catalytic converter. This is the real issue of the most efficient use of strategic metals. Let’s say that a Pd-based fuel cell would use at least one ounce of Pd in order to be able to produce enough electricity to power a four-passenger car. That same amount of Pd could be used to manufacture 100 exhaust-emission catalytic converters, for hydrocarbon-fueled ICE-powered vehicles! Note well, that new global production of Pd is in the 200 tons per year range. This is twice what it was 10 years ago, but nearly impossible to increase as most of the world’s new Pd comes from its production as a byproduct of nickel mining in Russia and Canada, with a little more coming from South African platinum mining. North America produces some 10% in total of the world’s annual new Pd. It is difficult to see how green technologists could ask us to depend on either Russia or South Africa for an ‘assured supply’ of anything much less for an increased supply.

So, the best solution for constructing fuel cells is not to use environmentally precious Pd or any other PGM in such a horribly wasteful way. Unfortunately, the best SOFC, based on Sc, is an even worse solution. There simply is not enough Sc produced in the world. Currently just a few tons a year are produced, so it is believed, in the former Soviet Union.

So we can either rob Peter or mine an empty bank vault.

There is a real analogy here to the REE supply issue now facing the world, and even an interface, since Sc is only likely ever to be produced as a byproduct of REE production (which itself is ironically usually produced as a byproduct of iron mining).

PGMs used in automotive-exhaust emission control devices (catalytic converters) are so scarce as to be among the most recycled materials on the planet. In relative-percentage-recycled terms they are right up there with iron, copper, aluminum, lead, and gold. But it is in absolute terms that the comparison fails. An excellent example of this is the PGM rhodium (Rh), used to eliminate acid-forming nitrogen oxides from automotive ICE exhaust. The world production of new Rh as a byproduct of South African platinum production is 30 tons a year. Yet the apparent demand from the global OEM automotive industry is nearly 50 tons per year. This additional material must come from the extensive recycling of catalytic converters.

It is the same type of thing with the REEs with a notable exception geographically. In China extensive recycling of REE industrial process waste as well as of end-of-life waste, is one of three things that keeps the supply of the key heavy REEs terbium and dysprosium, nearly equal to the demand. The others are illegal production within China and purchase of heavy REE ore concentrates from outside of China. The three processes together provide a doubling of ‘official’ production of these key REEs.

Only now in 2014 is there even the beginning of a non-Chinese REE recycling industry. This is because with just one exception, there is no REE separation plant outside of China with the capability/capacity to separate the heavy REEs from ore concentrates or scrap; there are 38 such facilities in China.

What little Sc is produced in the world may be augmented by the three processes above, but officially there is no verifiable Sc production anywhere. So, if there is to be a fuel-cell-powered OEM automotive power-train revolution, it will have to be itself driven by a fuel-cell technology that as of now is unproven, and does not involve a need for large quantities of either PGMs or Sc.

At the moment, supplies of PGMs and Sc globally are either insufficient or unavailable. Thus fuel-cell-powered vehicles will be curiosities, or the toys of the elites, for the foreseeable future.

Earlier today the Chinese Ministry of Commerce (MOFCOM) announced the first round of allocations of rare-earth export quotas for 2014, to companies operating in China.

A total of 15,110 t of export quotas was allocated in this first round, comprising 13,314 t of light rare-earth (LRE) products and 1,796 t of medium / heavy rare-earth (M / HRE) products. Initial mainstream media reports appear to have missed MOFCOM’s indication that the first-round allocation represents 70% of the annual quota for 2014. If this is the case, then the estimated quota for 2014 will be 21,586 t, approximately 70% of the 2013 quota allocation of 30,999 t.

Update (12/14/13): Further clarification of the MOFCOM announcement indicates that the first-round quota allocations for antimony, indium, molybdenum, silver, tin and tungsten will be 70% of their respective annual quotas for 2014, but that this will NOT be the case for rare earths.

One company that usually receives export-quota allocations, Inner Mongolia Baotou Hefa Rare Earth Co., will not be given a specific allocation, according to MOFCOM, until it has rectified environmental issues at its facilities.

Let’s now take a look at the allocation numbers associated with today’s announcement, before reviewing them in the context of the recent allocations. The companies below, highlighted in green are Chinese / non-Chinese joint-venture (JV) companies – the rest are Chinese-owned. The list is sorted from highest-to-lowest total allocation:

* Part of China Minmetals Group, which was allocated a total of 812 t.
** Part of Molycorp, which was allocated a total of 1,168 t.
*** Part of Baogang Group, which was allocated a total of 875 t (significantly lower than in previous allocations because Inner Mongolia Baotou Hefa Rare Earth Co. was not assigned quota at this time).

Here is a comparison of the quota allocations for the past six years:

If the second allocations in 2014 are similar in terms of LRE : M/HRE proportions to the first, then 11.9% of the total would be allocated to M/HRE products in 2014. This compares to 11.7% for 2013 and 12.5% for 2012, the first year that the quotas were split in this way.

There seems to be no reflection in the quota numbers, of the recent World Trade Organization ruling against China, with respect to rare-earth exports. It remains to be seen if the second allocations are in any way affected.

Update (12/13/13): by request I have added notes above to indicate which two facilities are owned by Molycorp.

At the Perth AusIMM Critical Minerals conference held in June this year, my esteemed colleague Dudley Kingsnorth presented updated forecasts for the near-term future of the global rare-earth market. Some of the details were recently reported by InvestorIntel. Prof. Kingsnorth’s forecasts always command attention; I would like to offer my own perspective on what we might expect in the latter half of the present decade.

No nation has ever industrialized faster than the Peoples’ Republic of China is now in the process of doing. But even so, and even though we admire China’s breathtaking industrial (re)evolution, common sense tells us that every so often, even the champion runner must take a breather to recover his equilibrium so he can continue, or realize that he cannot continue the pace (note: I’m an old-timer, and I can’t abide political correctness in the written word, so I won’t alternate ‘he’ and ‘she’ or substitute some form of ‘person’ in common phrases). This is finally what’s happening in China. Optimists will say that China is taking a breather, to see just where the new base line of its GDP growth should reside. Pessimists will tell you that the game is over, and that China cannot keep expanding forever. As usual the reality lies somewhere in between.

I emphasize the state of China’s economy, because in the case of the rare-earth total supply chain, China is most of the global ball game. Certainly for the rest of this decade, as China goes, so goes the rare-earth market. China, as of this writing still produces 95% of the world’s rare-earths supply and China, as of this writing, still consumes more than 75% of the world’s rare earth supply. Consumption here does NOT mean domestic internal use; it means that China adds the majority of the final value to its rare-earth supply and even that is usually in the form of components of more complex assemblies (vacuum cleaners, automobile components, or wind turbine generators, for example).

It is becoming clear that China likely does NOT possess the world’s largest resources and reserves of the rare earths. That title, so my colleague and TMR co-founder Gareth Hatch informs me, may well belong to Greenland or Canada. Let’s call them together the North Atlantic Mineral Resource Zone (NAMRZ). That said, China certainly possesses the world’s largest (by volume production capacity) rare-earths total supply chain, and its very large reserves of rare earths could supply the world’s demand for centuries. The rare earths in the NAMRZ are not only undeveloped, but they are in a zone that currently does not have enough access to capital or technology domestically, to create a total rare-earths supply chain of the magnitude of the one in China.

The ideal solution for the NAMRZ would be to put in place as much value addition as possible, so as to capture the most benefit from its vast resources of ALL of the rare earths. The business model of Innovation Metals Corp. (IMC), co-founded by Gareth and to which I am a technical advisor, accomplishes just that. IMC would reduce the tens of thousands of tonnes of mixed rare-earth concentrates that could be produced in the zone from hundreds of thousands of tonnes of mineral concentrates, to a few thousand tons of rare-earth chemicals, and ultimately metallic forms, which are much more valuable and profitable.

But let us turn back to where the rare-earths market may be in the latter half of the decade. First of all, China is not reducing the production of rare earths and condensing the size and numbers of players in the rare-earth total supply chain, to single out the rare-earth industry only for environmental issues. China is modernizing. Credit is too easy; savings are too large; consumption is too low; and production capacity across the board is too large in China, for an economy that is slowing down its rate of growth to a new normal. Large operating companies in the rare-earth sector and beyond, would do well to notice this ‘new normal’ in the American, Australian and other economies.

China, in other words, is trying to streamline its economy to become more responsive to the markets and to lower costs across the board, so as to remain competitive globally, even as its standard of living and labor costs increase rapidly. It is frequently pointed out that the world’s ‘second-largest economy’, on a per-capita basis, is still only one quarter of the size of the US economy, on a per-capita basis. What is not pointed out, however, is that China’s middle class is growing, while America’s is declining. This means that discretionary purchases of gadgets that depend on rare-earth enablers for some of their properties, such as all miniaturized personal entertainment, communication, data processing, appliances and the like will continue to increase in China, even as its economy slows to a new equilibrium of somewhere between two (the best case) and seven (the current case) times the rate of growth of the US economy. You don’t need to be a mathematician to understand that a Chinese economy that consistently grows at a rate of more than twice that of the US, will surpass the total GDP of the US within just a few years (unless there is an American economic miracle).

I foresee that the Chinese domestic total supply chain for rare earths will become more competitive as it reduces the number of marginal and loss-making individual players. It is difficult to see China’s production capacity for rare earths ever being less than the world demand. If, as Prof. Kingsnorth recently forecasted, we see 200-240,000 tonnes of rare-earth demand in 2020, that number is still less than China’s current capacity for their production at the mine site, reflected perhaps in Prof. Kingsnorth’s forecast of 240-280,000 tonnes of rare-earth SUPPLY in the same year.

The only impediments to continued Chinese dominance of the rare-earth total supply chain would be:

1. Political insecurity of supply caused by Chinese actions;
2. The creation and rise of efficient non-Chinese total supply chains, with cost structures less than those in China (note: if non-Chinese mines produce at lower cost than Chinese mines, then the buyers of this lower-cost feed stock will first of all be Chinese rare-earth processors and end users, unless the rest of the non-Chinese total supply chain is put in place and operates at an even lower cost!); and
3. The rise of an outlier such as India or Brazil, as a lower cost actor in the total supply chain space. This would be, like Chinese dominance, an economic phenomenon that is very unlikely to occur in nations with less centrally managed economies than that of China.

China today produces all of the world’s heavy rare earths as well as the majority of the world’s neodymium/praseodymium. Thus China has a virtual monopoly on critical rare earths as they can be defined by today’s consumer demands. China does not seem to have, however, any hard-rock deposits with economically recoverable heavy rare earths. Therefore, the extremely inefficient and costly-to-process ion-adsorbed clays are the only resources available in the world today, for terbium, dysprosium, and yttrium, which together are three of the five or so “critical” rare earths as I define them (there is growing evidence that europium is not in short supply and will get less likely to be, even if its new production is limited to just China).

I agree that market forces drove the rare-earth exploration boomlet of the last few years, but that market was capitalized by the casino-like gamblers who create and bet upon commodities within the venture exchanges of Toronto, Vancouver, Perth, New York, and London. The total supply chain issue was completely ignored by the hucksters and promoters in those markets, but its centralization in China and the dearth of the skills to create or expand it outside of China, kept genuine productive capital investment out of the non-Chinese market.

For the last six years, at least, I have heard over and over again the lament, “why don’t the big end users give us off takes that are either paid for, or that we can use as collateral to borrow to develop our mines?” The reason is that they had nothing to gain and a great deal to lose, by investing in the lowest value-adding part of a natural-resource supply chain – the development of the mineral ore body into a producing mine. None of the Global 1000 manufacturing companies buys directly from a mine. They buy from their tier-one suppliers who in the rare-earth supply chain are probably the last of 7-10 steps in the end-user directed total supply chain.

While the promoters owned the market, productive capital was as scarce as junior miners who understood their place in the rare-earth total supply chain.

The realization that there is a complex total rare-earth supply chain is a recent development. Those who have recognized it are now scrambling to either place themselves as far downstream in that chain as they can, or to partner with those who are freestanding members of the chain, downstream from them. As I see it, the only hope for non-Chinese juniors who are in the medium/ heavy rare-earth space, is to combine their efforts to support a central toll-separation facility such as the one being developed by IMC, so as to bring their costs of moving downstream under control. Most of the investment in the rare-earth junior mining space was speculative and wasted. The survivors will downsize their participation in the total supply chain, so as to have the lowest break-even possible, and they will combine their efforts into the least number of separation/purification and metal/alloy making plants possible in order to assure profitability.

I sincerely believe that if a group of juniors were to approach large end users with such a plan, and with the skill sets in place from existing qualified technology vendors, then the end users would buy in.

In the mean time, if you want to know what will be the supply and demand of the rare earths for the rest of this decade, I would ask the Chinese for details of their industry consolidation plan, their timetable for switching from an investment / export to a domestic-consumption economy, and their political plans to co-operate within the WTO rules. After that, I would ask the Japanese what they are going to do about their lack of the initial step in the rare-earth total supply chain. I’ve heard enough anecdotes to give me serious doubt that Viet Nam is going to be an easy partner; I don’t doubt that once India gets into the production of rare earths, it will expand into the total supply chain and become a competitor, not a partner, of both Japan and then of China.

I predict that only one of the two large-scale existing light rare-earth producers will survive. I don’t know yet which one I would pick between Molycorp and Lynas. I predict also that there will be several non-Chinese medium / heavy rare-earth producers that will survive and thrive, but only by moving down the supply chain, as far as they can, to reach a reproducible profitability at the lowest cost.

Rare-earth production could well reach 240-280,000 tonnes by 2020 but almost half of that would be cerium, most of which will have little in the way of unique use. Therefore the real supply of useful and valuable rare earths will be slightly more than half of those figures.

When I project a future basket price for a project, these days I only price the critical rare earths from a deposit. Try that for a dose of optimistic reality.

Disclosure: Jack Lifton is a member of the Technical Advisory Board for Innovation Metals Corp. At the time of writing, he holds no shares or stock options in, nor does he consult to, any of the publicly traded rare-earth companies mentioned above.

The most important and wide-ranging historical analyses of the economic consequences of our activities have simple yet globally descriptive titles. In the eighteenth century, Adam Smith began the modern study of global economics, with his famously titled seminal treatise “An Inquiry into the Nature and Causes of the Wealth of Nations.”

In the first part of the twentieth century John Maynard Keynes described the economic consequences to both the victors and the vanquished of World War I (known as The Great War in the days when it was hoped that it would be the last of its type), in “The Economic Consequences of the Peace.”

Keynes next deeply studied global economics and titled his masterpiece, simply “The General Theory of Employment, Interest and Money.” Milton Friedman then wrote “A Monetary History of the United States,” and Frederich Hayek penned “The Road to Serfdom” as his analysis of the then-raging battle between the consequences of socialism and capitalism. All of these twentieth century studies were written before the middle of that century.

In Smith’s day the richest nation on earth, in terms of what we now call gross domestic product (GDP), was probably China. Between Adam Smith’s death and the publication of “The Road to Serfdom”, the Industrial Revolution led to the pre-eminence, economically and globally, first of Great Britain and then of its intellectual descendant, the United States of America.

The wheel of history seems now to be turning again, so that we will surely see by 2020 at the latest, the return of China to its former place as the nation with the highest GDP. This return to economic dominance by China could not have been, and was certainly not foreseen in 1947, when America owned half of the world’s gold reserves and was the richest nation in history both in GDP and in per-capita income.

The last half of the twentieth century has seen the transformation of China from a third-world socialist economy, to first an export powerhouse and now a nascent consumer economy, under a hybrid version of capitalism that sees state control of the banking system used to control the direction and growth of capitalist institutions. The Chinese refer to this as “Capitalism with Chinese Characteristics,” but it is really just a very sophisticated state-controlled capitalism.

Chinese capitalism has created the greatest commodity-consuming nation in human history. Just with regard to metals, which is the economic sector that I study, we now live in a world where the Chinese economy consumes nearly 70% of the total output of all metals of all kinds, produced in the world each year. China at the same time produces more than 60% of all of the metals produced in the world each year. Thus any analysis of the markets for, and the future of, any metal – any metal at all – must assume that China is and will continue to be the major consumer of that metal. As it also turns out, China is probably going to also be the major producer of that metal too.

Great Britain in 1850 and the United States in 1947 held the titles of the world’s largest producers of iron and steel. The first because it was the home of both the Industrial Revolution and the birthplace of modern capitalism, and the second because as the victor and armorer of the world in the Second World War, it had by far the largest remaining iron and steel industry. It also had the pent-up demand not only of its 13,000,000 returning soldiers and sailors to satisfy, but also that of its 120 million additional and now richest in the world consumers, who had been saving enormous sums for a decade.

Now, in 2013, it has been not war but industrialization, mainly in China, that has produced a nation of voracious savers whose centrally controlled economy is moving to create the greatest consumer-driven economy in the history of the world. More than one billion Chinese consumers are being readied to continue the growth of the Chinese economy and its starting point is already that of the world’s second largest economy. I have no doubt that another two billion Asians, Indians, Indonesians, Koreans, Malaysians, and Filipinos will join the Chinese consumer boom by 2050, to firmly center the global economy in Asia.

What will this mean for the markets for critical and strategic materials? First and foremost it will mean, and already does, that civilian not military demands for structural and technology metals will be the dominant and overwhelming driver for the growth in their supply. It also means that the natural resources of both the wealthy and of the poorer of the resource-rich nations, which do not have enough population or industry to build the capital they need to produce or consume their domestic resources, will be developed by Asian capital and purchased for use domestically in Asia.

The currently wealthiest nations of the world in North America, Western Europe, and Japan are mature consumers of material natural resources. Their economies are not growing. Therefore the only material natural resources they need are to replace those lost through waste or mismanagement.

The economic power and growth of Asia’s economies will, I believe, mean that the rare technology metals will ultimately only be available to non-Asian (but still rich) economies through conservation and recycling. This is not a military-capability problem; it is a deep problem of the civilian standard of living. Because it is not a military-security issue there is a zero probability that governments in the West or Japan are going to finance mining to produce new supplies of rare technology metals. In any case, only in the USA are there sufficient deposits of such materials to make it worthwhile. Mining is today in the USA too politically expensive for our short-sighted politicians to even consider such a solution.

The immense resources of rare technology metals contained in the existing American and European “inventories” of end-of life consumer and military scrap are already being mined by Asian entrepreneurs for their own benefit. I believe we are already at the stage in the USA where producing rare technology metals from scrap is the only remaining hope of obtaining a secure supply of the lowest possible cost materials, to feed a total domestic supply chain to satisfy our domestic (replacement) demand for such materials.

It is now sixty years since the great twentieth-century economists explained where the global economy came from and where it stood. We have been annotating these great works of economic analysis and theory for nearly three generations, as academics advise ever more poorly educated politicians on how to create wealth equitably. it seems to me that this instruction passes right over all of their heads, and it has become accepted as inevitable that the rapacious accumulation of wealth and power is the natural state of human endeavors.

It is obvious, however, that the avoiding of polarization into “haves” and “have nots”, by the waste of productive capital through its pointless accumulation, is the major purpose of government. Such accumulations reduce society to oligarchy and the protection of the oligarch’s wealth, the protection of which then supersedes a society’s economic growth and fair distribution as economic policy.

If we have to beg the oligarchs to follow a path that provides the most wealth for the many, we are already lost.

Earlier this week, the Chinese Ministry of Commerce (MOFCOM) announced the second round of allocations of rare-earth export quotas for 2013, to companies operating in China. This follows the initial announcement outlining the first allocation for 2013 in December 2012.

A total of 15,500 t of export quotas was allocated in this second round, comprising 13,821 t of light rare-earth (LRE) products and 1,679 t of medium / heavy rare-earth (M / HRE) products, bringing the total for 2013 to 30,999 t. This is almost identical to the 2012 total of 30,996 t.

Let’s now take a look at the allocation numbers associated with this week’s announcement, before reviewing them in the context of the full year’s allocations, and those of recent years. The companies below, highlighted in green are Chinese / non-Chinese joint-venture (JV) companies – the rest are Chinese-owned. The list is sorted from highest-to-lowest total allocation:

* Part of China Minmetals Group, which was allocated a confirmed total of 973 t.
** Part of Baogang Group, which was allocated a confirmed total of 1,755 t.

Here is a comparison of the quota allocations for the past five years:

We can see that there has been little change in the total quantity of allocations in the past four years, even if the structure and methods of allocations have evolved. The same companies which were allocated first-round quotas in 2013 also received them in the second round.

Given the projected increases in non-Chinese supply of LREs in 2013 and beyond, it was expected in some quarters that MOFCOM might eliminate export quotas for LREs; while this has not yet happened, it is still a distinct possibility. MOFCOM was apparently at pains to preserve the total export quota numbers in comparison to 2012, perhaps in an attempt to minimize volatility caused by the allocations. Of course, doing so is a case of “too little, too late” given that the rare-earth price increases which peaked in mid-2011, were caused by the rare-earth supply chain mis-interpreting the drop in quotas in 2010 as an actual restriction on supplies from China…

From my perspective, the natural evolution and expansion of global free-market capitalism into mainland China was disrupted by the reforms of Deng Xiaoping about 25 years ago. By fiat he created a centrally commanded version of capitalism in which it appeared that domestic Chinese costs (of both skilled and unskilled labor) were lower than those in the then-developed world. We now know that this was only a perception (an artifact), due to virtual and actual subsidies paid by the Chinese local, provincial, and national governments, to ‘kick-start’ and then maintain what turned out to be a massive export-driven Chinese national economy.

The ‘reforms’ of Deng were labeled Capitalism with Chinese characteristics and they worked. However, the logical, foreseeable consequences of the subsidy program (invisible to foreigners but known to insiders), namely the economic cancers of over-capacity and over-supply, also began. Its consequences are now sharply curtailing the rate of growth of the Chinese economy, and the impact of these consequences is also to hold back the global ‘recovery’ from the debt-fueled Western economic collapse of 2007.

The Chinese national government is taking official, not virtual, steps to attempt to reverse the impact of this over-capacity and over-production on its economy, and in this way is again having a direct impact on the entire global economy. This is very apparent in the global rare-earth sector. This sector is tiny in the context of the global industrial economy, but it is a perfect example of the problems created by central (command) control of the production of a natural resource.

The news from China about the reorganization of its domestic rare-earth-mining sector is a strong indication, I think, that from a global point of view the world’s rare-earth total supply chain is also in a rapid transition to reorganization, and, alliteration aside, it is, by economic necessity, evolving toward one of compact regional centers, as distinct from the current Sinocentric model.

In the paradigmatic and foremost of these centers, China, the rare-earth markets are being directed to reorganize into survivable units, i.e. with a minimum size to be profitable, even without virtual and actual subsidies. China’s rare-earth supply chain has too much of everything – mines, separation plants, metal / alloy / fine-chemical makers, and magnet and other end-use product makers. China announced just this past weekend that strict limits on emissions of pollution from named industries, such as mining, are to be enforced. From the point of view of economics, this means the capitalizing (recognizing the costs as liabilities) of both curbs on current polluting emissions and of remediation (cleaning up) of the damage from past emissions.

This means that even as over-production and over-capacities in the total supply chain, which is today essentially Chinese, have driven down the selling prices of the rare earths, the industry will be saddled with new and permanent increased costs of operation and the huge legacy costs of an industry long used to artisanal mining (in China’s case this means rogue and illegal mining). To implement a ‘crackdown’ the Chinese government has already added very significant taxes to mining and processing to fund remediation; it has also promulgated expensive regulations requiring proof of the holding of licenses to produce and to consume rare earths. These taxes and regulations will force the industry to contract, by creating a minimum size for a profitable rare-earth business.

The rising costs in China though, especially due to capitalization of environmental remediation, are also fueled by an expansion of the rule of law (equality of the rich and poor before the law) and even a distinct glimmer of a serious adherence to the concept of property rights, are reworking the rare-earth landscape (“if your pollution injures me or my property I can bring you to law, or, as in China – and the USA – the State can shut you down, pending the resolution of the problem”).

Most of the (logical) evolution of China from a “developing nation,” which it loves to call itself in international trade, to the world’s second largest economy by GDP, has taken place in plain sight and with lots of publicity. We outsiders who do not read Mandarin or understand Chinese culture, see the overall plan, but certainly not the operational details at any particular sites.

The fierce internal competition in China among legal producers of the rare earths, has until now been matched in ferocity by illegal, unregulated ‘midnight mining’. The existing dozens of small separation plants in China (and even nearby in places such as Vietnam and Thailand) have operated for years on irregular offers of such illegal material as cash-generating icing on the cake. Now, as the central government of China forces consolidation and requires certificates of mine and separation-plant allocation, the illegal miners have to work with a ‘total illegal supply chain’ to keep everything ‘off the books’. Those who puzzle over the existence of an illegal separation plant built by Chinese ‘contractors’ in Vietnam and ask, “from where does it get feedstock?” are naive in the extreme. Such a plant is part of an illegal total supply chain. I can only assume that corrupt officials in China, Vietnam, and perhaps other Southeast Asian countries, keep this supply chain going.

I discuss this, because it is a plausible explanation of how a seeming global shortage supported by ‘official data on total production’ of the critical rare earths, does not seem to cause extreme distress or shutdown of industries totally dependent on rare-earth permanent-magnet (REPM) alloys, modified with dysprosium and terbium. The fact that official production figures do not support the current demand picture of dysprosium and terbium, show that end-users must now, in the face of the Chinese crackdown on illegal production, secure their supplies outside of China. If, for example, as the Chinese repeatedly say, they are not able to expand their proven resources of heavy rare earths through legal mining regulated as to health, safety, and pollution, then the illegal mining and refining that is supporting the current shortfalls, is undoubtedly draining the reserves much faster than the official figures are showing. This is the real crisis!

Non-Chinese sources of heavy rare earths must now be brought into production under all circumstances. Non-Chinese manufacturing centers and regions need to attain self-sufficiency as soon as possible. There are ion-adsorption clays exactly as those in China in the tropical regions, in addition to numerous non-Chinese hard-rock sources, including those listed on the TMR Advanced Rare-Earth Projects Index.

There is, however, simply not enough middle and heavy rare-earth separation and purification capacity outside of China, to support European, North American, and non-Chinese, Southeast Asian DEMAND, along with an increasing Chinese domestic demand. This is in particular true as Chinese domestic demand literally explodes. Long-term Chinese planning is based on the very fact that Chinese sources of the heavy rare earths must be conserved, to support the changeover of the Chinese economy from being export-driven to being domestic-consumer-driven.

For the total rare-earth supply chain, the news is even worse. Outside of China the global capacity for rare-earth metals and alloys production is tiny. If we base non-Chinese REPM production capacity on secure access to didymium metal, samarium metal, ferro-dysprosium, and cobalt, then I suspect non-Chinese capacity would be today at most just 10% of global demand.

The non-Chinese world, even if its costs become level with or lower than those in China, still has one big problem – the cost of building new separation and metal and alloy making facilities, as compared with the already arrayed and substantial available capacity within China. This problem can only be resolved by central, regionally deployed tolling facilities for separation, such as the one being developed in Quebec by Innovation Metals Corp. (whose President is my TMR colleague Gareth Hatch), and perhaps even for metal and alloy making. I believe that this will occur in four regions: Europe, North America, Japan, and Korea. India will most likely be a fifth non-Chinese rare earth total supply chain center, but perhaps later than the first four here mentioned.

Disclosure: Jack Lifton is a member of the Technical Advisory Board for Innovation Metals Corp.

On December 27, 2012 the Foreign Trade Division of the Chinese Ministry of Commerce (MOFCOM) announced the first round of allocations of rare-earth export quotas for 2013, to companies operating in China. A total of 15,499 t of export quotas was allocated in this first round, comprising 13,561 t of light rare-earth (LRE) products and 1,938 t of medium / heavy rare-earth (M / HRE) products (FYI – MOFCOM is showing a total of 13,563 t of LRE products in its announcement, but this appears to be an addition error).

There were no changes to the way that the quotas were calculated this time. As you may recall, the allocation of export quotas for 2012 saw separate allocations for LRE and M/HRE products  for the first time, as well as the allocation of provisional and confirmed quotas depending on whether or not companies had passed new pollution-control standards. The separation into LRE and M/HRE products remains, but there are no distinctions in this announcement between provisional and confirmed quotas. There is also no indication in the announcement, of what the total quota might be for 2013, in contrast to the announcement made a year ago for the first allocation of 2012.

So let’s take a look now at the specific companies that have received quota allocations in this first allocation for 2013. The list is divided into sub-lists for Chinese and Chinese / non-Chinese joint-venture (JV) companies. The two sub-lists are sorted from highest-to-lowest total allocation:

* Part of China Minmetals Group, which was allocated a confirmed total of 1,063 t.
** Part of Baogang Group, which was allocated a confirmed total of 1,811 t.

The total quota is allocated to each individual company via a formula that is related to the sales volume and revenues generated by each company in the recent past, in comparison to sales for the industry as a whole.

One company which received quota allocations previously but which is not on the list above is Jiangxi South Rare Earths Hi-Tech Co., part of the China Minmetals Group. This was one of four companies that, according to MOFCOM, needed to be reviewed by the authorities before they were deemed to have qualified to receive rare-earth export quotas. The other three are included in the list above.

Here is a comparison of the quota allocations for the past few years:

While there was no mention of an estimate of the total quotas for 2013 in the MOFCOM announcement, there have been one or two rumors circulating from Chinese sources, that the total for 2013 would be about the same as in previous years. However, given the fact that the actual exports of rare earths out of China have been significantly lower than the quota allocations set, the drop in demand for some materials, and the likelihood of new sources of (non-Chinese) supplies of LREs coming onto the market in 2013, there is a distinct possibility that the total quota for 2013 will be lower than those for the last three years.