Chinese Restructuring Of The Rare Earth Mining Industry Goes Into High Gear

Yesterday I reported on why I think Baotou Rare Earths has announced its creation of a plan to stockpile 300,000 tonnes of rare earth ore concentrates during the next three years (i.e., by 2013). A colleague of mine sent me an article this morning (morning, that is in Shanghai) that explains the actions of Baotou REEs, and I think points to my conjecture being correct.

The Chinese rare earth mining and refining industry is growing up. Recognizing the critical importance of the rare earth elements to modern high tech and cleantech, the Chinese government has decided to finally end the era of free-for-all mining for these critical materials. The announcement came in a news story entitled “MIIT Releases Draft Entry Standards for Rare Earth Industry.”

The announcement is a typical administrative request for comment by the affected industry, on standards for the creation and maintenance of ventures in that industry. In other words, the Chinese government is going to “regulate” rare earth mining and refining, and in particular is raising the bar for entry into or for remaining in the rare earth production and refining industry.

The article commented that the notice “outlines several detailed regulations concerning the industry”, including:

• Production scale
• Technological equipment
• Energy consumption
• Resource utilization
• Environmental protection
• Product quality
• Supervision and management.

The article went on to note that the notice proposes minimum annual production capacities of:

• 300,000 tons for light earth enterprises
• 3,000 tons for “red earth” enterprises

In addition:

“The size of rare earth smelting projects should be no less than 1,500 tons per year. The capital ratio of fixed asset investment projects in the industry would be set at a minimum of 40% under proposals included in the notice. Energy consumption would also be tightened under the notice, which stipulates that energy consumption in rare earth smelting should have an efficiency of at least 85%, and energy consumption for each ton of product produced should be less than 1.6 tons standard coal equivalent.”

The article went on to say that

[t]he analyst said that as Baotou Steel Rare-Earth Hi-Tech Co. Ltd. (600111.SH), the largest rare earth enterprise by revenue in China, has largely integrated the rare earth resources in North China, the new wave of restructuring will focus on South China, in particular Sichuan, Jiangxi and Guangdong provinces.”

I have encountered the term “red earth” enterprises before, as part of an inquiry on translating documents such as this from a Washington, D.C.-based colleague who is fluent in the Chinese language. We decided that “red” or sometimes the word “colored” is used in such descriptions to mean “the other lesser available kind of metal in a category.” It means non-ferrous metal when applied to base metals and “heavy” rare earths when applied to rare earths.

But even if that is a correct interpretation, 3,000 tons seems rather small unless you decide that included in this figure are only results for dysprosium, terbium, and europium, which I think likely. Yttrium, which is traditionally group with the heavy rare earths, may have been eliminated from that category for the purposes of this regulation.

It is also difficult to decide whether or not the 300,000 tons and 3,000 tons refers to ore concentrates or to refined oxides or metals. But in any case, the figure set for allowed production by the industry as a whole, explains why Baotou is announcing its stockpiling as an inventory build. The company is proposing to unofficially cover the needs of the entire Chinese rare earth utilization industry for at least a year, probably more, in the case of a total shutdown, for whatever reason. This is equivalent to saying to the government regulators: “We agree with your plan and with your goals as set.”

The Chinese mining industry does not originate or make economic or political decisions for the state; it follows directives in those categories from the state.

I have written before of the Chinese government’s overriding economic concerns being primarily to hold down inflation and maintain a stable currency.

MIIT is merely doing its part to implement those core economic policies in the rare earth mining industry by, for the first time, closely regulating it. This will eliminate “artisanal,” i.e., illegal, mining, and allow a metric for evaluating the efficiency of a mining company to be used, by creating fixed operating parameters and targets under which regime individual enterprises can be judged, along with whether or not to issue a license for a new enterprise or an expansion of an existing one.

How will this affect the USA? First of all, the numbers tell us exactly what China will produce at a maximum for all types of rare earths. Second, it will make every aspect of dealing with “artisanal” miners a crime, so that foreign as well as Chinese buyers of “smuggled’ goods will have much to think about in the way of consequences,  before encouraging such behavior. Positively, this will mean that when a target is missed within the Chinese rare earths industry, there will be an immediate opportunity for a non-Chinese supplier to step in to fill the gap, and it will encourage Chinese export customers to plan for such “shortages,” which will probably drive China, when and if they occur, to restrict exports.

For the moment, Baotou’s creation of a strategic inventory should be a red flag (excuse the pun) for those who think the rare earth security of supply issue is losing traction. China’s rare earth industry is already preparing for the consequences of restructuring. This will include a possible shutdown for environmental remediation. This will mean conservation by China of critical resources.

I say again: We need to get some non-Chinese resources of the rare earths into production as rapidly as possible. Baotou is saying we have just 3 years left to get our act together.

What do you think?