The First Round Of Chinese Rare-Earth Export-Quota Allocations For 2012

@ D. Carlton Rossi: great to hear from you! I think you make an interesting point – if we assume that at least some of the companies on the provisional list don’t pass muster for July 2011, then indeed, other companies may be all set to take advantage, and may produce additional materials ahead of time. On the other hand, the companies on the provisional list will have to focus on the domestic market (to which, to my knowledge, they will not be precluded from), which won’t be as profitable for them, so this is as much of an incentive as any, to get their collective acts together…

I suspect though that these guys are pretty capable of ramping up production as required, either way.

Note that the companies on these lists are to my knowledge either processors or traders, not mining companies (though I am not familiar with every single company, so I might be mistaken on this).

@David William: I can only really talk from the supply-chain perspective, and I would say that from that viewpoint, this week’s quota news will have little effect on the probability of commercialization for most non-Chinese projects out there – one way or another. Where things will start to get interesting is if / when the Chinese authorities further decouple the quota allocations for light vs. medium / heavy rare earths – this could have indirect effects on all of the companies currently developing rare-earth projects.

The effects of the quota on the sector have been consistently blown out of all proportion by the media. The key potential effect, for me, is on export pricing of rare earths – higher prices mean less demand (remember – 70-80% of export volumes in recent years have been for lanthanum- and cerium-based materials – materials that can and have been replaced in the face of high prices). We’ve already seen a correction in prices though, since the peaks of the summer of 2011.

@Sebastian: I believe a key reason for the separation into light and medium/heavy rare earths, is to give the authorities closer control over the disposition of the heavies, which by many (though NOT all) accounts, have associated deposits in China that are running out much faster than the light deposits. note that this differentiation already occurs for their production quotas.

The price difference between lights for domestic and export, compared to heavies, was far greater in percentage terms, only because the so-called export quota surcharge (value applied to each unit of quota) applied to these materials, was far greater than the underlying value of some of these materials. e.g. a $100 / kg surcharge on a kg of normally $5 / kg cerium oxide, has a more dramatic effect than, say, on normally $600 / kg europium oxide.

As I stated above, it seems strange to me that the quota levels for 2012 are not lower than for 2011, since the quotas were not filled, by quite some way. I can only surmise that the authorities anticipate prices to be a lot lower than in 2011 – either passively, or as a result of their intervention – perhaps prohibiting excessive quota-related surcharges – leading to greater demand.

@John: the authorities indicated that any quotas not confirmed for the companies currently on the provisional list, will be re-distributed to the currently confirmed companies. So either way, this week’s announcement leads to around 31,130 t of export quotas for 2012. To answer your other question, as I mentioned above there are no indications that the companies on the provisional list are prevented from selling into the domestic market.

I believe the Chinese have a perfectly valid concern with regard to enforcing new environmental standards, and are in fact doing so. Where I do have a problem, is with the coupling of such standards with the export market only, since this discriminates against non-Chinese customers.

@Sebastian: quotas were allocated on the basis of previous revenues and volumes in recent years. In previous years, companies have traded quota allocations but whether they’ll be able to do that going forward, is not entirely clear.

@Roger: neither the official export statistics nor the quota allocations really take into account the volume of exports that take place unofficially / illegally. Some estimated put this additional “channel” for these materials at 10-15 ktpa.

@G H: I’ve said for some time that a comprehensive effort to curb pollution and to otherwise control environmental issues in this industry, will require reductions in overall production quotas, not export quotas. Presumably the recent division into confirmed and provisional allocations of quota is meant as a carrot from the commercial point of view, since exports have recently commanded higher prices. But I would agree that the effects here are going to be very short lived.

@fran: Is there really an impact? Something else that I’ve said before is that I believe that the only effect that the export quotas have had on exports is on the price of the material being exported. If you are an end user in Japan, Germany or wherever, you can get material, of any kind. It won’t necessarily come via officially sanctioned channels, and it might not have been mined recently, but I see no evidence of real supply constraints for these materials.

@Andy: there is significant evidence of substantial demand destruction in 2011 as a result of the elevated export prices. The story of rare-earth exports is really the story of lanthanum and cerium exports. We saw successful efforts by a number of end users to move away from usage of these materials.

As for halting production – there are likely to still be significant inventories of these materials warehoused in China and elsewhere. I therefore see little chance that any halt in production would lead to reduced exports of finished goods.

Within a year, we should have two new major sources of light rare earths on-stream. When that happens, any export quotas still being imposed by China for light rare earths, will have decreasing relevance to the supply chain.

@John: I’ve not seen any recent announcements on either rare-earth mining or production quotas.

@Mike Niehuser: I don’t think the rare-earth sector is any different to other commodities – as prices went up, demand decreased, especially for the light rare earths. Also, you have to look at quota allocations on a year-on-year basis – not comparing, for example H1 2011 with H2 2010. That’s not how the system works – allocations are made at the beginning of a given year, with “top ups” in the second half of the year; those first half quota allocations still pertain to the whole year. I don’t see high prices coming later in 2012, especially not for light rare earths.

As for HREE quotas compared to prior years – the quotas were not broken out that way before, so it’s not possible to do the comparison. You might see some clues in the way the production quotas have previously been allocated, since those have previously been allocated on a L / HREE basis.

@Alberto: yttrium is widely considered to be a critical metal, and has numerous important applications. Scandium has the potential for a number of end uses, but is produced in such low quantities that I don’t see it being of any significance in the immediate future.

@charlie: the export of alloys and other rare-earth-based compounds has taken place for years. There is really nothing new in those articles, and I find it a little strange that the implication is that companies making the ribbons / melt-spun materials, used for permanent magnets, are somehow trying to circumvent the system. The same goes with strip-cast alloys that Japanese companies have produced in China, for use in their permanent magnets.