A potential sting for REE in the WTO tail
Just be careful what you wish for.
There may well be joy unconfined at the ruling by the World Trade Organisation that China must dismantle its system of export taxes and quotas for nine industrial metals - rare earths are not included in the ruling, but the implications are there for all to see. The metals that are named: bauxite, zinc, yellow phosphorus, coke, fluorspar, magnesium, manganese, silicon carbide and silicon metal.
But there are two constituencies involved here - the consumers on the one hand, the miners on the other. The benefits of the WTO ruling will favour the first. The last thing that Western mining companies need is a further blow to prices.
Simply put, we can only conjecture about what this WTO ruling might portend for the rare earths sector. I am going to hypothesize about this - but add a firm caveat that this theory (some may see it as a brain snap) is only that, and that things could play out very differently. All I am trying to do here is suggest caution until we can get more information of the impact on REE.
Like with REE, China is the main producer of the nine metals covered by the ruling. Already there is, naturally, speculation that this ruling sets a precedent for Chinese restrictions on other natural resources including REE.
The view is that China will comply with this WTO ruling (and, therefore, would do so with a similar one on REE). It has complied with similarly adverse ones in the past and, what is more, Beijing is hyper-sensitive to protectionist talk in the U.S. and any suggestion that Congress might pass laws that impose penalties on China.
But here’s the thing.
If quotas and export taxes on REE coming out of China are removed, doesn’t that have the potential to undermine rare earth prices? Japanese companies are paying anything up to $US200/kg for neodymium but Chinese domestic end-users pay only around $US100/kg. What if China has to start charging its Japanese customers $100, too? Great for those Japanese end users.
But what about the REE projects outside China, the deposits at varying stages of development that really depend on robust prices for their products when they come on the market?
One of the pillars holding up the whole REE story is the scarcity of the heavy rare earths. This has been made potentially worse by the announced quotas for 2012; as we have explained, the decision to allocate 15 per cent of the export quotas across the board to all miners in China - regardless of whether they either produce HREE or its their main line - means that supplies of the heavies will be severely dented.
But let’s look beyond 2012.
If China removes quotas by, say, 2014, then there could well be new supplies of HREE coming on to the market. What could that mean for emerging HREE producers outside China? It means, at least, they have to redo all their costs and margins.
So this might - just conceivably - play into China’s hands. If prices fall, due to the removal of quotas and duties, and there is a severe global slowdown, where does that leave all the other REE players? Might it stall some projects?
None of this may occur, I stress again.
But I think it’s too early to strike up the band just on the basis of this WTO ruling.
No doubt there will be plenty of strong opinions out there on this.
