China to Launch 2nd Trading Platform to Focus on Heavy Rare Earth Elements

Received another timely piece from our Shanghai correspondent Hongpo who gives us more details on China’s new rare earth element (REE) trading platform that is expected to launch next month on August 8, 2012. He points out that the State Regulation Center of Supplies Reserve will be part of China’s REE trading platform. He explains why this is significant and gives us his perspective on these latest developments in China’s REE industry. He also highlights that the new REE trading platform focuses on light rare earths and suggests the possibility of China launching a second trading platform to focus specifically on heavy rare earth elements.

Hongpo* writes: On July 20, 2012, three listed companies in China’s rare earth element (REE) market simultaneously announced a plan to launch China’s first national spot trading platform for rare earths called Baotou Rare Earth Exchange Co., Ltd. The platform will launch on August 8, 2012, with four other enterprises. It is worth paying special attention that the State Regulation Center of Supplies Reserve (SRCSR) will enter the national REE trading platform as this enterprise is the subordinate body of the State Reserve Bureau, led by the National Development and Reform Commission and the State Bureau of Material Reserve that is responsible for formulating China’s national strategic material reserve strategy and plan including aspects such as organizing, collecting, stockholding, utilizing, replacing the REE reserves as well as day-to-day management of national strategic material reserve. The SRCSR is an executor of a specialized division of China’s national strategic material reserve in the market and acts on behalf of the state to reserve products or arrange the sale of inventory, to regulate supply and demand of major commodities in the market — the SRCSR always plays an important role in the mechanism of purchase and storage of commodities in China. So I believe that China will begin stockpiling rare earth elements for strategic reserves through this trading platform in the future.

According to the plan, seven enterprises including the State Regulation Center of Supplies Reserve (SRCSR), Inner Mongolia Baotou Steel Rare-Earth Group Hi-Tech Co., Ltd. (600111), China Nonferrous Metal Industry’s Foreign Engineering & Construction Co. Ltd. (NFC)(000758), ShiChuan Jiangxi Copper Corporation (JCC) Rare Earth Mineral Industry Co. Ltd., Gansu Rare Earth Mineral Industry Co. Ltd., Xiamen Tungsten Co., Ltd (XTC) (600549), Inner Mongolia Hi-Tech Holding Co. Ltd. will join to invest a total of 70 million Yuan ($10.98 million) to start the rare earth trading platform. Each shareholder will invest 10 million Yuan and hold around 14.29% stake in the company. The exchange will be located in Baotou City in China’s Inner Mongolia region.

This announcement also said that the REE exchange will only allow physical trading of rare earths in order to improve price recovery for the commodities and subject the market to better regulation. However, illegal mining and smelting production has not yet been completely reversed. You may recall that on June 28, 2012, that Rare Earth Mandatory Production Plan Management Interim Measures (the “Interim Measures”) was issued by the Ministry of Industry and Information Technology (MIIT). A second batch of mining and smelting quotas was recently announced by the Chinese government as part of the mandatory production plan for rare earths. According to the mining and smelting quota of the 2012 mandatory production plan, the enterprises that obtained smelting quotas are:

  • Baotou Steel Rare Earth: 35,000 tonnes rare earth oxide (REO) (light rare earths)
  • NFC: 2,000 tonnes REO (heavy rare earths)
  • JCC Rare Earth: 4,800 tonnes REO (light rare earths)
  • Gansu Rare Earth: 7,000 tonnes rare earth oxide (light rare earths)
  • XTC: 2,500 tonnes REO (heavy rare earths)

Most of these quotas are the same as last year. In 2011, the total smelting quota was 90,400 tonnes REO (including about 64400 tonnes light rare earths REO and about 26000 tonnes heavy rare earths REO) in China. The data shows at least approximately 51,300 tonnes REO will be traded on the platform in the next year, but it seems that the focus is mainly on the light rare earth elements now.

Although the exchange will be positioned as a national spot trading platform, I am confused about why other large state-owned enterprises, such as Aluminum Corporation of China Limited (CHALCO) Rare Earth, China Minmetals Corporation (CMC) Rare Earth and local state-owned enterprises Ganzhou Rare Earth Mineral Industry, Guangdong Rising Nonferrous Metals Share Co. Ltd (RNMS) are not on the list of the announcement to join the plan to launch China’s first national spot trading platform for rare earths with another enterprises together, as these enterprises obtained the smelting quotas totaling about 20,000 tonnes REO (heavy rare earths) in 2012.

I wonder if China will launch a second REE exchange mainly focused on heavy rare earth elements because the local governments of Jiangxi and Guangdong province always wanted to establish an exchange of heavy rare earth products in Southern China. Further, the State Council statement announced a plan to oversee rare earths industry in Ganzhou on its website on June 28, 2012, saying that the central government plans to set up a large-scale rare earths conglomerate in Ganzhou, Jiangxi province, in a step toward consolidating the country’s ill-regulated industry in southern China. The statements notes, “The country will have priority policies for the city in terms of production quotas for rare earths and tungsten products…and support Ganzhou to build up a strategic resources inventory base for ion-type rare earths, the country also will research the set-up of a rare metals futures trading center in Ganzhou….” Maybe this is one of the reasons why they did not join the plan of establishing Baotou Rare Earth Exchange together?

(*Disclaimer: While we have a full name for Hongpo, we have never met him in person. We made some minor grammatical changes to the text he submitted and edited some of the content on a best case effort towards capturing the editor’s intent.)