Doubts growing that China’s REE export quotas will work

Since China’s Ministry of Commerce (MofCom) released the figures for the 2012 rare earth export quotas, the preoccupation has been on the tonnages and who will win and lose from the allocations.

But there are two other questions. One, will it work? Two, what does it tell us about the present state of China’s rare earth industry? Unfortunately, the answers to both questions don’t exactly confirm that this was the best way to go about it.

So, will it work? What seems strange is that MofCom seems to have adopted a one-size-fits-all approach. Every company gets their quota split around 85 per cent for light rare earths and the remaining 15 per cent goes to exports of the heavies. The problem, of course, is that the HREE producers are stuck with a 15 per cent quota for their main product and the rest for LREE even if that is not their primary product; similarly, LREE producers seem to have been given an HREE allocation even if they cannot use it.

Take China Minmetals Group. Its quota is made up of 2,148 tonnes of LREE and 309 tonnes of HREE. So here is a company that is primarily a producer of the heavy elements but only 12.5 per cent of its export quota can be utilized in the sale of its main products. In the best of all worlds, China Minmetals would need a (HREE) quota of between 1,000 and 1,500 tonnes for export.

Baotou Steel Rare Earth Group gets 3,140 tonnes for LREE, which probably is fine. But it also receives a quota for 310 tonnes of HREE – for which it has very limited use.

I put this to Dudley Kingsnorth, Perth-based principal of Industrial Metals Co. of Australia. His view is that this quota allocation will have serious ramifications for heavy rare earth prices in 2012. In other words, they are going to be in continuing scarce supply with obvious ramifications for prices. For the LREE producers of Inner Mongolia and Sichuan, the HREE portion of their quota is useless unless they sell that HREE quota; the rare earths companies in southern China, which are primarily in the heavy elements sector, have been given LREE allocations for which they have no use.

Kingsnorth says the decision on splitting LREE and HREE quotas – which he was not expecting to be introduced quite this soon – lacks practicality. China, understandably, does not want to deplete its HREE reserves any earlier than it must, but this new quota allocation will really crimp HREE exports next year and many end users may find they are worse off than in 2011.

I asked him whether the way around this was for companies to sell those inappropriate or unusable parts of their quotas. He thought trading quotas could be feasible but is unsure whether MofCom would sanction such dealings. “In the past they have expressed their displeasure at this,” he added. So it would seem that MofCom has been able to put both the HREE processors and the Rest-of-World consumers offside with one move.

But there is another factor that is striking when you look at the allocations.

That is, China’s much heralded consolidation of REE companies seems to have become derailed, or at least postponed. For just the environmentally approved 10,546 tonnes (9,095 tonnes of LREE and 1,451 tonnes of HREE) in the initial allocation, there are 32 companies involved. That’s an average of 329 tonnes each – which hardly suggests economy of scale; when you take it to the potential limit of 24,904 tonnes then it‘s still an average of just 778 tonnes. (These, of course, are export quotas and don’t include the larger amounts of REE sold to Chinese end-users, but even so it’s still a pretty fractured industry.) The total quotas range from 1,725 tonnes for Baotou Rhodia Rare Earths to 106 tonnes allocated to Changshu Shengchang Rare Earths Smelting. Kingsnorth concurs that in the allocation China has missed an opportunity to consolidate the industry.

Now we just have to wait and see how it’s all going to turn out.