China’s Great Rare Earth Reversal

Added July 30th, 2012 by Anthony David

From being the largest producer and exporter of rare earths, China is zooming towards the distinction of becoming the largest consumer of rare earths. With the growth of domestic high-tech industries, increased spending on defense technologies and demand for producing green energy, China is fast becoming a voracious consumer of rare earth materials. According to the U.S. Geological Survey, China’s consumption of rare earth elements quadrupled from 19,000 metric tons in 2000 to 73,000 metric tons in 2009. Almost 30% of China’s rare earths consumption has been primarily used in producing magnets.

In recent times, Chinese rare earth exports have fallen due to increased domestic demand and the government’s move to cap rare earth exports with quotas, citing environment protection and conservation of natural resources. According to a recent news report, China has cut rare earth mining permits by half in order to consolidate the industry and create bigger rare earth producing companies.

Perceived as muscle flexing and market manipulation, China’s move to cap rare earth exports and reduce production triggered off a price rise as well as panic in certain quarters. The situation however, has given a big boost to new rare earth exploration projects outside China and a slew of announcements for joint exploration and production of rare earth materials.

China’s domestic consumption of rare earths is expected to grow by 10 percent each year in the coming years. Increased domestic consumption combined with the cut in mining permits has set the stage for China to become a net importer of certain rare earths by 2014. While international rare earth producers are already positioning themselves to take advantage of this situation, it must be noted that China has a considerable stockpile of rare earths and export restrictions will only add to this inventory, thereby creating a shortfall in the market in the near term and driving up prices even further.

Since last year, there have been reports that China is actively spending huge amounts of money to buy up domestically mined rare earths to build a national stockpile. There are also indications that they are specifically targeting certain heavy rare earths. Chinese authorities have recently confirmed reports of establishing a spot trading platform for rare earths in August, 2012. This together with the national stockpiling exercise will give China a greater control on the rare earth market.

Another important aspect is that China is methodically establishing itself as a globally dominant force in the production of critically important components such as magnets, hydrogen storage cells, luminescent materials and more. Rare earths are the raw materials for all these products. More importantly some of the major manufacturers who use rare earths as raw materials have already moved their facilities to China. Export curbs and inducements by the government have encouraged international companies to set up shop in China.

Today China produces over 80% of the world’s magnets and is set to continue growing this industry. Satellites, renewable energy, medical equipment and drilling equipment for natural gas are just some of the applications of magnets. Chinese domestic high-tech industries, the largest consumers of rare earths, are set to play a dominant global role in the coming years. As some analysts have pointed out, China’s coking coal sector offers a great insight into how China curbed the export of coking coal to feed its own domestic steel mills. The might of the Chinese steel industry is a testimony to this strategy.

China’s strategy of reducing rare earths exports, cleaning up its mining industry and addressing environmental concerns, while pursuing gains in domestic high-tech manufacturing is all about maximizing the returns on its natural resources. In hindsight, dominance over the world’s rare earths market gave China sufficient time to establish its supply chain. So its tilt towards rare earths imports should set the alarm bells ringing, if they haven’t already, in many downstream manufacturing industries.

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